Is privatisation a realistic route for MAS?

By Stephanie Jacob

There have been many suggestions offered as a solution to Malaysia Airlines’ woes, however one that has been gaining traction, is the idea of privatisation. But many factors need to be considered, such as who will control MAS, how and at what cost?

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It would appear that there are three routes available to the carrier as it considers its options for the future. The first is bankruptcy, which is unlikely because of several pertinent factors which we will deal with below. The other more likely options are, an internal management and cost restructuring exercise or privatisation.

So far 2014 has been a tough year for Malaysia Airlines, and it is only half gone. First in mid February the ailing airline posted a staggering loss of RM1.2 billion for financial year 2013 (FY13). Then just weeks later, in early March its MH370 flight from Kuala Lumpur to Beijing went missing, and over a 100 days later has yet to be found despite a widespread multinational search effort.

Compounded by the MH370 incident, in May, the national carrier announced that its losses continued in the first quarter for financial year 2014 (1Q14) to the tune of RM422 million – almost double the losses it made in the previous year’s corresponding quarter.

After almost six months of woes, MAS confirmed in mid-May that it was in fact looking at restructuring options. It said “the management would like to put it on record that at this juncture, a thorough review of the business plan is being undertaken and all avenues are being explored to ensure the long term sustainability of the company.”

But while it took MAS till mid May to announce this, many others had already beaten them to it. On May 19, MAS shares tumbled on Bursa to 15.5 sen from its May 16 close of 19 sen. The sharp decline came after local news reports quoted comments Prime Minister Najib Abdul Razak made to the Wall Street Journal appearing to suggest that the government would be willing to let the airline go bust. Transport minister Hishammuddin Hussein and tourism minister Nazri Aziz also emphasised that the government was no longer willing to bail out MAS.

So what now for MAS?

The shape and form any restructuring plan for MAS (without significantly changing its ownership structure) will take is a moving target. By and large, it is agreed that there are several factors that must be addressed – a new business plan, capacity issues, and the size of its workforce.

An RHB Research report released last week suggested that in its current state MAS’ should go for low hanging fruit, which ideally would be a combination of cutting capacity and reducing the size of its workforce. It estimated that a 19% downsizing ot MAS’ workforce and a 10% capacity cut could trim the the carrier’s losses by as much as RM349 million in financial year 2015 (FY15).

Other suggestions also include hiving of some of MAS’ divisions to bolster the group’s position overall. However the effectiveness of this has been questioned, with the Centre for Aviation (Capa) highlighting that these units themselves require deep restructuring before they can be sold.

Bankruptcy was also widely touted after the dismal 1Q14 results. However that option seems to have faded into the background as several factors make it an unlikely answer to MAS’ problems. This includes the fact that the airline is sitting on a RM3 billion cash pile, and the likelihood that it will not meet insolvency criteria anytime in the near future.

Capa opines that perhaps more importantly, when it comes to declaring bankruptcy the scenario is very different in Malaysia, versus somewhere like the United States (US) or Japan. In America for example, companies can rely on provisions such as the Chapter 11 protection, which among other things allows for the cancellation of contracts – an option not available in Malaysia.

All in all, bankruptcy has proved an unlikely route and there are suggestions that it was only even talked about in order to lower public expectations or to ready them for drastic changes at MAS – such as a deep corporate restructuring or privatisation to a third party.

Could privatisation work for MAS?

Now that bankruptcy has been all but ruled out as a realistic option, talk has turned towards the idea of privatisation. However the idea gives rise to many questions which need to be addressed before the national carrier can go into private hands.

Who should MAS be sold to and will it be delisted from Bursa? How much will the airline fetch and when would the ideal time be to let it go? These questions are just a fraction of the factors that needs to be considered before this course of action is taken.

There are also historical lessons that must be learnt from the last time MAS was privatised, and the expensive failure that it proved to be. In 1994, the Mahathir Mohamad led government privatised MAS to Tajudin Ramli, who was known as a close associate of former finance minister Daim Zainuddin.

Tajudin, through his listed vehicle Naluri purchased a 30% stake in MAS for around RM2 billion or around RM8 a share. At the point of purchase, MAS shares were hovering around the RM6 mark per share.

Over the next six years MAS went on a downward spiral, made worse by the Asian Financial Crises. In 2000, after three consecutive years of substantial losses, the government bought back Tajudin’s stake and paid RM8 per share despite the fact that its counter was trading at less than half of that.

Perhaps, unsurprisingly Mahathir has again been vocal in pushing for privatisation this time around. He has suggested that it is best option at hand because MAS needs a massive overhaul, which presumably he feels a new owner can offer.

Among the names most often thrown into the ring, is Syed Mokhtar Albukhary, who is known to be a close associate of the former PM. Weststar Group Sdn Bhd’s group managing director Syed Azman Syed Ibrahim and Airod Sdn Bhd’s president, Ahmad Johan. (Kinibiz looks at each individual in relation to privatising MAS in more detail tomorrow).

In an interview with The Malaysian Reserve, Mahathir suggested that MAS current majority shareholder, Khazanah Nasional Bhd (Khazanah) should exit the airline game because it does not have the time and necessary manpower needed to properly run MAS.

While stopping short of naming a possible candidate, Mahathir called for the carrier to be privatised by someone who has experience in the aviation sector and who can work with MAS’ vocal unions.

According to the article the Malaysia Airline System Employees Union (Maseu) have indicated that they think either Ahmad Johan or Syed Azman should be the preferred choices if it comes to privatisation.

However several analysts take the opposite view; and believe that if MAS is taken private, it must be done by the party who can both make the necessary hard decisions and stand up to the unions.

An analyst with a bank backed research house asked “who has the political will to push through the changes? A new investor will have to do things like cut the workforce and make capacity cuts…they must have the strength to push this through…past the unions. Which investor out there can do that?”

He added any new investor coming in may be asked to enter into agreements stating that there will be no drastic cuts to workforce, or give similar concessions to the government or the unions. This will waste important recovery time, as any investor needs to deal quickly with the more addressable cost issues, particularly with regards to downsizing the workforce and capacity cuts.

Currently as the majority shareholder, Khazanah probably is in the best position to make the necessary changes, he said, adding that they do not even necessarily have to take it private to be able to take action.

While agreeing that Khazanah is likely to be the most effective force in instituting the necessary changes, an aviation analyst at another research house suggested that there may be some merit for Khazanah to take the carrier private.

The analyst noted that public listed companies are subject to significant demands that govern the way they work, and also the speed at which they can make changes. “Any significant change to the structure of MAS would have to be put to an EGM, and this would require MAS giving notice and then having to hold the vote and so on. It puts a strain on already stretched finances and also wastes valuable time,” he said.

But what about the share price, which is in its lowest range in the past decade?

MAS’ counter as previously mentioned fell to 15.5 sen on May 19 as a result of news reports. However over the past few days the counter has been rising on reports suggesting that a new restructuring plan is coming, and today it was trading at pre-MH370 levels of around 25 sen.

However the aviation analyst brushed aside concerns over the share price, saying that in MAS’ current state there is not going to be a perfect time to privatise. He notes that currently the share price is rallying over optimism surrounding restructuring plans, but pointed out that it may fall again if MAS 2Q14 results are not good.

The most pressing factor in turning MAS around is time, and action needs to be taken now. Khazanah is currently best placed to take this on, and if it can privatise MAS, then it will be able to move even more quickly, he added.

Tomorrow: The men who might privatise MAS