M'sia Airlines touching down for a delisting

[SINGAPORE] Under intense pressure and an unforgiving timeline to whip up a revival plan for tragedy-struck Malaysia Airlines (MAS), Khazanah Nasional, majority owner of the national carrier, is expected to submit a broad plan to take the airline private to Malaysian Prime Minister Najib Razak next week.

The plan, pieced together with adviser CIMB Group after the airline was hit by a second disaster in quick succession with the downing of flight MH17 over Ukraine, also involves an overhaul of the airline's top management, The Business Times understands.

That MAS would file for bankruptcy, as widely speculated, can be ruled out. A rebranding exercise which could involve a renaming is being contemplated but that may come later as the architects of the airline's revamp, for now at least, are intent on a more substantive overhaul.

"It will be a total end-to-end restructure where every aspect of the business will be looked at - route streamlining, fleet resizing and people streamlining. MAS can't do bits and pieces of restructuring anymore like in the past. This will be a classic, traditional restructuring," said a source close to the plan.

"Given the depth and scale of the proposed restructuring, keeping MAS listed is going to be a distraction and quite harrowing . . . and costly," the source added.

Based on MAS's volume weighted average share price over nine months of some 23 sen - it finished yesterday unchanged at 22 sen - Khazanah, which already owns nearly 70 per cent of the airline, would need to cough up some RM1.2 billion (S$469 million) to buy out the remaining shareholders. It would cost more if a premium is attached to the price tag, which sources say is highly likely.

"These are very different circumstances. The idea is to make an offer that is reasonably fair," said the source.

The public to private route for MAS has long been bandied about given the airline's spotty financial track record - it spent half of financial years 2003 to 2013 in the red with short-lived intervals of profit - but the idea gained traction following the shocking disappearance of an MAS jetliner, yet to be found, on March 8.

It was however not favoured then as MAS shares were hammered - in mid-May, it skidded to a record low of 15.5 sen - and a privatisation based on common pricing benchmarks would have been unpalatable for minority shareholders, although it would have cost Khazanah less. Such an exit for minority shareholders of a state-controlled entity, one that has long embodied national pride no less, did not sit well with the Malaysian government.

But with the latest MH17 tragedy, the airline, already battling massive losses, brutal competition from low cost carriers and overcapacity which have crimped yields, found itself running out of plausible options. The preferred course of action narrowed to just one - to take it private.

"The worry is that in the absence of any plan, there is going to be excessive speculation. A preliminary plan will be submitted next week, followed by a more detailed one by end-August," said the source.

BT also understands that once the carrier is sliced and diced with profitable subsidiaries spun off and listed, the leaner entity is likely to make a comeback on the Malaysian stock exchange by 2018, in time for the country's 14th general election.

"We are between two disasters and two elections. Malaysia just completed one (election) last year and the idea is to bring MAS back to the market, recover some of Khazanah's investments and allow others to participate in this asset before the next polls. MAS has this broad window to work on," said the source. Roping in a strategic equity partner to lend its expertise and access to global networks to bolster MAS's standing in the bitterly-competitive industry is part of the agenda. To this end, talks are ongoing with a couple of top Middle Eastern airlines, namely Qatar Airways and Abu Dhabi's state-owned Etihad Airways.

It has yet to be determined if the divestment of a strategic stake will happen in the near term or later, at the pre-IPO (initial public offering) stage when it would be easier to court other airlines.

That the timeline of the airline's reboot and re-listing plans is tied to elections should not surprise given that MAS has strong political overtones. To some extent, it is political meddling in the state-owned entity that has thus far hampered its turnaround.

For instance, a S$450 million share swap involving MAS and low-cost stalwart AirAsia two years ago, which was meant to close the competitive gap between the bitter rivals and sharpen MAS's focus, was bungled due to blistering opposition by its militant union in 2012. It was a risk that Malaysia's Barisan Nasional-led government felt it could ill afford as it was preparing for its toughest elections, as the union represented a huge workforce of some 20,000 people. So, the deal was dropped.

Now, two calamities over five months - claiming 537 lives from nations across the globe and turning the world's scrutiny on MAS and by extension, Malaysia - have served as a wake up call.

"Before this, any MAS restructuring was always up against obstacles. Now, the message is, you (the union) are no longer the solution, you are part of the problem. So, work with us. Everyone seems to have woken up to the realisation that it's now or never," said an industry source.

Still, overhauling MAS will be a task riddled with challenges - overcapacity, rising costs, bruised travel sentiments and intense competition. Insurance firms will also be raising their premiums substantially in the wake of the recent string of aircraft disasters. It will be a punishing environment for an award-winning airline which prior to all this enjoyed an excellent safety track record.

"A lot of people are demanding a rescue plan immediately. We are talking about a company with 50 years of legacy and 77 years of flying. It's going to be hard," the source added.