Reprieve for MAB, but hurdles ahead

MAG announces carrier will receive RM3.6b capital injection from Khazanah to cover operational costs until 2025


A RM3.6 billion lifeline has given troubled carrier Malaysia Airlines Bhd (MAB) time to re-organise and survive, but analysts believe its long-term survival plan has big hurdles.

The airlines’ parent, Malaysia Aviation Group (MAG), announced late on Monday that it will receive the new capital injection from owner Khazanah Nasional Bhd to cover operational costs until 2025 as part of an RM16 billion restructuring plan after creditors and a UK court allowed it to go ahead.

Though the capital is meant to fund the airline until 2025, aviation analysts say with MAB’s current burn rate, that money would do well if it lasts 10 months.

Alton Aviation Consultancy director Joshua Ng said the new RM3.6 billion commitment is likely enough to tide the airline for that time, based on publicly available information regarding the airlines’ cash burn of US$84 million (RM339.65 million) per month as of August 2020.

He said, however, the burn rate could be lower and the reprieve period longer, depending on how much the airline has negotiated with creditors.

“This restructuring will help to reset MAG’s balance sheet, through a combination of relief from aircraft lease commitments, as well as an injection of capital from its main shareholder. However, other airlines in the region have also undergone their restructuring process.

“Following this restructuring, key strategic decisions will have to be made to the airline’s commercial and operating model to ensure that it can be a profitable carrier in the new normal,” Ng told The Malaysian Reserve (TMR).

In the past, he said MAB faced intense competition brought about by low-cost carriers (LCCs) such as AirAsia Group Bhd, Jetstar Airways Pte Ltd and Scoot Tigerair Pte Ltd.

From a network perspective, he said a majority of routes flown by MAB overlapped with LCCs, putting significant yield pressures on the company, but with the flag carrier carrying the burden of a higher cost base.

With MAG’s plan to expand to other travel-related products and services beyond flights, he said MAB can engage with its loyal customers in many different ways, from retailing of merchandise and goods to travel stays and activities, similar to how other airlines do.

Winair AS founder and aviation consultant Hans Jørgen Elnæs raised doubts that such a strategy to diversify and become a “global travel group”, as MAG put it, would be a key success factor to turnaround the company.

“The history of airlines to become much more than stay with its core business of an airline is not very successful. Though, I support a strategy that increases ancillary revenue growth. But to invest in too much of non-core business, I am doubtful if this is a key to success,” Elnæs told TMR.

He said integrating partnership into MAB’s product and distribution can be a success factor.

He also said travel behaviour will change post-Covid-19 with tourism, visiting friends and relatives’ segment is expected to take a larger slice of the market and be the first movers while business segment takes a back seat.

Sobie Aviation Pte Ltd analyst and consultant Brendan Sobie said MAG restructuring — which is among the first to be completed soon in the region — is an important step that enables MAB to improve its competitiveness by significantly reducing leasing costs for 737s, A330s and A350s aircraft.

He said other steps to be completed over the next month will address other key areas to achieve significant cost savings going forward.

“Whether all the cost reductions or the capital injection, which was necessary to secure new agreements with creditors, are sufficient depends on how long this crisis lasts and how long it will take for travel to fully recover,” Sobie told TMR.

He said how market conditions evolve in Malaysia in terms of the competitive landscape will also be a factor in determining if MAG can successfully turn around and eventually become profitable.

He added that additional measures may be required over the next few years but that is hard to predict given all the continued uncertainties.

Aviation analyst and founder of Endau Analytics Shukor Yusof argued that the MAG restructuring is another bailout because restructuring typically includes job cuts.

He raised questions about whether the plan would involve job cuts to commensurate with fewer aircraft flying until the restructuring period of 2025 while competitiveness might remain a fundamental issue at MAB.

“Money is not an issue. Khazanah will pump again if it is not enough. No problem. The funds will keep MAB alive but not make it competitive,” Shukor told TMR.

Khazanah had, in 2014, initiated a turnaround plan for MAB which included RM6 billion capital infusion, consolidation of its operations, delisting and retrenchment of 6,000 employees. That too had fallen short of its objective.

An analyst does not discount another fundraising for the company in the future, giving a comparison that AirAsia needs as much as RM2.5 billion and that is barely enough to cover both 2020 and 2021.

“It is good to know that MAG is expanding into other travel-related products and services but other airlines are far more innovative in expanding their revenue catchment,” the analyst, who requested anonymity, told TMR.

Read our previous report here

UK Court gives MAG restructuring nod, Khazanah to commit RM3.6 bil