AirAsia’s takeover of Malaysia Airlines may cost Khazanah over RM8 bil

By Emmanuel Samarathisa

AIRASIA Group Bhd’s (AAGB) proposed takeover of Malaysia Airlines Bhd (MAB) will include key exclusions which may take the initial cost to Khazanah Nasional Bhd (which owns all of MAB) to over RM8 bil, documents sighted by FocusM show.

These include an RM5.4 bil financing gap for MAB’s six A380s, the exclusion of an RM2.5 bil sukuk, costs of staff layoffs, and the cost of cancellation of 25 Boeing 737 MAX 8 orders as well as other fleet rationalisation. All these total up to well over RM8 bil that Khazanah will have to bear even if MAB is acquired by AAGB.

The documents showed that last month AAGB chief executive officer Tan Sri Tony Fernandes pitched to Khazanah managing director Datuk Shahril Ridza Ridzuan a merger between AAGB, its long-haul unit AirAsia X Bhd and MAB (MergedCo).

This MergedCo would be listed on Bursa Malaysia and be a “Malaysian/Asean champion.” These were some of the pull factors that entitled AAGB to be MAB’s strategic partner.

It is also understood that Shahril and the Khazanah management were in favour of the deal but it was shot down by the board. It is believed that the proposal is still making rounds and being considered as the fund needs to decide on a strategic partner for MAB soon.

According to Prime Minister Tun Dr Mahathir Mohamad, there are five proposals. Economic Affairs Minister Datuk Seri Mohamed Azmin Ali also said Khazanah is still on the lookout for a strategic partner. The fund will need to settle on a name soon.

AAGB’s bid is one among four bids currently on the table and is probably the leading bid, followed by Japan Airlines, the other two being Air France-KLM and Malindo Airways.

But AAGB had the leg up as Khazanah believes the synergy derived from the MergedCo would amount to roughly RM1.4 bil a year, which is sufficient to cover MAB’s operations of RM1 bil a year.

Here are the salient points of Fernandes’ initial proposal to Shahril:

1) AirAsia Group is in the process of consolidation

AAGB, through AirAsia Bhd (AAB or AK), is in “the process of acquiring” AirAsia X Bhd (AAX or D7). This will see both airlines merge into one airline operation, retiring AK and D7 and only using one IATA code AK.

This enlarged group will serve the low-cost market, covering domestic and international segments, from short to long haul. This is also the crucial step in merging with MAB to form the enlarged MergedCo.

2) MH will be retired and placed under AirAsia group

MAB will be placed under Asia Aviation Investment Ltd (AAIL) which is 100% owned by AAGB. The IATA code MH will be changed to MY but will target the “premium segment” for both domestic and international markets.

AK, which is the merged company between AirAsia and AirAsia X, will aim for the low-cost segment for both domestic and international markets.

Further, AirAsia plans to retain the blue colour of the current MH but “with a refreshed, modern image and branding” while its low-cost offerings under AirAsia Group remains with its red and current branding.

3) No golden share

Post-transaction, the Malaysian government or Khazanah should not have any golden shares, or preference shares in MAB. AAGB also is demanding for complete control of management, including the appointment of key senior personnel, including the chief executive officer.

Fernandes wants “minimal government intervention” as MAB will be under the AAGB umbrella. But Khazanah may be allowed to have a seat on the board of the MergedCo.

4) Khazanah to bear staff layoffs and settle RM2.5 bil sukuk

AAGB wants to have full discretion on who to hire and fire from MAB but Khazanah has to execute the rationalisation exercise.

This includes bearing compensation and costs related to the exercise which may involve voluntary separation schemes (VSS) and/or mandatory separation schemes (MSS).

AAGB might retain pilots and cabin crew for future growth but other divisions are subject to “further deliberation.” AAGB will also not take up the RM2.5 bil corporate perpetual sukuk issued in 2012.

5) AAGB is seeking government and Khazanah’s help for clearance from the Malaysian Competition Commission (MyCC)

Having a MergedCo consisting AAGB, AAX and MAB is expected to trigger anti-competition problems. AAGB is seeking for the proposed transaction to be approved by MyCC. This is done to protect AAGB and its stakeholders’ interests.

6) AAGB will look to cancel, exclude and retire a number of MH planes

Six Airbus A380-800 are to be sold or disposed by Khazanah prior to the merger transaction. The reason is, according to AAGB, the group does not need to use the A380s as part of its operations.

Also, these six Airbuses have yet to be fully paid for by MAB. There is an RM5.4 bil loan financing gap for the six planes. AAGB does not want to bear that either.

AAGB also wants Khazanah to cancel the 25 Boeing 737 MAX 8 orders. This is to streamline planes to ensure that they originate from a single manufacturer, Airbus. Also, AAGB is worried about “current issues associated with the B737 MAX aircraft”, so it doesn’t see the benefits of adding the Boeing fleet into its current Airbus stable.

Khazanah is to bear any penalties arising from the cancellation, prior to the proposed merger.

AAGB will also seek to retire six Airbus A330-200 which are around 10 to 14 years old. These planes, according to AAGB, operate different engines, and ultimately would impact MAB’s turnaround.

7) Firefly to be excluded, MASwings to be sold, Brahim’s to be acquired

There are two options for MAB subsidiary Firefly. First is to exclude the airline entirely from the proposed merger. The second option is to include Firefly as part of the transaction but keep it as a separate company from MH and not as a subsidiary of MH.

Firefly can come under AAGB but be transformed into a business jet arm providing connectivity from Subang Airport, similar to London City Airport.

But AAGB is proposing that the Sabah and Sarawak state governments take over MASwings and for them to operate the Rural Air Services (RAS) routes.

AAGB wants to buy over Brahim’s to streamline in-flight catering operations to ensure cost efficiency and operations. – Jan 20, 2020

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