By Emmanuel Samarathisa
AN RM1.12 bil cash injection for a 25% stake in Malaysia Airlines Bhd (MAB), an offer of revenue management and turnaround expertise, and making KLIA an international hub are key parts of Japan Airlines Co Ltd’s (JAL) proposal for MAB, according to documents seen by FocusM.
However, the initial sticking point that deemed the proposal inferior to that of AirAsia Group Bhd (AAGB) by Khazanah Nasional Bhd (the owners of MAB) is that estimated synergies would only amount to RM138 mil-RM359 mil a year – not enough to cover MAB’s losses.
However, this does not appear to have taken into account any positive impact from revenue management and improvement in service levels which can garner higher fares and hence revenues.
JAL’s own turnaround after the company went bankrupt in 2010 was premised on better revenue management and higher service levels even as costs were kept down. In just two years, the airline recovered and made an initial public offering as a prelude to a listing, worth US$8.5 bil then, the second largest after Facebook Inc.
According to documents, Khazanah believed AAGB would fetch the fund RM1.4 bil a year in synergies but did not outline how they would accrue. There were no hard figures on valuations. But this quantum is expected to keep MAB operational, according to the fund’s estimates.
Fresh capital aside, JAL wanted Khazanah to remain MAB’s major shareholder with 75% stake. The Malaysian government would also retain its golden share in the airline.
An attractive feature of the JAL proposal is that it expressed interest in transforming KLIA into a hub competing against Bangkok and Singapore, where it will direct traffic from Japan to India, Indonesia and Australia through Thailand and Singapore to KLIA. It also improves connectivity between Kuala Lumpur and the US through Tokyo.
Mooted also is the creation of a new mid-to-long-haul low-cost carrier with a network integration which could open up new routes to the US and Europe, and a cross-secondment of MAB and JAL staff for exchange of best practices.
Despite the ease of execution, JAL turned off Khazanah due to the Japanese airline not taking a lead in the restructuring of MAB and the inability to solve domestic overcapacity. AAGB came out tops in these two categories, according to the documents.
Khazanah, while acknowledging JAL’s expertise and strong cultural alignment, remained apprehensive on the fact that the partnership would not solve “competitive rivalry.”
Khazanah’s management would go on to favour AAGB, despite costing the fund more than RM8 bil, as JAL would only bring “modest synergies.” This decision had been shot down by the Khazanah board.
As reported previously by FocusM, there were four companies in the running to be a strategic partner of MAB: AAGB, JAL, Air France-KLM SA and Malindo Airways Sdn Bhd.
Below are summaries of the other three bidders and their proposals:
– Equity stake and valuation pending detailed proposal.
– Estimated synergies of RM1.4 bil per year.
– Expected to solve industry overcapacity.
– Access AirAsia’s digital and other aviation businesses.
– No initial investment but a call option for a 49% stake.
– Synergies estimated between RM1.2 bil and RM2.2 bil per year.
– 50:50 joint venture in maintenance, repair and operations.
– Commercial cooperation with daily Paris-Kuala Lumpur flights and possible expansion to North Africa and Europe.
– No available information on equity stake or valuation.
– One year collaboration trial before final decision on merger.
– Expected cost reduction through scale of economies.
Prime Minister Tun Dr Mahathir Mohamad on Jan 20 said there are five proposals. The name of the fifth bidder can’t be ascertained at the time of writing.
But 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.