By Emmanuel Samarathisa

MALAYSIA Airlines Bhd (MAB) is expected to remain unprofitable and will require as much as RM21 bil of public funds to keep it running until 2025, if the languishing flag carrier fails to turn around its fortunes or find a strategic partner, a memo sighted by FocusM says.

These were some of the findings from owner Khazanah Nasional Bhd’s committee over the fate of MAB after the airline proposed its business plan for the 2019-2025 period at an undisclosed date.

The RM21 bil financing is a “high-level estimate” based on Khazanah’s projections, which included aircraft purchases if MAB continued bleeding red. That would mean the fund would need to pump in roughly RM3.5 bil a year with RM1 bil-RM1.6 bil going to operations and the rest for aircraft. Based on MAB’s own estimates which Khazanah considered optimistic, RM10.3 billion would be needed.

Khazanah’s last business plan for MAB in 2014 envisaged spending RM6 bil for turnaround. Including that amount, by that time, the government had already spent some RM17 bil over the years to save MAB. Adding that RM21 bil to this would mean that RM38 bil could eventually be spent on MAB, with no guarantee of recovery.

Khazanah panned MAB’s business plan as “overly optimistic” as the airline believed its revenue would see a 4% a year boost between 2019-2025 with a focus on, among others, “driving revenue” and “managing costs” while maintaining “the premium customer experience.” MAB projected that it would break even in 2022 and achieve financial stability in 2024.

The Khazanah team, however, believed there were no “clear” differentiating business models with what MAB had been doing previously. The fund said the 4% a year revenue jump would be “unlikely” given the average growth rate of MAB had been 1% a year between the years 2016-2018.

Khazanah added that even if MAB’s estimates were accepted, barring unforeseen circumstances, the fund still needed to pump in an additional RM10.3 bil to pay off the RM5.6 bil loan from special-purpose vehicle Turus Pesawat Sdn Bhd for six Airbus 380s and finance operations.

As it is, MAB already risked defaulting on the Turus Pesawat loan. Also, bondholder Kumpulan Wang Persaraan (Diperbadankan), the civil servants’ pension fund, would need to take a haircut after subscribing to its portion of MAB’s perpetual sukuk in 2012 for RM1.5 bil, the memo said.

Khazanah deduced that any likelihood for MAB turning around based on the airline’s business plan was unlikely due to the flag carrier’s weak track record and execution capacity as well as its inability to address declining revenue yields, basically unit revenue.

More importantly, if MAB continued to grow at its historical rate of 1%, the airline would never break even, the memo said. According to the company’s filing, MAB made RM8.73 bil in revenue but a net loss of RM791.71 mil for the financial year ended Dec 31, 2018.

Previously, FocusM reported that there were four companies eyeing to be a strategic partner for MAB. They were: AirAsia Group Bhd (AAGB), Japan Airlines Co Ltd (JAL), Air France-KLM SA and Malindo Airways Sdn Bhd.

AAGB and JAL were picked as the frontrunners with the Khazanah management team favouring AAGB. Air France-KLM, according to a Reuters report on Jan 21, had dropped out of the race.

According to Prime Minister Tun Dr Mahathir Mohamad, who is also Khazanah chairman, there are five proposals. The identity of the fifth bidder is unknown at the time of writing. Khazanah would need to settle on a name soon.

Earlier stories:

How JAL proposes to turn around Malaysia Airlines

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

AirAsia appears in the lead to take over Malaysia Airlines

Share this post