MAS/Airasia ... Apr12

Sources say the controversial share swap between Khazanah and Tune Air Sdn Bhd in respect of their partial shareholding in MAS and Airasia Bhd respectively is off. The move is seen as Putrajaya giving in to the pressure piled on by the unions at MAS.

But sources say the comprehensive collaboration framework that spells out the areas which the airlines would work together for their common benefit remains intact.

It is unclear how Khazanah and Tune Air plan to unwind their positions, especially when there is a possibility that a MGO offer could be triggered if the shares are distributed back to their original owners.

Another matter that is likely to be deliberated at MAS next board meeting is a proposal to issue rm3 billion worth of Islamic perpetual binds that will help bridge the gap for its rm6 billion capex requirement in 2012.

The question remains as to whether the collaboration between MAS and Airasia will be less meaningful if there is no share swap.

On the subject of MAS issuing a rm3 billion Islamic perpetual bond, sources say KWAP is poised to take up most of the paper. Although there are no details on the coupon rate.

This mans that MAS would have to fork out a substantial amount for the interest repayment annually. But it should not be an issue as long as the airline gets better returns from investing the proceeds.

If Genting Singapore’s issuance is taken as a guide, the perpetual bonds will not have a maturity date and can be redeemed in whole, but at a date stipulated by the company.

As part debt, part equity, the holders of the perpetual bonds rank higher than the shareholders of the airline. If the perpetual bonds are convertible, the exercise will be dilutive to shareholders. The downside of the perpetual bonds is that they would be dilutive for existing shareholders and would impact MAS’s ability to pay dividends. But the airline has not been profitable, so the issue of shareholders losing out on dividends does not arise.

It will take a while for MAS’ largest shareholders, including Khazanah and the EPF, to enjoy any dividends from the airline.

Tune Air meanwhile will no longer be a shareholder with the unwinding of the share swap.

What is certain is that the rm3 billion fundraising will ease pressure on MAS’ cash pile of rm960 million as at Dec 31, 2011. It will also dismiss the possibility of a rights issue.

While MAS’ current cash pile of just less than the rm1 billion is enough to sustain it for four quarters, it is due to take delivery of 23 aircraft in 2012-2013.

Based on a catalogue price of rm640 million, this means MAS will have to come up with at least US$40 million for each A380 or about rm640 million for five A380s due for delivery in 2012.

In addition, MAS may have to fork out another rm415 million in cash to take up its RCPS due at end Oct 2012.

Market observers are concerned about MAS’ high gearing, with some estimating that the airline’s debt to equity ratio may even hit four times by 2013. If Genting SP’s issuance of perpetual bonds is taken as guidance, MAS’ geraing may be less than estimated.

In the case of Genting SP the perpetual bonds were structured to put less pressure on the company’s debt ratios. Even though the bonds are part debt in nature, from an accounting point of view, they can be treaded as 100% equity in Genting SP’s books.

Such an accounting treatment may work to the advantage of MAS, but it remains to be seen. MAS’ debt stood at rm5.67 billion as at Dec 31, 2011 of which close to RM3 billion is attributed to long term financing issue.

Although the rm3 billion perpetual bonds will give MAS some breathing space, all its not well at the ailing airline facing a hiccup in its BTP.

Furthermore, if there is a revamp of the MAS board following the unraveling of the share swap, it raises questions about the continuation of the airline’s business plan.

There are reasons why the CCF and the share swap were crafted in the first place; it was to stop the local airlines from fighting each other and to prepare them for the onslaught of competition when Asean implements the open-skies policy by 2015.

The carriers are getting prepared and are ahead of us by four or five steps while we are struggling. By unbundling the share swap we will be taking five steps backward.

The regional carriers were moving faster to position themselves ahead of 2015. Singapore Airlines (SIA) has both premium and low-cost airlines within its group to allow it to serve the low to high-end market. Thai Airways has done the same and Garuda is also getting there.

With the share swap, MAS could be the premium carrier and AirAsia, the low cost airline. Together they could have been a force to reckon with in the highly competitive environment. There are areas they could work together and compete at the same time.

The share swap and CCF were inked in August 2011.

Even if the share swap is called off, MAS and AirAsia will still need to work together as that is a global trend for airlines. Both may get into a memorandum of understanding (MoU) or a joint venture (JV) to work on areas that were identified in the CCF such as engineering, ground support, aircraft purchasing, cargo services and training. May be an MoU or JV is a better model given the objections to the share swap.

However, another source pointed out that “it would never be the same, as without a share swap there will be no economic alignment and the cooperation between the airlines will be limited”.

Any decision to unwind the share swap is not going to go down well for Malaysia Inc.

An unwinding of the share swap would mean AirAsia's Fernandes and Datuk Kamarudin Meranun may have to step down from the MAS board and also give up their 20% equity stake in the airline.

The AirAsia founding members were just trying to help to turn MAS around. AirAsia by itself is doing very well, so they could have done without a share swap.

An industry expert feels that MAS would continue to report losses if drastic steps are not taken to change the way things are done at the airline. MAS has to invest in short-term losses but it is for the long term gains. Cutting its workforce and network will not work as these are seen as quick shortcuts which will not resolve the problems the airline is facing.

For MAS to turn around, and for it to be able to compete with the likes of SIA, Cathay Pacific and Emirates, it has to get into the same frequency battle like other premium carriers. It needs to have the network breadth, its product has to be ahead of the curve and this includes having next-generation aircraft and all the latest fittings including real flat beds. It also needs to have a customer relationship management system so that it is able to serve its customers better.