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Shannon Teoh
Thursday, Sep 11, 2014

Malaysia, Asian Opinions

MAS needs harder reset to get out of tailspin

The Straits Times | Shannon Teoh | Thursday, Sep 11, 2014

Sovereign wealth fund Khazanah says it would slash 6,000 jobs and pump RM6 billion (S$2.4 billion) into MAS. But job cuts are difficult to implement when there is a powerful union. And so are route cuts, when there are hangars full of under-utilised planes.

The figures from what Khazanah Nasional called a "hard reset" of beleaguered flag carrier Malaysia Airlines (MAS) certainly sounded impressive - it would slash 6,000 jobs and pump in RM6 billion (S$2.4 billion).

But the sovereign wealth fund's rescue plan for an airline that has lost RM5 billion since 2011 is not quite as bold as it seems in this age of the sound bite.

There is nothing ingenious about the idea of dumping money into a business to continue operations - even one that loses more than RM1 million a day from just financing costs alone - or of "right-sizing" the headcount by a third, when you have only 60 per cent of neighbouring Singapore Airlines' efficiency.

Indeed, there was an eerie sense of deja vu when Khazanah boss Azman Mokhtar said that when a new holding company is set up to house a delisted MAS in July next year, it would need a "clean slate" with a reduced net gearing - or ratio of debt to equity - of 120 per cent, from the current 290 per cent.

The same Tan Sri Azman was head of BinaFikir, which advised the government on how to turn MAS around in 2002 when the gearing was at 700 per cent.

The widespread asset unbundling (WAU) involved transferring RM5 billion in assets and RM7 billion of debt to a Khazanah-owned holding company, Penerbangan Malaysia Berhad (PMB), which then leased planes back to MAS, transformed into an "asset-light" carrier with a net cash position.

Initially, it looked like it worked. By the time Mr Azman was Khazanah managing director in 2004, MAS reported an annual net profit of RM461 million, its best performance since its 1985 listing.

Then it all went downhill. Since the government took over MAS in 2001, the airline has bled RM8.4 billion while taxpayers are down RM17.4 billion, including RM2.8 billion in losses by PMB.

A rescue team that came onboard in 2005 revealed that previous profits before a sudden dive were merely from one-off gains. Nine years and three CEOs later, Mr Azman "appears to be dusting off the old playbook", Mr Shukor Yusof, founder of aviation researchers Endau Analytics, said.

MAS counts RM1.5 billion in perpetual sukuk (Islamic bonds) as equity - a widely-used creative accounting method. But if this were filed under debt, the gearing would be more than six times, close to 2002 levels.

In the latest exercise, debt holders are being leaned on to swap for equity at a discount - not so different from the WAU in 2002, when PMB took on debt and operated as a loss-making lessor. For example, the government's pension fund will swap about 6 per cent of MAS' total debts, but given that that is worth a sixth of the airline's current market value based on Khazanah's delisting offer, some discounting is surely involved.

"It's the same plan, under the same guys, but today MAS has even more debt than when they executed it the first time," one analyst said. "Doesn't this show that it failed?"

Some, like Maybank analyst Mohsin Aziz, say that MAS must identify "hopeless" operations and "cut them off and stop the bleeding". This would entail write- offs, he said on Bloomberg TV, and an easy decision would be to drop European routes which have been "losing money for decades".

But Khazanah did not delve deeply into route cuts for an airline that reduced capacity by 12 per cent in 2012, only for available seat-kilometres to jump by 17 per cent the following year.

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