Clean slate for MAS

THE latest process of turning ailing Malaysia Airlines around began on Feb 26, 2014, shortly after it announced its fourth consecutive quarterly loss for the financial year ended Dec 2013. The Government and Khazanah Nasional Bhd agreed that an independent review of the airline was necessary and engaged PricewaterhouseCoopers for the job.

Khazanah was given six months to come up with its rescue plan. Mere weeks later, MAS was rocked by the disappearance of MH370 in March, followed by the shooting down of MH17 last month. On Aug 26, exactly six months later, Khazanah submitted its turnaround plans to the Cabinet, which were approved on Thursday.

Managing director Tan Sri Azman Mokhtar kicked off his very busy Friday with back-to-back meetings with the MAS unions and the media. Here are key points from the question and answer session:

Why will this plan be different from previous turnaround plans?

Where it is different this time, is that it is attempting to go into new company (NewCo) with a completely new slate and will only move the parts of MAS i.e. the staff, work practices, reset contracts that can sustain a competitive business and cost structure for MAS to compete properly. I think that is one major difference. The second difference is in the area of regulatory support. We believe that with the onset of an aviation commission, it should help all industry players to get more clarity. One of the issues in the market, in Khazanah’s view, is that there has been rather haphazard competition happening. It is envisaged that while our recovery plan will be executed by MAS, the renegotiation is not necessarily to be done through the courts as has been done in other countries. We would, with the proposed MAS Act as envisaged by the Government, provide another alternative pathway if we indeed need to get the help to push through the difficult changes.

Why is it important for MAS to relist?

We believe relisting, eventually, is a good control measure in terms of the financial and operational discipline of our companies, not just MAS. Khazanah, in general, believes in listing our companies. Of course, during certain times, for example, when a company first gets incubated or in this case goes through a rebirth, this is not the time to be listed and having to comply with various rules and regulations such as quarterly reporting. Nevertheless, we recognise public interest is high and we will institute a form of public accountability briefings at appropriate junctures.

Does this mean some international routes will be dropped? Will there be a reduction in number of aircraft operating as well?

The details of that are really the domain of MAS. We have engaged over the last six months, also in consultation with MAS, with aviation experts. We believe it is premature to say which routes will be shed, the reason being this will depend, amongst other things, the ability to move beyond the new cost structure. I think the flagship route to London will remain, the other routes into Europe generally will be reviewed and announced by MAS. In terms of network and thereafter fleet strategy, we have stated our broad outline but MAS’ management will drill down into their operating business model.

Khazanah has pumped in RM7bil. Now you’re putting in RM6bil more, that’s RM13bil. You’re going to list it in two to three years time. Are you going to recover the RM7bil and what is the possibility of recovering the RM6bil back?

In our estimation, up to RM6bil will be given on a staggered and conditional basis. If the medicine that comes with the conditionality is taken, we believe MAS will return to profitability and therefore, the RM6bil will be recovered. We believe the RM6bil is not a bailout and will be recovered through the relisting or through the value of a company that is re-listable within three years. The key fulcrum is the ability of MAS to turn around. We have diagnosed the problem and the medicine, we believe, are the ones we are putting conditionality on. This medicine is linked to the money coming in. So if you don’t take the medicine, we are not going to give you the money.

How did the union respond during the discussion earlier?

It was a good and frank discussion. I think we were at pains to try and explain what will be happening, including that the vessel of NewCo will not be able to carry everybody. We know how excellent many parts of MAS are and it is in this spirit that Khazanah is committed to do the reskilling, redeployment and job creation. In some respects, such a major corporate restructuring in this aspect is somewhat unusual or unprecedented.

Criteria of new CEO? Local or foreigner? Will he or she be from the aviation industry?

We are looking at both Malaysian leadership talent and global aviation specialists, basically CEOs. We should not pre-empt beyond that. We are seeing no lack of interest about people wanting to come and serve MAS.

Will the NewCo still have maintenance, repair and overhaul (MRO) and MAS Aerospace Engineering (MAE)?

Currently, it is envisaged that MAS will not be broken up as it stands.

Will the name of NewCo be changed?

I can categorically state that as far as we are concerned, we have recommended that the name stays. The tweaking of the brand is something NewCo will be doing but our recommendation is that the name stays.

What is Retirement Fund Inc (KWAP)’s take-away from this? Why did they agree on the swap? What are the parameters you have agreed with KWAP?

It is fairly straightforward. Debt equity swap. Debt is a fixed income instrument. They will forego some of that in exchange for an equity instrument where the capital value could go up.

The details of that will come out in due course. This is part of our broader programme - the 100 - 125% net gearing target over a three year period was not a number that was simply plucked.

We found that airlines that manage to sustain themselves are airlines with that kind of capital structure.

Is the aviation commission the right response to haphazard competition and will it introduce regulations to control or restrict capacity?

The issue is orderly competition. I’m sure it is desirable not just for MAS but for all players. From our understanding, the economic regulation may or may not include capacity regulation.

Indeed, the Malaysian market has moved away from capacity regulation.

With the impending onset of open skies, we can expect a more liberal market in terms of capacity.

What happens if the RM3bil has been spent and MAS is still not profitable?

The purpose of this paper is to explain to the Malaysian public why and how are we going to approach the twin and sometimes contradicting objectives of having a national carrier, at the same time manage prudent use of funds.

Based on our model, if successful, we will recover our RM6bil. We may not recover fully the RM7bil before that but we will recover the rm6bil if this happens.