MAS should go for Section 176 of Companies Act

  • Business
  • Saturday, 17 May 2014

THE tragic disappearance of MH370 has taken a huge toll on Malaysia Airlines (MAS). Since the plane vanished on March 8, the airline has cancelled close to 900 flights.

Cancellations were mainly for China and Asian flights, and demand seems to have hit rock bottom. In March, sales in China fell by 60% after the MH370 was lost.

Recently, one of its flights to Bali had less than ten passengers and it would have been wiser to cancel the flight rather than endure a big loss to proceed with that flight. The decline in the number of passengers was also seen on its 500-seater A380 flagship route to London, where on some days the plane carried about 200 passengers.

Flying with less than 30% load means MAS is flying at a loss and as it stands, MAS is burning up to RM2mil in cash a day. Couple with finance cost, the cash burn rate is RM4mil.

MAS has RM3.37bil cash at the end of March but that amount has since fallen to RM2.8bil. If nothing is done, its cash reserves can be depleted by 2015/2016. It has liabilities of RM11.8bil and net debt level of RM8.5bil as at end-March.

After MH370 and the cancellations, MAS cannot continue to operate in its current form. It needs to shrink its size, and high costs is its biggest liability.

Even Prime Minister Datuk Seri Najib Tun Razak said on Thursday that it was too late to save the airline in its current form. He is saying that bankruptcy might be among several options to restructure MAS.

MAS sank further in the red with RM443mil net loss for the three months ending March this year, and its fifth consecutive loss.

Though MH370 is a factor in the loss, the amount is its biggest in over two years and that means all the numerous restructuring exercises undertaken over the decade have not been able to put it on a profitability path.

Granted, the industry is ever evolving and there is competition from new players. MAS has legacy issues. But after undergoing so many restructuring exercises, some which has been quick fixes, MAS has remained in the red five out of the past ten years.

It has come to a situation where its survival today is questionable and the fact that its yields are depressed at 22.5 sen and its cost per available seat km (ask) at 22.8 sen is higher than its revenue per ask of 17.2 sen.

The team at MAS is rewriting its business plan to restructure the airline once again.

CIMB Research in a note said that “vested interests has destroyed many restructuring in the past, so will this one be any different?’’

In the past some tough decisions were not undertaken as being a national carrier it had to succumb to political overriding over commercial reasons, and had to serve the social agenda.

But many have forgotten that MAS is a company first, and it has to make money.

The way out this time would be to collapse MAS, seek for Section 176 of the Companies Act for protection from creditors whilst it restructures. Do a capital reduction and of course shareholders will have to take a hit.

It may be a viable way to park the debts in the old MAS and set up an new operating unit to fly the routes and no need to close the airline for a day. To do that, contracts need to be renegotiated and the ones that will feel the pinch are the staff.

Their terms may be compromised and should MAS network shrink, then that will lead to job cuts. The figure floated around is 4,000 to 7,000 jobs may be slashed. It needs to realign its airline and non-airline operations, it should learn from successful examples like Garuda, Japan Airlines and many more.

If there are job cuts, then it has to be done professionally, appoint an agency to evaluate what jobs are needed and what can be reduced and pay the employees a reasonable sum. Don’t forget they have served the airline when in boom and bust times.

And if reducing cost is the main focus, then some of those earning RM100,000 or more a month should be among the first to take a pay cut.

Re-doing MAS is going to be tough with political inferences, but it is time for MAS to bite the bullet. Either save the airline or be a popular government.

The good thing is that the government has also said that it will not inject new cash, but MAS will need more money in the future. Since 1998, some RM16.7bil has been pumped into the airline to keep it afloat via rights issues and government-backed debt.

The route ahead is filled with turbulence and while the current team is busy rewriting the new plan, there is also a group out there being courted to take over. Whatever is done should be in the interest of the airline.

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