Jentayu seeks other options

Feriz (left) and Shukor at a press conference on Monday. Was it a wrong move on the part of Jentayu?

Feriz (left) and Shukor at a press conference on Monday. Was it a wrong move on the part of Jentayu?

THERE is no shortage of ideas of what to do to save Malaysia Airlines Bhd (MAS).

At last count, Khazanah Nasional Bhd, which owns and has put into action its plan to salvage the ailing MAS, says there are 28 unsolicited proposals to save the airline, one of which is from Air France to work with MAS on the maintenance, repair and operations (MRO) business.

Just how many of those dossiers will Khazanah study remains unknown but the one that has created the biggest stir has been from Jentayu Danaraksa Sdn Bhd (JD).

JD’s proposal comes with a RM8.75bil financing plan it has lined up to venture into the leasing business, start a new airline alongside MAS and in the process, it claims, the new entity will be able to absorb the 6,000 people that will lose their jobs at MAS as part of Khazanah’s 12-point revival plan for MAS.

On the face of it, JD’s proposal does not affect MAS per se because it is only after the leasing business.

The representatives from JD were supposed to meet up with Khazanah on Tuesday but the meeting was postponed by the latter.

The reason apparently is because Khazanah was not happy with JD’s decision to go public with its plan a day earlier, instead of presenting it to the government investment arm behind closed doors first.

Surprisingly, Khazanah’s reasoning for postponing the meeting is only based on an unverified report in a news wire.

So, is it game over for JD or will it have to visit the Prime Minister again as it did previously, before Khazanah hears them out?

JD director Shukor Yusof believes it still has some options and is looking at executing them.

Who’s behind JD

Six people came together in July after MAS was struck with a second air tragedy this year. In total, two planes and 537 lives were lost in the two unprecedented tragedies that struck MAS. That prompted the Government to push Khazanah to resuscitate MAS, though its books were tainted with red ink even before the two air disasters.

JD is led by former MAS MD Tan Sri Aziz Abdul Rahman, who has remained vocal all these years on the need to get MAS on a strong financial footing. The only two other people in the group with aviation expertise are Shukor, a former aviation analyst with Standards’ & Poor, and Datuk Abdul Rahim Mohd Zin, the former director of Senai Airport Terminal Services Sdn Bhd.

The other directors of JD are Feriz Omar (MD of JD), Datuk Seri Zakaria Bahari (group chief executive of Radimax Group Sdn Bhd, formerly known as Realmild (M) Sdn Bhd), and Daruis Zainuddin (director of AIA and American Insurance Group and Sure Reach Sdn Bhd).

Feriz claims the six have 100 years of combined aviation, transport, corporate and financial experiences.

MAS has been a state of flux for the past decade after various plans to revitalise the airline were put into action. Those plans had flashes of success but were unravelled by business conditions and tragedies.

Khazanah tried several times to get MAS on proper financial footing, and the first plan it executed was the widespread asset unbundling (WAU). That did not work and later initiated the turnaround/restructuring, share swap with AirAsia and the re-book/reset plans.

Those too did not work for long and those plans did not provide the sustainable model for profitability.

Now it has the 12-point plan to resuscitate MAS. For the plan to work, MAS needs to cut its workforce by 6,000 from 20,000, though the market believes the cuts could be larger. It needs to inject RM6bil cash and set up a new company to take over from July 1 next year.

“It has ruled the roost for so long. Why is it that Khazanah thinks its plan is the best when past plans have not been able to relieve MAS of its problems. How can it be so sure that its 12-point plan will work this time around?” asks an industry official.

“Here is an option (from JD) to transfer some of the risk from the government to the private sector. On the face of it no tax payer money is involved and why is it not even looking at it?”

To him, MAS needs the money and if JD is able to buy the assets, especially the planes from MAS for RM5.25bil, that will provide MAS with the cash it needs.

Under Khazanah’s 12-point plan, there is a need to pump in RM6bil, much of that public funds. Thus far, the Government has invested RM17.4bil in the airline, and about RM12.6bil has been raised from equity and debt capital markets since 2009.

What is JD after?

JD’s first proposal was to buy MAS’ cream assets, such as Firefly, MAS maintenance, repair and overhaul (MRO) and Khazanah’s Penerbangan Nasional Bhd (PMB).

PMB was set up as part of the WAU exercise in 2002, a year after the Government bought back the airline from Tan Sri Tajuddin Ramli. But PMB transfered all its MAS shares to Khazanah before the share swap with AirAsia two years ago. MAS has also backtracked from an asset light airline from the WAU days to one that owns assets, entering arrangements with manufacturers to buy planes.

JD first presented their case to the PM, who referred them to Khazanah, which is major shareholder of MAS.

Two meetings were held, one of which was with Khazanah chief Tan Sri Azman Mokhtar.

“What they wanted were the profitable assets and that was not something Khazanah was willing to let go,” says someone in the know.

They returned to their drawing boards and came up with a second plan requiring financing of up to RM8.75bil plan.

Basically, they want to get into the aircraft leasing business by buying PMB and rename it JD Leasing. They want to buy over MAS aircraft and have leaseback arrangements with MAS for the aircraft at what they claim will be “preferential rates.” That will lift MAS the burden of buying new planes and raising funding for that.

They claim to have bankers backing them and also global players wanting to partner them for the leasing business.

They are also keen to set up a new premium carrier (Fly JD) to ply Asean routes, that would give them access to new markets for their planes. The question is, is the local market big enough for a fourth player at a time when the air travel market in South East Asia is getting matured, and over capacity issues exists in the region. Competition is also stiff and what guarantee is that they will not cannibalise on MAS routes.

Aircraft leasing

Aircraft leasing is a billion-dollar business. Now 40% of the global fleet of 20,000 commercial aircraft around the world are on lease, and it is projected to grow to 50% by 2020, says a report.

Given the demand in leasing and the potential growth in air travel in China, merger and acquisition activities are taking place, and even Hong Kong tycoon Li Ka-shing and his Cheung Kong Holdings are entering the leasing sector.

CAPA Centre for Aviation in its report said enhanced interest in leasing is beneficial for the airline industry, and is a considerable contrast considering the lack of interest a few years ago. There will no doubt be some learning curves along the way.

But as China becomes an increasingly powerful voice in global aviation, China’s vision for having its airlines, some of the world’s largest, complemented by some of the world’s largest lessors, appears merely a logical progression.’’

“That opens another avenue to a marriage of Asian aviation growth and the fast-expanding wealth in the region. Entering the value chain at the leasing level allows Asia, and China in particular, the opportunity to participate more actively and broadly in the industry’s financial activity,’’ CAPA adds.

Another report says when Asian billionaire (Li Ka-shing) enters aircraft leasing, it gives others some confidence that following his move even on a smaller scale can be beneficial.

China needs 5,000 aircraft in the next two decades and the companies seeking to bulk up in aircraft leasing are banking on booming demand from China’s airlines, especially because Beijing ended a six-year ban on new privately owned airlines last year. A rush for more fuel-efficient aircraft globally, as well as booming demand from budget carriers in Southeast Asia, add to the mix of demand.

Globally, GE Capital Aviation Services (GECAS) is the biggest aircraft leasing company with 1,600 aircraft, followed by AerCap with 1,300, BBAM 430, SMBC Aviation Capital 373, and AWAS 315 planes, all having a mix of models.

Reports say, each year, more than US$100bil will be required to finance new and replacement aircraft for the world’s airlines. Aircraft leasing is expected to account for the dominant share of that financing.

JD’s rationale to get into this business can be understood, but what is puzzling is why is it wanting PMB and not setting its own company with its partners.

If it is willing to invest RM8.75bil to get PMB, a new company and some aircraft will only cost it a third of what it will spend on PMB. But JD wants a ready market and ready leases as the returns on investment is about 12-15%, and that is a good starting point.

Last year MAS leasing cost was RM1.3bil and interest charges RM430mil. Even if JD offers preferential rates, getting RM1bil from MAS every year for leasing aircraft is a lot of money for a new startup, says someone from the industry.

“Given the spat with Khazanah, it now has to bare the dollar and the partners to win support or else it will discounted. It will be a tough battle, but it has come to that now,’’ he adds.

There again, if the leasing business has such great potential, why was PMB not transformed into a regional leasing company when there was an opportunity?

There is also talk in the market place that MAS may be looking to hive off at least four of the six A380s as it now will focus on regional routes, but this could not be verified.