This article first appeared in The Edge Malaysia Weekly on April 6, 2020 - April 12, 2020

AS the fallout from the Covid-19 pandemic continues to hit the global air travel industry, more airlines are reaching out to their governments for help, and Malaysian airlines are no exception.

So far, the stimulus packages announced by the Malaysian government do not include aid for airlines. But Singapore’s recent commitment to bail out Singapore Airlines Ltd (SIA) by underwriting its sale of shares and bonds for up to S$15 billion has prompted the question of whether the Malaysian government should consider offering similar relief.

Proponents of a bailout argue that the government should assist airlines as they are far too important to the economy to be allowed to collapse, resulting in the loss of thousands of jobs.

“The question is how. A bailout may not be the best [solution] from the public’s point of view.  Taking over debt may also set a bad precedent,” an aviation expert tells The Edge. He says the government may consider giving financial assistance in the form of tax deductions and other relief or relaxing some financial regulations on loans.

Malaysia Airlines Retirees Association president Captain Abdul Razak Hashim believes the government should extend financial support to Malaysia Airlines Bhd as it is the national flag carrier. The government is also the airline’s sole shareholder, via Khazanah Nasional Bhd.  MAS also operates the rural air services in Sabah and Sarawak via MASwings, he adds.

Abdul Razak blames the failure of previous bailouts on Khazanah, which as a sovereign wealth fund has no experience in running an airline. “Khazanah should not interfere in the running of the airline. We have enough Malaysian talent to run the airline.”

He says MAS was adversely affected by Khazanah’s restructuring of the airline in 2014, which saw it cut one-third of its workforce and drop most of its international routes, including some profitable ones, as it evolved into a regional airline.

“To safeguard the national carrier, I believe the government should bail out MAS. You do not need to set up a special-purpose vehicle to take over the debt of MAS and AirAsia Group Bhd (AAGB) (as) they can make money and service their debt at the same time. We have done it before,” he says, pointing to the period when the late Tan Sri Abdul Aziz Abdul Rahman was managing director of the now-defunct Malaysian Airline System Bhd from 1982 to 1991.

“In view of the current situation, which has badly affected all global airlines, it will take some time for MAS to recover. The government assistance would help the airline meet immediate operating expenditure, including servicing of debt, for at least one to two years,” Abdul Razak adds.

Nomura Global Markets Research transport analyst Ahmad Maghfur Usman says as MAS and Malaysia Airports Holdings Bhd are deemed strategic assets of Khazanah, a package may be introduced later to ensure the survival of the aviation sector, in particular the airlines.

With earlier media reports citing a possible merger between AAGB,  Air­Asia X Bhd (AAX) and MAS, he does not rule out that a rescue package may include a merger and a restructuring of these airline entities, with the government taking a significant stake.

Nomura says as AAGB has a net cash balance of RM2.16 billion as at Dec 31, 2019, it will be able to weather the crisis without a significant deterioration of its balance sheet. This is assuming that the pandemic is contained by June.

Ahmad Maghfur anticipates, however, that long-haul sister company, AAX, will likely be in dire need of a cash injection to stay afloat.

“While concerns of possible privatisation may be valid, we think this may not be acceptable to minority shareholders, given their preference for the long-haul and short-haul low-cost airline entities to remain as separately listed entities. As such, we think the likely avenue for AAGB to rescue AAX would be through an inter-company loan,” he writes in a March 17 report.

Transport infrastructure consultancy Modalis Infrastructure Partners associate director Khair Mirza tells The Edge that at the end of the day, each government has to decide which industry is more important to its national economy. “Singapore admits that bailing out its flag carrier is for national survival. Its economy depends on a thriving air hub for passengers and cargo, supporting its position as the regional financial centre and as one of the top three busiest seaports in the world. Most other countries have much more pressing concerns, such as what oil and gas is to Malaysia and hotels are to Thailand.”

He believes the government does not need to rush to bail out AAGB, AAX or Malindo Airways Sdn Bhd. “If at all the government were to offer assistance to private airlines, it should take a leaf out of the UK’s book, where the latter is offering to pay 80% of employees’ salaries and self-employed workers’ profits as the crisis mounts. We should ask ourselves if Malaysia really depends on one airline for its survival. Or if one airline were to collapse, can the rest expand profitably to take its place?”

The Malaysian Aviation Commission’s (Mavcom) view is that any financial assistance should be carefully structured to ensure that it is not treated as a windfall gain for airline shareholders.

“Given the pressures on the government’s fiscal resources, Mavcom recommends that industry operators must exhaust all other options first, including assistance from their respective shareholders, before approaching the government, which should act only as a lender of last resort for the industry,” it says in its March 27 commentary paper.

Is consolidation key to survival?

An airline analyst says a merger between MAS,  AAGB and AAX makes sense from a demand and supply standpoint as airlines in Malaysia were already struggling to cope with overcapacity prior to the emergence of Covid-19. “While this problem may not be possible to control in the international market, a consolidation would help to correct the overcapacity in the domestic market.”

Modalis’ Khair, however, thinks the government should be cautious over what it guarantees. “Imagine if aircraft prices drop by half in the next 12 months — what is the value of holding these assets at paper value?

“Perhaps AAGB, AAX and Malindo Air could explore a merger first. Other countries are doing it this way. Why must Malaysia be so special that it will give up a national company to be run by a private company?”  

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