UPDATE 3-Malaysian Airlines shares tumble, adding pressure for restructuring

Mon May 19, 2014 8:08am EDT

* MAS shares fall to record low in heavy trade

* Hit by widening losses, missing flight

* Bankers say bankruptcy not decision govt will take lightly

* MAS more likely to restructure, sell off units-analysts (Adds comment from government spokesperson)

By Al-Zaquan Amer Hamzah

KUALA LUMPUR, May 19 (Reuters) - Shares in Malaysian Airlines fell sharply for a second day to hit a record low on Monday, raising pressure on the state-run carrier to come up with a plan to restore investor confidence after missing flight MH370 and widening losses.

Malaysian Airline System Bhd (MAS) last week reported its worst quarterly loss in over two years. Investors were also spooked after the Wall Street Journal on Friday quoted Prime Minister Najib Razak as saying the government could not rule out bankruptcy for the airline.

An official at Najib's office said the comment was from an interview that took place in April, well before the airline's quarterly results were released last Thursday.

Asked about the Wall Street Journal report, a government spokesperson said that Najib had not mentioned bankruptcy specifically but had said the airline's status as a public company needed to be taken into consideration.

According to the government spokesperson, Najib was asked, "Bankruptcy has been mentioned in some quarters as a solution to Malaysia Airlines' problems. What's your view of that?"

And Najib responded: "Well different modalities have been suggested. But we have to look at it from all angles, bearing in mind that MAS is a government-linked company. It's not a private company so there are certain repercussions in what you want to do in terms of how it is being received by the employees and the general public."

Shares in Malaysian Airlines fell as much as 21 percent to a low of 15 sen, equivalent to just 5 U.S. cents, in heavy trade on Monday morning, adding to a drop of 9.5 percent on Friday. By late afternoon the stock was trading at 15.5 sen, a drop on the day of 18.4 percent.

The airline's market value has plunged about 50 percent so far this year.

"It's a bit drastic what's happening to the stock, but I think it will struggle to make profit in the next year or two years and investors are cashing out now," said Jerry Lee, an analyst with RHB Investment Bank.

The airline said on Thursday the impact of the disappearance in March of flight MH370 had pushed it to its worst quarter in over two years, with a sharp drop in passenger traffic likely preventing it from returning to profit this year.

BLEEDING COSTS

The airline and its key stakeholders are in talks with banks for a strategic overhaul that could include the partial sale of its engineering unit and an upgrade of its ageing fleet, sources involved in the discussions have told Reuters.

Bankers said declaring Malaysian Airlines bankrupt was not a decision the government would take lightly as it could harm the airline's chances of selling off profitable units.

"I would still think that sales of their profitable units is the most likely scenario instead of a complicated bankruptcy," said one banker who declined to be named as he was not authorised to speak to the media.

"If you don't service the debt and let it go into default, the name gets tarnished forever," the banker added. State investor Khazanah Nasional Bhd owns 69 percent of the company.

Japan Airlines emerged from bankruptcy to become Asia's most profitable airline in 2012. Chua Boon Kian, Kuala Lumpur-based research analyst with MIDF Amanah Investment Bank Berhad, said it would be premature to completely rule out bankruptcy for Malaysian Airlines.

"I expect the company to file for bankruptcy within the next couple of quarters," Chua said. "It is unlikely the government will inject any new equity."

A Reuters analysis of Malaysian Airlines' financial statements shows its cash balance of 3.25 billion ringgit ($1 billion) at the end of the first quarter would be exhausted in about six quarters if it continued to bleed losses at its current pace.

The airline has had negative operating cash flow for the past three years, which means it is not generating enough cash to meet its day-to-day operating costs.

Malaysian Airlines reduced its unit costs during the last quarter, but several analysts said it was too large to function profitably, and should cut down loss-making routes and sell certain assets.

"It needs to break into smaller units, sell assets which have value, and restructure routes which are not making money," said Mohshin Aziz, an analyst with Maybank Investment Bank Research.

($1 = 3.2340 Malaysian Ringgits) (Reporting by Al-Zaquan Amer Hamzah, Yantoultra Ngui, Umesh Desai and Anshuman Daga; Editing by Stuart Grudgings, Edwina Gibbs, Miral Fahmy and Mark Potter)