SINGAPORE May 12 Malaysian Airline System Bhd
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 said.
Even before the loss of its flight MH370 from Kuala Lumpur
to Beijing on March 8 there was talk that loss-making MAS might
need a financial rescue from state investor Khazanah Nasional
Bhd, which owns 69 percent of the company.
"They are sending all these feelers to banks to try and test
the waters," said a banking source familiar with the situation.
"The most imminent move looks to be on the engineering
business, an IPO or trade sale," said the source, who declined
to be identified as the talks are private.
MAS aimed to break even this year after three years of red
ink, but analysts expect losses to widen as the airline cuts
fares to spur demand shaken by the disappearance of its MH370
flight over the Indian Ocean. It was already facing stiff
competition from AirAsia Bhd on local and short-haul
routes and from AirAsia X and Gulf carriers in the
medium and long-haul market.
"The next step will be to kick off a formal auction process
for the engineering unit. They wanted to cut down the stake for
many years, but from all the other options now, this might be
one of the easier things to do," the banking source said.
In a resarch report in April, MayBank Investment Bank Bhd
highlighted MAS Engineering as the biggest profitable business
unit in MAS, valuing it at 2 billion Malaysian ringgit ($619
Officials from MAS, Malaysia's Ministry of Transport and
Khazanah are involved in the informal talks with a
handful of banks including CIMB Group Holdings Bhd,
A spokesman from Khazanah declined comment while CIMB was
not immediately available to comment. Officials from MAS and the
Ministry of Transport did not offer any immediate comment when
contacted by Reuters for the story.
Despite the most intensive air, sea and underwater search in
commercial aviation history, no trace of flight MH370 has been
found since it vanished on a regularly scheduled flight from
Kuala Lumpur to Beijing. The airline's load factor, a measure of
occupancy, fell year on year in March, potentially in response
to the incident.
The shares have lost as much as 20 percent since MH370 went
missing. It is down about 80 over the past five years, while the
broader Malaysian index has surged by about 80 percent
over the same period.
In the year ending December 2013, MAS's losses widened
nearly three times to 1.17 billion ringgit ($362 million) from a
year ago. (r.reuters.com/syz29v)
A second banking source familiar with the discussions said
the airline needs a plan to restore profitability. "They are now
losing money more than before. Not only is the brand beginning
to get hurt, but the government is also losing patience."
MAS had been waiting for government approval to place a
multi-billion dollar order for up to 100 Airbus and
Boeing aircraft, sources told Reuters in February, as it
looks to retire its older, less fuel-efficient jets.
A source at a northeast Asian bank said MAS's overall
financing support had weakened since the MH370 incident, but it
was still not offering higher pricing for aircraft financing and
thus finding it tough to line up lenders.
Second-tier carriers like MAS usually have to pay up to 200
basis points on average above LIBOR in aircraft financing deals
versus 150 basis points for top-tier names like Singapore
Airlines Ltd. Banks are now requiring MAS to pay a
higher premium, the source said.
Bankers say the government's support for the airline is the
main reason they are backing it.
($1 = 3.2290 Malaysian ringgit)
(Additional reporting by Saeed Azhar, Kane Wu of Basis Point
and the Kuala Lumpur bureau; Editing by Michael Urquhart)