| SINGAPORE/KUALA LUMPUR, March 26
SINGAPORE/KUALA LUMPUR, March 26 Even before the
loss of its Flight MH370, Malaysian Airline System (MAS)
was bleeding cash, prompting talk that it may need
another financial rescue from state investor Khazanah Nasional
Bhd, its majority shareholder.
The flag carrier's cash and short-term investments at
end-December were close to $1.2 billion - less than its average
operating costs of the two previous quarters, and a signal that
it may soon need fresh funding or bank loans.
MAS, Southeast Asia's fourth-largest airline by market
value, has had negative operating cash flow for three years -
which means it is not generating enough cash to meet its
day-to-day operating costs - and has had negative free cash flow
- operating cash flow minus capital expenditure - for six years.
No one has yet calculated the cost to the airline of the
lost plane, which is now assumed to have crashed into the Indian
Ocean earlier this month with 239 passengers and crew on board.
While the plane was insured, there will likely
be compensation payouts to the relatives of those who died.
"What this accident is going to create is an acceleration of
the downward trend that we've seen at MAS for years, and the
need to restructure," said Bertrand Grabowski, who heads German
bank DVB's aviation and land transport finance divisions.
"The only way out is shrinking, in terms of capacity and
BOOKINGS SEEN DECLINING
MAS has based its recent strategy on having more plane seats
filled by cutting ticket prices as it battles rivals AirAsia
and Indonesia's Lion Air, which have expanded
capacity. Bankers and analysts say the loss of Flight MH370 will
dent bookings at MAS, making a fresh capital raising more
"Even assuming this is a one-off and the travelling public
realizes it's out of (the airline's) control, we expect some
quarters of declining bookings, further cuts in ticket prices
and - without any change to its high cost base - MAS is likely
to bleed even more red ink than it did in 2013," said Timothy
Ross, Asia-Pacific transportation analyst at Credit Suisse,
which forecasts another three years of losses at MAS.
"It certainly becomes highly likely that liquidity will
suffer and its capex program and possibly financing even
day-to-day operations might require an injection of more funds."
There are no forecasts yet on how much insurers are likely
to pay for the lost flight, but Torsten Jeworrek, board member
at Munich Re, the world's largest reinsurer, has said
the $500 million reported in some media was too high.
Allianz, the lead insurer covering the
airplane, has said it has begun paying out on claims linked to
"Primarily, it's Malaysian Airlines' reputation and, to a
lesser extent, that of the aircraft hull and engine
manufacturers on the line until the cause is identified to be
something outside their control," said Anna Tipping, partner at
law firm Norton Rose Fulbright in Singapore. "MAS will take the
initial brunt of the loss, being the carrier, but once the cause
of loss is identified the blame and consequences will shift."
"For PR reasons, particularly if there are going to be
payouts to the families of the victims, then that will probably
be paid sooner rather than later and by Malaysian Airlines
because of the reputational aspect."
MAS declined to comment on its financial situation. CEO
Ahmad Jauhari Yayha told a briefing on Tuesday that it was "a
very painful period for the airline."
Until Flight MH370 vanished, MAS had been looking to break
even this year. In February, Ahmad Jauhari, a triathlete and
long distance runner, said the airline expected further pressure
on its yields - passenger revenue per seat - and would try
harder to cut its structural costs and improve productivity.
"Management's focus is understandably diverted to this
crisis and so the running of the airline is more or less on auto
pilot," said Shukor Yusof, analyst at Standard & Poor's Capital
IQ. "The cost of money for MAS would rise considerably because
of this incident in spite of it being sovereign guaranteed."
MAS shares have slumped to life lows and have lost
three-quarters of their value in the past five years.
The airline last raised funds almost a year ago through a $1
billion rights issue. It also raised 7.8 billion ringgit ($2.36
billion) through Islamic bonds and a special purpose vehicle
owned by the finance ministry to buy planes in mid-2012.
Khazanah, which owns 69 percent of MAS, backed the recent
rights issue. In 2012, Khazanah had tried to cut its stake in
the airline, but the powerful Malaysian Airline System Employee
Union (MASEU), which represents the airline's 20,000 workforce,
rejected a share swap deal with AirAsia.
"Khazanah will have to support MAS (just) as Temasek backed
Neptune Orient during the financial crisis," said an
investment banker, referring to the Singapore state investor's
support for the local shipping firm's 2009 rights issue.
R. Sivarasa, a member of parliament for Malaysia's PKR
opposition party, said MAS was one of the country's "sick"
government-linked companies which "basically bleed public
funds." "As far as MAS is concerned, they'll bail them out,' he
Bankers warned that MAS' financial situation meant it was
unlikely to secure government approval for its multi-billion
dollar plans to buy 100 new aircraft.
Some banks with exposure to MAS say government support for
the airline is the only reason they are still standing by it.
"We don't need to put MAS on a watch-list. Most banks have
lent money to the airline because of the government support, and
now it will be stronger than before," said one banker. "If you
look at the areas of criticism during this incident, they're
mainly on the investigative side, on passport checking. This is
about Malaysia Inc, not MAS."
The airline's main bankers, according to its latest annual
report, are RHB, CIMB, Maybank and
As of end-December, MAS had total debt of 11.7 billion
ringgit. Its next major debt repayments are due in mid-2022,
when $455.2 million worth of bonds mature, according to Thomson
DVB's Grabowski said this could be a turning point for MAS,
citing Japan Airlines' emergence from bankruptcy to
become Asia's most profitable airline in 2012, but Ross at
Credit Suisse warned that the carrier's union could be an
obstacle to any major restructuring.
"The prime stumbling block is labour, and turkeys don't vote
for Christmas. These guys are not pushing for change because
they know which big-line items need to have a knife taken to
them - and one of them is employee costs. MAS employs several
thousand people too many," said Ross.
MASEU President Alias Aziz did not respond to requests for
($1 = 3.3085 Malaysian ringgit)
(Additional reporting by Saeed Azhar in SINGAPORE, Al-Zaquan
Amer Hamzah in KUALA LUMPUR and Patturaja Murugaboopathy in
BANGALORE; Editing by Ian Geoghegan)