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 route
BOOKINGS SEEN DECLINING
MAS has based its recent strategy on having more plane seats filled
by cutting ticket prices as it battles rivals AirAsia <AIRA.KL> 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 likely.
"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
<MUVGn.DE>, the world's largest reinsurer, has said the $500 million
reported in some media was too high. Allianz <ALVG.DE>, the lead
insurer covering the airplane, has said it has begun paying out on
claims linked to its disappearance.
"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
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.
[to top of second column]
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 <NEPS.SI> 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 said.
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 <RHBC.KL>, CIMB <CIMB.KL>, Maybank <MBBM.KL> and Citibank <C.N>.
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 Reuters data.
DVB's Grabowski said this could be a turning point for MAS, citing
Japan Airlines' <9201.T> 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
"The prime stumbling block is labor, 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 comment.
($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)
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