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Malaysia Airlines to Be Taken Over by Government Malaysia Steps In to Save Its Reeling National Airline
(about 11 hours later)
BANGKOK — Mired in debt and reeling from two aircraft disasters this year, Malaysia Airlines will be fully taken over by the government as a prelude to a restructuring, the Malaysian government said Friday. Malaysia Airlines was struggling with growing losses, debt and a troubled business model well before the loss of two of its airplanes this year.
Khazanah Nasional, the investment arm of the Malaysian government, formally requested the delisting of the airline in a letter to the Malaysian stock exchange on Friday and offered to buy back shares at a price 12.5 percent higher than Thursday’s closing price. Faced with competition from low-cost Asian carriers as well as pressure from the high-end airlines of the Persian Gulf, Malaysia Airlines had been losing money in the last three years. Tense labor relations and a bureaucratic management culture had stymied earlier efforts to reform the airline despite more than $1 billion in government investment in the last decade.
Malaysia Airlines had been losing money for several years when five months ago, a flight bound for China disappeared, and no trace of the aircraft or its 239 passengers has been found. Just over three weeks ago, another Malaysia Airlines plane exploded over Ukraine, killing almost 300 people. On Friday, the Malaysian government, signaling that the embattled airline remained a strategic asset, announced that it would take full control of the company through a stock buyback and restructure its operations in an attempt to restore confidence in the flagging business.
Khazanah was vague about its plans for the airline, saying only that it intended “to undertake a comprehensive review and restructuring” and that the airline had “substantial funding requirements.” While a restructuring was long overdue, the airline must now also contend with dual crash investigations, as well as resolve potential liability and insurance issues. The airline has had a sharp drop in bookings after the loss of its airplanes. Business from China has been particularly hard hit.
“There is a growing understanding, reached in unfortunate circumstances, that Malaysia Airlines needs to change,” said Will Horton, an analyst at the CAPA Center for Aviation, a consulting firm. “One question is what concessions the airline’s stakeholders are prepared to offer.”
Malaysia’s prime minister, Najib Razak, said a “holistic restructuring plan” would be announced by the end of the month.Malaysia’s prime minister, Najib Razak, said a “holistic restructuring plan” would be announced by the end of the month.
“This process of renewal will involve painful steps and sacrifices from all parties,” he said in a statement that specifically mentioned the need for support from, among others, the airline’s creditors, raising the possibility of a debt write-down. “This process of renewal will involve painful steps and sacrifices from all parties,” he said in a statement that mentioned the need for support from, among others, the airline’s creditors, raising the possibility of a debt write-down.
The share buyback, which would cost Khazanah about 1.4 billion ringgit, or $437 million, still needs approval by private shareholders, who own about 30 percent of the company. Khazanah’s offer price of 27 sen, 0.27 ringgit, a share appears favorable to stockholders: That price was last reached in February, before the company’s two tragedies. The airline’s managers were sharply criticized for their handling of the disappearance in March of Flight 370, a Boeing 777-200 that was flying from Kuala Lumpur, Malaysia, to Beijing with 239 people on board. The fate of that plane remains a mystery, and a search for clues continues in the southern Indian Ocean.
The disappearance in March of Flight 370 from Kuala Lumpur to Beijing remains a mystery, and a search in the southern Indian Ocean is still underway. On July 17, 298 passengers on a Malaysia Airlines flight from Amsterdam to Kuala Lumpur were killed when a company Boeing 777 was shot down over Ukraine. Last month, Malaysia Airlines Flight 17 was shot down over Ukraine, killing all 298 people on board. The plane, a 777-200 flying from Amsterdam to Kuala Lumpur, was probably shot down by a missile fired by pro-Russian separatists, according to American intelligence analysts.
The disasters aggravated what was already poor financial performance by the airline, which has lost money for the past three years and has been squeezed by nimbler rivals, like Air Asia, the privately owned, low-cost airline also based out of Malaysia that has grown exponentially since beginning operations more than a decade ago. Both disasters aggravated what was already poor financial performance. The airline faces competition on its home turf from AirAsia, a privately owned low-cost airline that has grown rapidly since beginning operations more than a decade ago.
Malaysia Airlines, which began as Malayan Airlines, in 1947 during the British colonial period, has suffered a number of sharp losses in recent decades. It has often been managed by business executives close to the governing party, the United Malays National Organization, and was bailed out by the government at least once. Like many other government-linked companies in Malaysia, the airline is saddled with ties to influential contractors connected to the party, which has governed the country since independence in 1957. Malaysia Airlines’ response in recent years has been to sell discounted tickets as well as to add capacity, in part using Airbus A380 double-decker planes. The strategy did little to stem losses, and it backfired when bookings melted away after the disappearance of Flight 370.
The Malaysian government sees the carrier as a national strategic asset. The airline has already cut many of its money-losing long-range routes, including some flights to South America. But analysts said that the airline would have to drastically reduce the number of its destinations to survive. The airline serves 80 destinations worldwide.
In a statement Friday, Khazanah said the goal of the restructuring was to make the airline profitable but also for it to “serve its function as a critical national development entity.” Analysts said that earlier attempts to restructure the company did not go far enough because of union resistance or political interference. A 2011 plan to exchange shares with AirAsia and share expenses, for example, failed because labor groups opposed it.
“Malaysia Airlines was already sleepwalking and ignoring the competitive threat from the low-cost market when AirAsia set up shop,” said Saj Ahmad, an analyst with StrategicAero Research in London.
“Given that Malaysia Airlines is government-owned, as is the sovereign wealth fund that is now looking to take on 100 percent ownership, the problem is that rebranding does nothing to stop customers from staying away from a tainted entity,” he said.
The government has ruled out bankruptcy in part because the country lacked bankruptcy laws equivalent to Chapter 11 in the United States, which has allowed American carriers to restructure their operations, cancel contracts or rewrite labor deals, according to a report by CAPA.
At this point, the airline is unlikely to generate much interest from foreign partners, including Etihad Airlines, once seen as a possible partner.
Khazanah Nasional Berhad, the investment arm of the Malaysian government, on Friday offered to take control of the company and to buy back shares at a price 12.5 percent higher than Thursday’s closing price, and it requested that the company be delisted from the Malaysian stock exchange.
Khazanah was vague about its immediate plans for the airline, saying only that it intended “to undertake a comprehensive review and restructuring” and that the airline had “substantial funding requirements.”
Malaysia Airlines, which made its first commercial flight as the national airline in 1947, during the British colonial period, was then called Malayan Airways. After independence, the government used the airline as a tool to raise the country’s profile in Asia and around the world. An image of a jet even appeared on local currency.
The share buyback, which would cost Khazanah about $431 million, would have to be approved by private shareholders, who own about 30 percent of the company. In a statement on Friday, Khazanah said the goal of the restructuring was to make the airline profitable but also for it to “serve its function as a critical national development entity.”