This article first appeared in The Edge Malaysia Weekly on March 1, 2021 - March 7, 2021

MALAYSIA Airlines Bhd (MAS) appears to have a head start on its closest rivals — AirAsia Group Bhd, AirAsia X Bhd (AAX) and Malindo Airways Sdn Bhd — after closing a restructuring deal that sees it emerging with a stronger balance sheet, having eliminated some RM10 billion in debt.

Last week, the UK court approved the national airline’s plan to restructure more than RM15 billion in liabilities, which effectively removes “decades-long legacy issues in its balance sheet”, its parent Malaysia Aviation Group Bhd (MAG) says. The plan includes a RM3.6 billion lifeline from its sole shareholder Khazanah Nasional Bhd to support the carrier’s new five-year business plan, which envisages MAS returning to profitability from 2022.

The restructuring also sees MAS continuing its aircraft leases with existing lessors, but with by-the-hour payments for 2021 and options for extended lease periods and contingent payment deferrals. Restructured terms with aircraft finance lessors, meanwhile, include payment moratoriums, extended tenures and reduction in interest margins.

While the restructuring and subsequent recapitalisation will allow for a more secure future for now, critics are not convinced that it is clear skies for MAS given that the loss-making airline had been struggling even before the Covid-19 pandemic. They see MAS still having to deal with a host of legacy issues such as a bloated workforce and political interventions from the government and an industry characterised by overcapacity and thin margins.

Opponents have also questioned the latest capital injection from the sovereign wealth fund, which is deemed as a bailout for MAS. They say the amount will give the carrier only a brief reprieve, with the travel industry currently on its knees because of the impact of Covid-19 and unlikely to experience a recovery in the near term due to renewed lockdowns.

Although much attention has been focused on the RM3.6 billion, MAG points out that it is relatively small compared with the assistance received by airlines around the world from their governments and shareholders to help them cope with the fallout of the Covid-19 crisis.

“The different components of the restructuring are inter-conditional and require the agreement of terms with all groups of creditors. They are also subject to certain conditions, which include a commitment of RM3.6 billion in new capital by Khazanah to support MAG in executing its enhanced long-term business plan (LTBP 2.0) over the course of five years. This is to better equip MAG to operate in the uncertain and challenging post-Covid-19 environment.

“As the country’s national airline, MAG plays an important role to catalyse the safe restart of air travel and promote aviation industry recovery,” MAG tells The Edge.

On its part, MAG says it has taken “many painful measures” to keep all its subsidiaries afloat over the past year. “The RM5.5 billion in total cost savings/avoidance in 2020 reflects the earnest effort of every single employee in ensuring the group withstands the storm caused by the pandemic (in addition to) staff across all ranks standing in solidarity by taking pay cuts of up to 60% and unpaid leave for the past 11 months.”

The group also sold assets worth RM1.1 billion to Khazanah to sustain itself during this period, but did not elaborate.

In a letter seen by Reuters, MAG told its lessors last October that it was experiencing an average monthly operating cash burn of US$84 million, but only had US$88 million in liquidity as at Aug 31, 2020 and an additional US$139 million available from Khazanah.

MAG says the pandemic has, however, given the group the opportunity to holistically repair its balance sheet and address some legacy issues, beyond what was achievable under the previous five-year MAS Recovery Plan (MRP) conceived in 2014.

Shukor Yusof, head of aviation consultancy Endau Analytics, is sceptical of the latest turnaround plan, pointing out that the carrier has had a poor track record of building sustainable profits.

The LTBP 2.0 rests on five main pillars: To become a premium Asia-Pacific carrier, recapture the domestic and Asean market, drive deeper commercial partnerships, diversify its revenue streams and make digital the cornerstone of its business.

Shukor says, however, that the business plan does not address its high staff figures. MAS shed 6,000 employees in 2015 under the MRP and now employs 12,000 — still considered bloated by some given its smaller network and with most of its fleet grounded.

He also calls for accountability. “We must make sure that someone is held accountable if the new business plan doesn’t work out by 2025. Khazanah had lost RM6 billion under the MRP and no one was held accountable for that.”

Under the MRP, MAS was to have broken even in 2018, achieved profitability and been listed in 2019. However, the airline missed the target, which it blamed on a challenging operating environment due to intense competition, oversupply of capacity, and fuel and foreign exchange headwinds.

Khair Mirza, an associate director of Canadian consultancy Modalis Infrastructure Partners, says following the completion of the debt restructuring, MAS could consider undertaking asset disposals, consolidation or cost sharing to further strengthen its balance sheet, which would stand it in good stead during the pandemic.

“Unlike privately-owned airlines, MAS is constrained by different issues. Its focus is that of a national airline, making sure that air logistics in the country continues. (Because of this,) it doesn’t matter whether or not it makes money on these routes. That’s why it is difficult to compare its profit and loss (with other airlines) because it would start spending money, putting up all these cargo flights which is good for the country’s economy but may not necessarily be good for the airline,” he adds.

An airline veteran says for MAS’ operations to be viable, it must have a clear direction on the type of services it will provide to passengers, with corresponding airfares. “In order to be profitable, it must ensure costs remain under control.”

The pressure is now on the other cash-strapped airlines to quickly recapitalise their balance sheets. Low-cost airline AirAsia is still hopeful about reaching its fundraising target of RM2.5 billion, having recently placed out 369.85 million new shares, or an 11.07% stake of its existing share base, raising a total of RM250 million. Of this, 5% was taken up by Hong Kong businessman and high-stakes poker player Dr Stanley Choi Chiu Fai, via his private investment vehicle, Positive Boom Ltd. Choi is the chairman of Head & Shoulders Financial Group, as well as the chairman and executive director of Hong Kong-listed International Entertainment Corp. Last October, AirAsia also secured a RM300 million loan from Sabah Development Bank Bhd.

AAX and Malindo Air’s parent Lion Air Group, meanwhile, are in the midst of a restructuring exercise. On Feb 19, AAX obtained court approval to convene meetings with creditors to vote on its proposed debt restructuring scheme. The low-cost long-haul affiliate of AirAsia is asking creditors to reconstitute a whopping 99.7% of its outstanding obligations of RM64.15 billion into a principal amount of RM200 million and have the rest waived.

Khair says unlike MAS, which took only the aircraft operating lessors to the UK court to approve its scheme of arrangement, the journey for AAX will be long and arduous as it will have to hold separate meetings with its creditors, which have been divided into three classes — first, Malaysia Airports (Sepang) Sdn Bhd (MASSB), the operator of the Kuala Lumpur International Airport; second, the aircraft operating lessors such as BOC Aviation Ltd, Macquarie Aircraft Leasing Services (Ireland) Ltd, Sky High Leasing Co Ltd and International Lease Finance Corp; and finally, planemaker Airbus SAS.

AAX now needs to gain an equivalent of 75% of the overall outstanding value of money owed to each class of creditors at their separate meetings. Recall that in its original scheme of arrangement, AAX only had to deal with a single class of unsecured creditors.

An industry observer says AAX’s biggest challenge will be in convincing the aircraft operating lessors. “Some lessors like BOC Aviation have taken action to enforce a UK court judgment for AAX to pay its outstanding aircraft lease liabilities.”

A source close to the matter says the recent court decision for AAX to hold separate creditor meetings was made because the court did not want Airbus, which is the largest creditor in terms of value, to dictate terms.

According to court documents seen by The Edge, the aircraft operating lessors wanted to be placed in a separate class from Airbus as the amount of the debt said to be owed to Airbus was RM48.71 billion, which constitutes about 77% of the total scheme debts. In contrast, the collective debt owed to the lessors was RM9.26 billion.

“This means that if Airbus were in the same class as the other lessors, all AAX needed to do was to persuade Airbus to agree to its restructuring scheme. Now that the lessors are in a separate class, there will be more meaningful negotiations between AAX and all creditors. At the same time, Airbus’ rights are preserved because it can still vote for or against the scheme,” says the source.

The date for AAX to hold the creditors’ meetings has yet to be fixed, although it has up to six months to do so. However, it is understood that AAX has started out-of-court negotiations with its scheme creditors to get them to sign a lock-up agreement prior to the meetings. During this time, the carrier will push to strike a deal that will satisfy both sides.

“The main purpose is to secure the creditors’ votes in favour of the proposed scheme before the meetings. Thus, it would be in the interest of AAX not to call the meetings until they have got the numbers,” says the source.

The court documents show that some lessors deem the scheme unreasonable and unfair as it writes off 99.7% of claims without offering creditors an equity stake. MASSB and a few of the lessors have also raised objections to the scheme as they say AAX is a “hopelessly insolvent company and has no viable business”.

For the 12 months ended Dec 31, 2020, AAX recorded a net loss of RM1.34 billion. Its current liabilities exceed its current assets by RM2.7 billion and it has negative shareholders’ funds of RM1.25 billion.

International Air Transport Association regional vice-president for Asia-Pacific Conrad Clifford says any effort to provide relief and support for airlines during the Covid-19 crisis is welcomed, noting that 2021 continues to be tough for the airlines, including in Malaysia.

“Our most recent analysis shows that the airline industry is expected to remain cash negative throughout this year, a worsening of what we had previously assessed, that the industry will turn cash positive in the fourth quarter of 2021. Estimates for the industry cash burn in 2021 have also ballooned to the US$75 billion to US$95 billion range,” he tells The Edge.

“(Thus,) we welcome all measures by the Malaysian government to provide direct support to ensure that airlines survive until the reopening of borders, such as that for MAS,” adds Clifford.

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