This article first appeared in Corporate, The Edge Malaysia Weekly, on July 18 - 24, 2016.

DESTINI Bhd and AirAsia Bhd are in talks to form a joint venture, as the latter is looking to consolidate its engineering department. The plan is for the upcoming unit to buy Sepang Aircraft Engineering Sdn Bhd (SAE), an Airbus SAS subsidiary providing maintenance, repair and overhaul (MRO) services for commercial aeroplanes, sources say.

This is a critical move for Destini, which has been growing for the past five years through acquisitions, in order to provide the full suite of MRO services for the commercial aviation industry.

“It is premature to say what price Destini and AirAsia will pay for SAE as the negotiations are  ongoing with Airbus,” one source says. Destini declined to respond to queries from The Edge while AirAsia could not be reached for comment at the time of writing.

Once the purchase of SAE is completed, the source says AirAsia will give the joint venture a US$1 billion contract for the low-cost carrier’s  full MRO service, which could materialise by the end of the year. The 10-year contract covers the complete range of MRO services for at least 300 of AirAsia’s aircraft.

In July last year, Destini and AirAsia signed a collaborative agreement allowing them to negotiate and implement a plan to outsource MRO-related services. These services included technical handling, component maintenance, repair and overhaul, and hangar-based MRO, according to a stock exchange filing by Destini at the time.

The plan was to implement these outsourcing activities one by one, within up to eight months after Destini and AirAsia signed the collaborative agreement. Yet, one year on, the two companies have been quiet over the arrangement.

“The joint venture — and the planned purchase of SAE — is the way for AirAsia and Destini to move forward with the stalled collaborative agreement,” says a source.

One major thing that Destini is lacking now, the source adds, is the expertise and facilities to provide a complete range of MRO services. Destini’s commercial aircraft MRO unit was established only last year.

Destini Aviation Sdn Bhd’s current subsidiaries in commercial airline maintenance services include a 50:50 joint venture with UK-based Avia Technique Ltd, a builder of aircraft components, and an 80% stake in SafeAir Technical Sdn Bhd, which provides technical line maintenance, a check-up service for commercial planes in between flights.

“By buying SAE, Destini will complete its range of MRO services for the commercial aviation industry,” the source says.

SAE, which describes itself as a company under the Airbus group’s umbrella, provides airframe hangar maintenance for the Airbus A320 and A330 Series, ATR 72 Series and Boeing 737s. Based at Kuala Lumpur International Airport, its 17,000 sq m purpose-built hangar can house up to four Airbus A320s, four ATR 42/72s or two A330/340s, according to the company.

SAE’s clients include the Royal Malaysian Air Force and Airbus. It has also provided livery painting services for AirAsia and its Thai unit.

The company was founded by Datuk Syed Budriz Putra Jamalullail Syed Amir Abidin Jamalullail, a member of the Perlis royal family. Only 5.25 million of the 59.25 million SAE shares issued were ordinary shares, with the rest being preference shares, a check with the Companies Commission of Malaysia shows.

Airbus owns 56.5 million of the total issued shares and Syed Budriz, 1.25 million. The rest are held by Sepang Hijau Sdn Bhd, an investment holding company co-owned by Syed Budriz.

SAE’s financials for FY2015 have yet to be made available. It incurred a net loss of RM2.39 million on revenue of RM103.41 million in FY2014, compared with a net profit of RM648,025 on lower revenue of RM85.17 million in FY2013.

Its share capital as at FY2014 was RM60.25 million but its reserves were in deficit, bringing its shareholders’ funds to RM44.44 million. SAE’s total assets came to RM146.84 million and total liabilities were RM102.4 million.

One source says Destini and AirAsia will also invest in SAE’s capacity expansion to accommodate the AirAsia group’s mammoth fleet. According to their respective annual reports for FY2015, AirAsia and its overseas units had 171 Airbus planes while AirAsia X Bhd’s fleet size was 29.

Last week, AirAsia co-founder and group chief CEO Tan Sri Tony Fernandes made headlines when the low-cost carrier bought 100 A321neo aircraft and 200 engines to power them in two days at the Farnborough International Airshow Trade 2016. The two deals are collectively worth US$15.3 billion.

Destini shares closed at 59 sen last Friday, the same price they closed 2015. The stock has gone as low as 53 sen this year, and 63 sen is the highest. 

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