This article first appeared in The Edge Financial Daily on September 27, 2019
KUALA LUMPUR: The potential merger between loss-making airlines, Malaysia Airlines Bhd and AirAsia X Bhd (AAX) would likely see the new merged entity (newco) operating under the Malaysia Airlines brand, and this could mark the scaling back of Malaysia AAX’s (MAAX) long-haul low-cost business, according to Nomura Global Markets Research.
“We think [the] formation of the newco would see less competition — particularly from the mid-haul segment — although competition from Malindo Airways Sdn Bhd, AirAsia Group Bhd and foreign carriers are likely to persist,” its aviation analyst Ahmad Maghfur Usman wrote in a report yesterday.
While there seems to be a general perception that the long-haul low-cost business is unsustainable, Ahmad Maghfur believes this would depend on the hub base.
“With regards to Malaysia, we think the viability of operating a long-haul low-cost is less feasible compared to Singapore and Bangkok, where both Singapore Airlines’ Scoot and Thai AirAsia X (TAAX) have seen a financially more sustainable performance than MAAX, where Kuala Lumpur is its base,” he said.
On Wednesday, The Malaysian Reserve reported, quoting sources, that Khazanah Nasional Bhd is pushing for a merger between its wholly-owned Malaysia Airlines and AAX. The report added that the proposal would require the government to inject money to recapitalise Malaysia Airlines and settle all outstanding debts prior to the merger. AAX will then make a bid to acquire or merge with the leaner Malaysia Airlines.
Ahmad Maghfur is of the view that the newco’s next possible logical move would be to pare short-haul capacity further as it likely focuses on growing its mid-long haul segment, backed by the existing order book backlog that AAX already has with Airbus (comprising 78 Airbus A330-900s, 30 A321XLRs and 10 A350-900s). Malaysia Airlines’ order book backlog, in contrast, is just 25 Boeing 737 Max, where currently there is uncertainty on the delivery timeline given the ongoing regulatory and safety issues it is facing, he added.
Other considerations would be whether the newco will likely dispose of its stake in TAAX, which is 49% owned by AAX. “If this occurs, TAAX would likely be taken over by AirAsia,” said Ahmad Maghfur.
In the financial years ended Dec 31, 2017 and 2018 (FY17 and FY18), TAAX saw its core net profit increase to RM50.6 million and RM48 million respectively, from RM6.8 million in FY16. However, owing to slowing inbound arrivals from China, coupled with a challenging economic backdrop in Thailand, TAAX raked in a core net loss of RM14.8 million in the first half of FY19.
Another consideration is the negative impact the potential scale back of MAAX would have on Malaysia AirAsia’s (MAA) short-haul businesses, as this would adversely affect the feeder traffic from MAAX into MAA.
Ahmad Maghfur said MAA also would stand to lose ancillary income in the form of branding rights in the event the merger materialises.
“However, we think the newco’s focus to grow mid-long haul sectors will also bring opportunity for MAA to strengthen its local short-haul market share, thus, neutralising the negative implications,” he added.
Still, Ahmad Maghfur said it remains to be seen whether the merger would be successful given issues in the past such as terminated proposed share-swap exercise back in 2012.
“Other factors that stakeholders and anti-competition regulators may take into account is whether Tune Group (AirAsia founders’ private vehicle, which has a combined 29.5% including individual direct shareholdings in AAX) and AirAsia (currently owns a 13.8% stake in AAX) will continue to own a stake in the newco,” he added.
An analyst from a local research firm, who declined to be named, does not discount the possibility of the merger materialising given the need for consolidation in the local aviation industry.
“If the proposed merger materialises, overall capacity could be reduced for airlines operating in Malaysia,” he told The Edge Financial Daily.
“It would remove some excess capacity and hence further strengthen the passenger load factor of the merged airline,” he added.
The analyst believes that the newco would first focus on mid-haul flights to North Asia (Japan and China) and North Indian markets (like Jaipur), which have been gaining traction on AAX’s side before solidifying long-haul flights that may cover Europe.