Author: Mei Ling Tan

Struggling flag carrier Malaysia Airlines’ previous attempt turn itself around collided with low-cost local rival AirAsia Group’s rise. Now, both companies have run into the same turbulence.

Malaysia Airlines, which has yet to recover from two 2014 tragedies that made global headlines, faces a growing risk of being forced to halt flights unless it secures aid. But the state has frowned on the idea of another bailout.

A group of creditors recently rejected a proposal by Malaysia Airlines to restructure its 16 billion ringgit ($3.85 billion) in liabilities. This comes after the company made deep pay cuts for management and pilots, as well putting staff on unpaid furloughs to reduce costs as the coronavirus pandemic paralyzed global air travel.

This disruption has also clouded the prospects for leaner AirAsia Group, which together with the flag carrier holds a majority market share in the country.

“Our partners and creditors will have to sacrifice for the better of the future,” Izham Ismail, group CEO of Malaysia Airlines, told The Edge Malaysia newspaper in mid-October. “If they don’t want to help themselves to survive, I have no choice but shut it down.”

Malaysia Airlines revealed that it entered into debt restructuring negotiations with creditors in early October. The airline called on leasing companies and suppliers to cooperate with the turnaround effort. If the creditors had agreed, the restructuring would have been completed within the next few months, according to Malaysia Airlines’ plan.

The government has expressed its unwillingness to embark on another public-sector bailout of the national carrier, which is fully owned by the sovereign wealth fund Khazanah Nasional.

“The Ministry of Finance will not be injecting any cash or any capital into Malaysia Airlines through Khazanah,” said Finance Minister Tengku Zafrul Aziz. A proposal has been floated to liquidate the airline and transfer a portion of the assets and staff to Firefly, the group’s low-cost carrier.

Khazanah first took over Malaysia Airlines in 2001 following the ravages of the Asian financial crisis, holding a stake of 69%.The carrier’s fortunes turned again in 2014, when flight MH370 disappeared mysteriously en route from Kuala Lumpur to Beijing. This was followed months later by flight MH17 being shot down over Ukraine.

The two tragedies drove away passenger traffic, prompting Khazanah to acquire the remaining shares in Malaysia Airlines and fully nationalize the carrier. Malaysia Airlines laid off roughly a third of its staff in a bid to revive its earnings.

This previous restructuring effort never bore fruit because of competition from powerful rival AirAsia. The budget carrier made great strides in the 2000s with its low fares, eventually gaining control of half the domestic market.

Malaysia Airlines, meanwhile, has lost money since 2011. Part of the problem is Malaysia’s unstable political situation. Former Prime Minister Mahathir Mohamad’s government sought capital and operational tie-ups with foreign carriers after determining that Malaysia Airlines could not heal itself. Japan Airlines was seen as a leading candidate to sponsor a turnaround due to the company’s experience recovering from bankruptcy.

But Mahathir abruptly resigned and was succeeded by Muhyiddin Yassin this March. Not only has the pandemic sapped the finances of any potential sponsors, but Muhyiddin has his hands full maintaining his hold on power. Malaysia Airlines’ restructuring took a back seat.

“None of the restructuring went deep enough,” said Brendan Sobie, an independent analyst. He added that it is too early to tell if the proposed debt restructuring plan would be sufficient.

“All airlines face an incredibly challenging outlook,” Sobie said. “A lot will depend on how quickly the market recovers and if it fully recovers.”

Because Malaysia Airlines is the flag carrier, observers believe the government will ultimately be forced into a new bailout. But the damage to corporate value may have already been done by the drawn-out restructuring process.

Other flag carriers in the region have been faster to rehabilitate. Singapore Airlines, which is majority-owned by government investment group Temasek Holdings, came out with a $10.5 billion fundraising plan in March that leans on existing shareholders. Thailand, which holds 51% of Thai Airways International, signed off on a court-supervised rehabilitation process for the carrier in May.

Long profitable private-sector carrier AirAsia has not been immune to the effects of the pandemic, and it has sought to steer out of its slump.

The group founded by CEO Tony Fernandes won Malaysian state backing of a 1 billion ringgit loan in October. Early that month, the group’s long-haul carrier AirAsia X applied in court for a debt forgiveness plan that would slash 63.5 billion ringgit in liabilities, including aircraft purchase commitments, to just 200 million ringgit.

The plan still needs the approval of creditors holding 75% of the debt. AirAsiaX said the debt relief is needed “to avoid a liquidation and to allow the airline to fly again.”

AirAsiaX — which offers flights to Australia, Hawaii and other Asia-Pacific destinations — operated at a loss in the most recent two years.

AirAsia Group said in October it would end its Japan operations, and analysts expect further cutbacks in scale. The group posted a 992 million ringgit net loss for the April-June quarter on a 96% plunge in revenue.

“AirAsia was a profitable airline and was potentially sustainable had it not added capacity rather recklessly,” said Nungsari Ahmad Radhi, ex-executive chairman of the Malaysian Aviation Commission. “It got to the point where the seat growth probably outstripped demand growth. The pandemic was a fatal blow.”