Airasia is just killing competitors locally

When I wrote the article on Airasia and MAHB working together, I meant to be for both to do well. You know whenever I read the monthly traffic report by MAHB, there is feeling that MAHB just wanted Airasia not to be doing well. That strategy just failed although Malindo and MAS probably treat the MAHB people better. (I am just speculating but that is a norm - especially when dealing with a Group CEO like Airasia who can be difficult and loud.) Why I say this, just read the report by MAHB - it may sound neutral but it is not.

But just look at these numbers as above for example which came out today (10 July 2017). Airasia is delivering and taking up market share. If you look at the ones on yellow box, one can already see it. Which airline does local flights in KLIA2? Airasia only. Which airlines do local flights in Malaysia through KLIA Main? MAS and Malindo. Airasia's June 2017 against June 2016's number grew 16.6% while those that went through KLIA Main dropped (surprise? - as this is a Raya month for 2017 as against 2016 which was in July 2016)

Note: It is harder to analyse numbers for KLIA Main as all other airlines use that terminal as against only Airasia, Airasia X and perhaps Tiger and Jetstar use KLIA2 (in a small way i.e. flight from Singapore)

Perhaps some of the traffic went to the international flights for MAS and Malindo as they probably have reduced their quantum of local flights in Malaysia. Or it could also be their load factor just dropped.

Just note that one should not look at year to date numbers or LTM numbers for comparison as Malindo moved from KLIA2 to KLIA Main last year 14 March.

Let me tell you - based on my observation (and not just from the above table) - Airasia is just flying in terms of bringing traffic as against its main competitors. For Airasia, it is not just load factor that has gone up but also its margin from higher ticket prices and lower fuel costs (as against several years ago). The main costs for Airasia that has gone up is the higher purchase price (from foreign exchange) for new planes and staffs costs. But yet again that happens to its competitors as well. The new planes that it brought is apparently this time is not to replace the old ones but to increase its total seats - and that is because it cannot meet new demand.

I am not just optimistic on Airasia because of my investment that I made 2 years ago but because they are continuously outperform my expectation. I think the message to MAHB is to just face it - Airasia is to dominate in the future - it will probably do the company well - unless higher traffic and profitability is not the main agenda for MAHB.

Interview with CEO of MAS

Please click on the short 10 min video which was an interview by TheEdge (Nadia Hassan) and the CEO of MAS.

http://www.dailymotion.com/video/x5boqns_talking-edge-malaysia-airlines-stumbles-and-soars_news#tab_embed

To understand Airasia's competition (Why Airasia? Because I own its shares and also MAS is not listed), one has to know where MAS is heading. The below video shows that MAS is not going to fight on price anymore as opposed to previously. This is bad for me as a consumer but good for me as an investor. I remember I took a lot of Firefly flights between Penang - Subang at RM39 - RM45. Those tickets are not available anymore despite fuel price still cheaper (than 2 years ago).

MAS is now acting just like a full-fledged airline - they should as they do sometimes have a captive market - i.e. government employees (Yes, Govt employees usually take MAS as compared to Airasia). Additionally, since MAS has its own plan of getting to profitability (presuming it is going into the IPO market by 2019), it will have to be more discipline in pricing its tickets. It will be much less getting into price war - which is good for the airlines generally. Yes, MAS is also much tighter in terms of its costs structure - but generally from the interview you would notice that Airasia has a much earlier headstart as it was able to have better and proper planning against MAS which was struggling for a long while.

Also, I would like to highlight although people would have thought that Malindo is a major competitor to Airasia, it is not actually. Malindo gets its planes from Batik Air (owned by LionAir) which is a full fledged airline in Indonesia. You would have noticed that Malindo sells business class seats (and has IPTV screen) compared to Airasia which does not. Hence the costs and pricing structure are different. This makes what Tony Fernandes says i.e. Malindo is more of a competitor to MAS than Airasia is somewhat true.

No wonder MAS was and is in trouble

Picking a story from a former MD of MAS, now I know why it is in trouble.

The news statement goes like this:

MAS should buy AirAsia to resolve woes: former MD

KUALA LUMPUR: Former Malaysian Airline System (MAS) managing director, Tan Sri Abdul Aziz Abdul Rahman, has suggested that the ailing carrier acquire profit-making AirAsia as a strategy to resolve its financial woes and return to profitability.

"(There is) no need for a merger with AirAsia X. MAS is the one that should buy over AirAsia and make it a subsidiary. MAS as the national carrier should lead, rather than the other way round.

"MAS just needs to be managed properly based on market demand," he said.

Abdul Aziz also suggested that the national carrier, 69% owned by Khazanah Nasional Bhd, be delisted from the stock market.

"As far as the airline is concerned, this is not going to make any difference. Delisting will make the management's job easier, as there is no need to follow procedures as set by the exchange. But those who bought MAS shares at RM3 or RM5 would be unhappy," he said.

The former MD said the acquisition would enable the combined group to focus on the low-cost fare market that comprises 80% of the South-East Asia market, as well as the competitive premium market, which is a far better proposition than competing against each other.

Proposals and suggestions to save MAS have gained greater traction following net losses in the first quarter ended March 31, 2014 which widened to RM443.39mil from RM278.83 million a year ago.

The airline put in place a turnaround plan recently but it has been scuppered by the missing MH370 plane incident in March, and things have worsen with the shooting-down of Flight MH17 in eastern Ukraine last week.

Shares in MAS which have fallen almost 35% on Bursa Malaysia this year, and was last traded Friday at 22 sen. – Bernama

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Just a recap of these two airlines - one is profitable, the other is very much in trouble now. By the way look at the market capitalisation of both...

As at 25 Jul 2014

As at 25 Jul 2014

The power of Tony Fernandes's brand

On a holiday, I was watching CNBC Europe yesterday and what CNBC had was a 15 minutes interview with Tony Fernandes. They were not just talking about Airasia and Airasia X as well as the challenges that his airlines are facing but also QPR.

What strikes me about the interview with Tony was that, unlike some other interviews, CNBC Europe was pre-empting viewers (for some 2 hours) that Tony was to be part of the show for the day which made me stayed on to watch. Like I said, it ended up as only a 15 minutes interview - maybe less even.

Now - let's think it over - Airasia is not even a part of Europe nowadays. It does not fly to Europe anymore. He is part owner of QPR and QPR is not even a Premier League team now. But what makes CNBC pre-empting its viewers for some 2 hours not letting us know at what time the interview was supposed to happen? Tony Fernandes is a big brand himself even in Europe.

One may or may not support Airasia - due to several things that it made to its consumers - like charging for almost anything, but as a Malaysian ain't we proud that we have someone like him?

How do we leverage on his brand? How does Malaysia support him rather fight him? We embraced lesser stars aren't we? - Jimmy Choo (whom does not own the Jimmy Choo brand anymore) and Michelle Yeoh and her husband (not a Malaysian), even.

I have been on local flights every week nowadays - and the thing that strikes me is that airfares price competition has gone to quite ridiculous stage. I like it, as it allows me to buy cheap flight tickets, but I also know that it probably will not last - got to enjoy it while I can.

While I know Airasia is one of the brands controlled by Malaysians and made it big by Malaysians is facing lots of challenges from the likes of Malindo and MAS - we know that the current situation will not last. We should not give in to Tony Fernandez and his group with a silver platter. He is a furious fighter. What Airasia has is scale, speed and sourcing. If Malaysia does not turn out well for Airasia, it has the ability to move beyond Malaysia. Not MAS.

But we are using taxpayers money (for MAS especially) to fight on something which you know MAS will lose without the support of government's money. Malindo is facing the same thing. I do not know who owns the 51% of Malindo (except that it is NADI - and who is behind NADI?) and I like the price competition but not the way it is fought.

We are just fighting a war which all will lose. Consumers win for now - but somehow or rather it is very short term. What we need is a major revamp in terms of cost structure for MAS, not giving extra privilege to Malindo whom is allowed landing in Subang but not Airasia. Not the way the war is fought currently.

You can watch his interview with CNBC Europe here.

Is MAS undervalued?

I hope so, but it is not. One can't use the price when it was RM6 to today's price. At today's price, it has just raised a 4 for 1 rights at RM0.23. That means the costs for every 4 of the 5 shares were at RM0.23. Putting that argument aside, I would like to ask a few questions.

1. What is the future outlook for MAS?
2. Are the other airlines almost similar to MAS - KLM, SIA, Thai Airways, British Airways in almost similar situation?
3. Is the business competitive?

If you do not see the situation surrounding MAS as positive, what makes one think MAS is undervalued? EPF has just reduced its stake in MAS to below 5% few months ago. If MAS is undervalued, then EPF has done something very wrong. To be fair to EPF, I support its move. MAS is a company that is bleeding money while the situation surrounding issues such as being a national carrier, manpower, and tougher competitors are difficult situation in play.

The current situation faced by MAS is 50% itself's wrong-doing while the 50% is due to situation in the market. There are too many competitors around and it seems that the low-costs airlines are winning - although barely.

At today's valuation (RM0.335), MAS is trading at more than RM5.5 billion market capitalisation. Yes! One would say that it raised more than RM3 billion to survive it. As a Malaysian, I would welcome any suitor whom would try to take the burden off the Malaysian government at say RM6 billion valuation. That would put it at around RM0.36. But to that suitor, sorry no more rescue if you could not make it.

Dare to try? 

You know who are the winners nowadays - Boeing, Airbus and the engine suppliers like GE, Rolls Royce.

Why only now selling MAS?

Today, MAS is being thrown into pieces - dropping 15% after it announced a capital restructuring exercise last night. Why only now investors are realizing this? In fact, this exercise was way overdue. See the below balance sheet.
It has more than RM8 billion debt with additional RM1.5 billion in perpetual sukuk. It needs another financial restructuring, that's for sure.

Now look at what it intends to do in shoring up the balance sheet - a 3 for 2 rights issue with assumption of its rights to be issued at RM0.60. In this exercise, it is trying to raise RM3.1 billion from the shareholders.


And the ones that are going to pick up the shares are mainly...Khazanah and EPF.

Why does it need the additional capital fund raising?

Would this exercise revive MAS? It will improve its balance sheet and ability to raise funds for sure, but operationally this has to be addressed to make it a viable airline again. Otherwise, even at this price (which is valuing MAS at RM2.84 billion, RM0.85), it is not worth the money.

Malindo Airways: Impact to Airasia

Tony Fernandez says MAS will be affected more. What do you think?

Malindo is a low costs airline operated by NADI (51% - Malaysia) and owners of Lion Air (49% - Indonesia). Hence from this news, what do you gather? Low costs carrier business is opening up. All the better. Will there be overcrowding? For sure there will be. Few or many will "kaput" in the future.

The opening up of the airlines business goes to show that the airline industry is to be shaken up. There will be a change in business model as well as how people travel. However, more often than not, the surviving players will be few.

The airline industry was shaken up in US before. Many airlines have given up or went bankrupt. Names such as American Airlines, PanAM are either no longer around or in trouble.

In the business where the final buyer is the consumer itself, you will see few survives. This is different from the B2B business.

High barrier of entry

The fact that airline business is a high barrier of entry business does not deter quite many to attempt at targeting this business segment. Aircrafts are not cheap. So are the systems that are put together for this business. The trick is not just in the pricing but the traffic pull by the airlines to people who purchases. Airasia, if you notice does this very well.


The high barrier of entry will become lower, actually. Once bankers believe in the business model, they now are more daring to fund. Also, once the skies are more open, it will allow the operators to obtain routes more easily, I hope. This is positive for Airasia, a private operator as it is no longer a Government to government initiative anymore to open up routes. Countries are more willing to open up routes due to competition as travelling becomes a race to pull in visitors - business and pleasure.

All these are positives for Airasia as it is the largest, fastest and most successful Asian low cost airline operator. Usually, the one that has that trait will win as it is the race to be the biggest and most cost competitive. Unless, it becomes too arrogant - things can change. We shall see!

Meantime, you notice Airasia's price has pull back. I am buying!

Why Airasia may benefit more by moving to Indonesia

Tony, it seems this time is quite real moving to helm Airasia from Indonesia while appointing a new CEO for its Malaysian operations. While he may not called it on paper, but his move to the bigger country could be just equivalent to having another base operating off Indonesia.

I wrote an article on why Airasia may benefit more by moving to Indonesia.

Here's why:

1. Airasia, while has been given quite a number of landing rights by the Malaysian government, its relationship with them has never been smooth. From buying the company at RM2 from DRB-Hicom about 10 years ago, it has grown its operations into a very respectable one - or probably one of the most respected airline globally. Currently, the company is valued at RM10 billion or more by investors. Despite that, its growth has always been hindered with the government not allowing them to operate off Subang airport and having been too slow to build a new low cost terminal to handle the volume that is ever growing. Note that, for several times Airasia has postponed the delivery of aircrafts from Airbus most probably due to current airport not allowing it to grow fast enough. Hence the very government that allowed the sale to Tony the airline has now hindered its growth.
2. Tony Fernandez has always been on the lookout to grow its business from anywhere that can provide them opportunities to even growing further. My last check, Airasia is flying to 68 destinations from Kuala Lumpur while it is only flying to 22 destinations from Jakarta. To obtain the route rights, it needs the assistance from the government in countries where it intends to fly from and land into. Hence, this is probably why Tony is willing to move - i.e. to grow Airasia even further.
3. Furthermore, just look at Indonesia alone, other competing airlines such as Merpati Air and Garuda have much more routes. Airasia if provided the route rights will benefit much more from there. I do not know what are the arrangements that the Indonesian government has provided to Airasia for the latter to move the HQ to Jakarta but looking at the moves that Tony has made before, it could be substantial. Tony is a negotiator and he is good at it. He is not afraid to make drastic decisions and the latest is another example to prove a point as well as showing who's the boss. At Airasia's size currently, he thinks he can be the boss, even to the Malaysian government. (I like that)
4. Operationally, while it may not be a smooth one to move from KL to Jakarta but an airline business is one which can be managed from anywhere in the region, what more from an airline which thrives through online booking, not so much via agencies. If it is implemented well, in fact it may save Airasia costs and to Tony saving costs is what it matters while it still manages to execute. After all, Airasia is never popular for its services. It is just there to provide the best bang for your buck to its users - that is what makes it successful. Hey! Ryanair is one of the most hated brand in Europe but look at them grow.
5. For a while, Indonesian airlines have always been viewed negatively until at one point of time, no Indonesian airline is allowed to fly to Europe. On safety, Airasia is viewed positively. Airasia by growing big in Indonesia will bring something to the country what the current bigger airlines in Indonesia are not able to bring immediately. Hence, to Indonesia besides creating jobs will be a win-win situation for the country.
6. Look at all the benefits - tourism, airport tax, jobs, country's airline perceptions, business travel etc. Indonesia sees it and Malaysia does not see it - this goes to both the government of Malaysia and its opposition who sometimes say things that does not make sense.
7. Since the share swap with Khazanah for MAS is called off, what the heck.

In the end this move I think is positive for Airasia but a loss to Malaysia - yet again.

Other related article

Why I do not like the MAS-Airasia deal. (This article has its relevance on why Airasia should just go out and do deal overseas.)

Read article below on why Tony Fernandez feels the collapse in tie-up with MAS is a good thing.

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KUALA LUMPUR: AirAsia boss Tony Fernandes has called the collapse of a tie-up with struggling flag carrier Malaysia Airlines a relief that will free him up to focus on his fast-growing budget carrier.

In his most extensive comments to date on the failed deal, Fernandes said in interviews published Friday that "massive" Malaysia Airlines union resistance was to blame and implied that the carrier had deep problems to resolve.

"I was off blood pressure pills as soon as the swap was off. I'm serious," he told The Edge business daily.

"Sometimes you need a bit of a kick up your backside. When we have built fantastic operations at AirAsia, we didn't appreciate it until we (saw) something else," he said.

His comments appear two days after AirAsia announced it is setting up a strategic planning centre in Indonesia, away from its Malaysian headquarters, with Fernandes expected to lead expansion of regional operations from there.

AirAsia had agreed in August last year to buy 20.5 per cent of Malaysia Airlines under a strategic tie-up aimed at turning around the national carrier.

But the share swap deal was pulled early last month after pressure from Malaysia Airlines' powerful employees union, who feared job cuts and other cost-reducing moves.

Fernandes said Malaysia Airlines' problems could have been fixed under the tie-up.

"Yes, there will be short-term pain but you have to make the business successful as you cannot be on life-support," he told The Star newspaper..

"(But) you reach a point of why waste time talking? ... I'm glad it's over," he added.

With Fernandes moving to Indonesia the airline will announce on Monday a replacement to head its Malaysia operations.

Fernandes said he would "still be heavily involved in the day-to-day running of the airline" and "not leaving anytime soon" but was keen on a succession plan.

The former music executive took over the airline a decade ago and turned it from an ailing outfit with two planes into one of the region's biggest success stories.

Last month, AirAsia posted a 4.0 per cent increase in first-quarter net profit with the company citing a solid business model as the reason. It also posted a record quarter revenue of 1.17 billion ringgit (US$367 million).

Malaysia Airlines, on the other hand, reported its fifth consecutive loss, amounting to 171.8 million ringgit for the quarter ended March 31.

- AFP/ck

Who are to be blamed if MAS needs help?

I just came back from a meeting with a government linked organization. My meeting stretched until after 5.30pm. When I walked out of the office the entire building was just empty and dark except for the lobby.

Now let me point this to MAS. How many times have they changed CEOs after the Tajudin Ramli debacle? Except probably for Idris Jala, do you have the feeling that the other CEOs have the political strength and will to push through the right agenda? Or is the more important agenda to protect their own positions, addressing the demand from the powers that be and in pleasing the Board of Directors? How do they attend to a minister who wanted to upgrade the entire family including the maid to first class for example? Can they say no? If they can't, how does the management rally the staffs?

These are questions which you probably have answers but we still blame MAS for failing. MAS is competing in a very competitive industry. They have Emirates, Singapore Airlines, Cathay Pacific, Thai Airways and Qantas to contend with besides the shareholders and government to answer. On top of that, over the last 10 years they have the most successful low cost airline in the region back at their heels. Yes, part and parcel of competition, we should say. But really, is Malaysia a much better and preferred business and convention destination? Are we a top notched tourist destination? If we are, then we are able to help MAS as they probably are finding it easier to fill up their seats. Fact is our neighbors (Singapore and Thailand) are doing better in this aspect - tourism and convention. Yet again, we are blaming MAS. We want them to do as well as SIA. In business, once you are on a high gear, you are flying. However, once you are stuck in a traffic jam, you will be crawling and be facing disgruntled people around you, while continuing to fail.

The latest sukuk fund raising called "perp" is not going to help. Yes, it is an exercise to stop the rot but at 6.9% financing costs, their financials are not going to strengthen. It is an exercise to make the financial guys look presumingly good. Yes, the fund appears in the equity section of the balance sheet and not on the debt section, but really are the prospective financiers to MAS in future be that blurr that they do not know. If I may be blunt, it is just an exercise to delay their demise as they are going to increase the costs of doing business for MAS. It is an exercise to make the balance sheet look nice, not the cashflow and the P&L. It is just a financial engineering, not business reengineering.

What does MAS need then? MAS needs a total revamp out of the eyes of the public. It needs to cut routes even though the cabinet may oppose to it. Can they do that?

If they can't, who should we blame here? The people for expecting too much from MAS and the government for giving us too much hope!

My call is follow Ananda Krishnan footsteps, delist MAS, really clean it up this time, have a no nonsense CEO on board for long term and only list it back after this. This time, I will support for this although I do not support Ananda's delisting of Astro.

Or an even more drastic move, can they do a GM? - as what the Obama administration did to the automotive giant few years ago, which is let it go bankrupt. From here, they probably can terminate some of the unjustified long term contracts. Just a naughty thought!

KWAP taking up MAS "perp" is close to your bailout of the airline?

First, let me highlight these few things:

What is Perp?
Perpetual bond, which is also known as a Perpetual or just a Perp, is a bond with no maturity date. Therefore, it may be treated as equity, not as debt. Perpetual bonds pay coupons forever, and the issuer does not have to redeem them. Their cashflows therefore, those of a perpetuity. Examples of perpetual bonds are consols issued by the UK Government. Most perpetual bonds issued nowadays are deeply subordinated bonds issued by banks. The bonds are counted as Tier 1 capital, and help the banks fulfil their capital requirements. Most of these bonds are callable, but the first call date is never less than five years from the date of issue—a call protection period.

What is KWAP?
KWAP was incorporated in March 2007 to help the government in funding its pension liability. 

Who contributes to KWAP?
The Federal Government contributes 5% of the total annual budgeted emolument of the Federal Government employees while Statutory Bodies, Local Authorities and Agencies contribute 17.5% of the basic salaries of their pensionable employees respectively to KWAP on a monthly basis.

Now, my question is with the instrument not redeemable (except for MAS who has the option under certain circumstances) and with NO MATURITY DATE, wouldn't it be close to a bailout? Who buys up this perp issued by MAS? KWAP, which is government's pension liability fund. What if when KWAP loses money? Government will still pay the pensioners right? So wouldn't it be close to your usual bailout, I wonder?

With the issuance of perp then, it is categorised as an equity in the balance sheet, hence MAS is boosting up its balance sheet in fact. What if MAS is not able to pay its dividends listed at a rate of 6.9%? Should it be regarded as a bad debt or just a carried forward owing? How creative.

I am reading with disgust that MAS can redeem the sukuk in the event there is a change in recognition in accounting treatment from equity to debt. Isn't this another accounting play? The fundamentals of the instrument is the same. At a time when most government are cracking down on investment banks taking opportunity of "off balance sheet" item and/or accounting loopholes, these guys are working in tandem embracing it.

Other articles on MAS financial debacle.

Which cash call route will MAS go for?

Who is to be blamed if MAS needs help?

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PETALING JAYA, June 12 — Malaysia Airlines’ (MAS) fund-raising efforts received a boost today when the civil service pension fund (KWAP) took up the entire first tranch of RM1 billion of the airlines’ perpetual sukuk today.

MAS also said in a press conference here that it received firm commitments for the rest of the RM1.5 billion of the perpetual sukuk, which MAS said today does not carry a government guarantee.

Perpetual bonds, also known as perps, are considered higher risk bonds as there is no guarantee of repayment.

The perpetual sukuk will pay a rate of 6.9 per cent and is not rated. It allows the financially troubled airline to raise money without affecting its gearing ratios as it is treated as equity under Malaysian accounting conventions.

“We consider it the cheapest form of equity,” said MAS deputy group CEO Mohd Rashdan Yusof. “It’s a great deal for our shareholders.”

MAS group chief executive Ahmad Jauhari Yahya said the successful subscription of the first tranche indicated the trust investors had in the airline.

“This firmly secures the first pillar of our funding plans and is testament of the confidence in MAS,” he said.

Ahmad also said he hoped the proposed government-funded special purpose vehicle (SPV) that will be used to finance the delivery of MAS aircraft will be finalised by the end of July.

MAS, which has posted large losses for the past several quarters, is proposing to raise about RM9 billion through a combination of perpetual sukuks, commercial loans and government financial assistance.

Interest in perpetual bonds has risen in the region, prompting the Monetary Authority of Singapore to express concern over the demand for the higher risk fixed income instruments.

The Thai SEC (Securities and Exchange Commission) also issued a warning earlier this month for investors to fully understand the details of subordinated debentures, which is corporate debt that ranks as a low priority for repayment.

MAS said that the perpetual junior sukuk will be recognised not as debt but as equity, and payment obligations will at all times be junior to the claims of present and future creditor of MAS but ahead of other share capital instruments.

The tenure of the sukuk is perpetual and MAS has a call option to redeem the junior sukuk at the end of the 10th year and on each following periodic distribution date.

MAS can also redeem the junior sukuk if there is a change in accounting standards resulting in it no longer being recognised as equity.

The airline may also defer periodic distributions but the deferred distributions will be cumulative.
Interest in perpetual bonds has grown as companies look to take advantage of the opportunity to raise funds without any impact on gearing ratios and investors look for higher payouts in the current low interest-rate environment.

Reuters reported that more perpetual bonds, informally called perps, were sold in Singapore in the first three months of 2012 than in the previous 15 years.

Perps are uncommon in Malaysia and mostly issued by banks.

MAS is also the world’s first corporation to issue an Islamic perpetual bond.

No more share swap for MAS-Airasia. What comes out of it?

The share swap deal is a deal only a merchant banker can create. It has no meaning, as the deal was created to create fees. So was it created, as CIMB has strong links to the government. After 9 months, the deal fell through. Instead of the share swap, both companies will form a JV company to buy aircraft, parts, oil and all other things in the name of economies of scale and saving some grace.

Now what does that mean after the 9 months?

1. Airasia has gotten the Sydney route that it wanted all these while;
2. Probably, after studying MAS books in detail, Tony and gang felt that it would be better off that they take their hands off from MAS's mess. MAS needs to raise additional equity funds. By shying away, Tune is better off not participating into it;
3. QPR (partly owned by Tony Fernandez) had acquired a new sponsor in the name of MAS - that they were looking for;
4. MAS gets messier and now we know how difficult it is to run MAS with the labor union etc;
5. The JV will not work - and if it works will probably benefits Airasia more.

So after the 9 months, what do we see? A result of poor planning for MAS survival as all the parties involved are only looking at what they can gain from MAS not how to save MAS, as always. I hope now CIMB is not thinking of merging MAS with Malaysia Airport Berhad as the income the latter gets does attract that thinking! It is probably the only way, financially and of course both CIMB and government can arm twist MAB to do that.

Which "Cash call" route will MAS go for this time?

Airline is a very brutal industry. Almost every country has at least an airline for itself, some countries just too many. Hence, competition is fierce especially with some airlines either state-owned or at least subsidized. For example, how do you compete against a state-owned Qatar Airways for a country that can afford to host a (football) World Cup with less than a million population. Another example is UAE - another small country with two large state-owned airlines in Emirates Air in Dubai and Etihad Airways in Abu Dhabi. Airlines in essence sometimes becomes national pride for very rich countries.

Government
Then, the other tough thing is national service. It is almost very common for non-profitable routes created due to country's bilateral arrangement - one example is the Johannesburg's route was in existence due to Malaysia's bilateral relationship with South Africa. In my guess, it is probably a much non-profitable route, otherwise why would MAS terminates it. 

(There are many more national service cases, which I do not want to talk about as can be sickening.)

Supply duopoly and cartel
Against so much tough competition, you would want to look for your ability to squeeze your suppliers. But...in the airline business, how do you squeeze your only 2 major airplane suppliers - Boeing and Airbus. Another high costs component, fuel - and we already know what OPEC as well as speculation can do to fuel prices.

Union and manpower costs
Another major costs for airlines - manpower costs, with most airlines having very strong union (MAS included) and for their top brackets wage earners - the pilots (high costs)! Ever wonder why Micheal O'Leary (CEO for the very profitable Ryanair) suggested for airplanes to be piloted by only one pilot for its planes rather than the current practice of more than one - I don't think its a joke but is more of a message on costs.

Hence, in essence airline companies that are not nimble would be tough to manoeuvre as they are facing headwinds from all angles. These are exactly what MAS encounters, not to include competitions from low costs airlines which are growing in numbers and getting more popular.
In US and many other parts of the world, bankruptcy is quite common for an airline company. This is what is faced by American Airlines (AA) which filed a Chapter 11 late last year (similar to bankruptcy protection in Malaysia).

Recently, MAS reported very bad numbers for FY2011 - for a period even before gas fuel prices goes sky high - to USD133 / barrel (latest numbers by IATA). Hence, from those bad numbers reported by MAS, in a battle among the FEEBLES, I took out latest numbers from AA to compare.

Comparison between MAS and American Airlines numbers

MAS' liquidity is worse than AA's!

For any company that faces concerned liquidity position, two most important ratios are studied - working capital and acid test. In both comparisons, MAS registered much poorer liquidity ratios than AA. Working Capital and Acid Test ratios for MAS was 38.6% and 33.4% respectively against AA which registered 60% for working capital and 50.3% for Acid Test.

The only thing MAS shows better numbers than AA in its balance sheet is Shareholders Equity. Now, for sure, MAS liquidity is very stretched. This is why in their statement from the 4th Quarter 2011 results, they mentioned that they are in the midst of looking for additional funds to shore up its balance sheet (read below).

The question now is to raise from who and how? Bonds, preference shares, bank loans (err...which bank would loan la - they only want the arrangement fee - CIMB again?)? Who is to participate if the company is to be continuously in the red for a long stretch. There is a mention of rights issue. Will the minority shareholders participate? Together with Tune Air (yet to be approved), the government (through Khazanah and EPF) controls 80% or more of MAS. Will Tune participate if the share swap is approved? And Will the government rescue MAS again?

If all is well with one of the few questions above solved, one question remains - how is it that MAS can be valued at RM4.5 billion (price: RM1.35), FOR A COMPANY THAT DESPERATELY NEEDS CASH INJECTION! (For comparison, AA is now valued at less than USD150 million! - and Quek Leng Chan probably lost quite a bit of money there)

Minorities, this is the time to sell fast as there is probably going to be a cash call and the participation is not going to be worth it. In any case, it is not worth the price now - Or do you still believe that the government is your Santa Claus?

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Oops! MAS needs it again!

As you can read from the statement below, I feel MAS sincerely needs a new management not a share swap. We know of the challenges - all the more needed private managers - not politicians. MAS does not need to do a share swap to promote synergies. I am sure any synergistic exercises that are to be engaged (and put to sturdy executions) would have benefited both parties, MAS and Airasia. - hence whats the point of having share swap? Share swaps in this case are just cheating shareholders. What MAS need is the sense of competition it gains from competing against Airasia. It is not only competing against Airasia alone. It is competing against any other airlines globally - stop sleeping! Further MAS is not a National Champion. Neither is Airasia, it is already a Regional player. We have enough of National Champions - err! another Proton story? Continue to use the championing national pride as an excuse.  If you also noticed on the statement, they are sort of again asking for rescue. Enough of that! Rescuing MAS has now become a cyclical thing. STATEMENT BY TAN SRI MD NOR YUSOF, CHAIRMAN MALAYSIA AIRLINES (MAS), FOR AND ON BEHALF OF THE BOARD OF DIRECTORS - Recovery of Malaysia Airlines is top priority On behalf of my colleagues on the Board of Directors of Malaysia Airlines, I wish to place on record our commitment and support for the Management Team of Malaysia Airlines, led by Group Chief Executive Officer Ahmad Jauhari Yahya. Malaysia Airlines recorded a significant net loss of RM2.5 billion in 2011, at a crucial juncture in time when airlines globally are challenged by intense competition, high fuel costs and spreading economic instabilities. These negative factors for the global airline industry have been building up over several years. In the last decade, numerous national carriers have failed because of this changing environment and finding a viable and sustainable business model has been a challenge. Certainly, the market is punitive for those airlines on a weak footing. The Board identified structural weaknesses in Malaysia Airlines in early 2011 and initiated a series of proactive measures to contain losses and strengthen the company for recovery and sustained future performance. A key foundation stone of this plan was the August 2011 Comprehensive Collaboration Framework (CCF) involving a share swap between Khazanah Nasional Berhad and Tune Air,  a collaboration agreement between Malaysia Airlines, AirAsia and AirAsia X, and a restructure of the Malaysia Airlines Board and Management Team. Subsequent to these changes, the Board and Management Team has endorsed a Business Plan for the recovery and sustained future performance of Malaysia Airlines. This is our top priority. The Board is confident that the CCF will benefit both Malaysia Airlines and AirAsia by promoting synergies in many areas. Already, we are in the process of setting up joint-venture companies for procurement and training and a potential maintenance service provided by Malaysia Airlines Engineering for the AirAsia fleet. I would like to be very clear in stating that the share swap is not part of the acute financial problems at Malaysia Airlines, it is part of the solution. Likewise, the collaboration agreement between Malaysia Airlines and AirAsia is not part of the acute financial problems at Malaysia Airlines. It is part of the solution. Malaysia is a small nation on the world stage, but we have the benefit of two national champions in aviation. Our ultimate belief is that we have the opportunity to promote two national champions and build economies of scale that will benefit Malaysia Airlines and AirAsia and Malaysian consumers. By strengthening Malaysia Airlines, we put the company back on its feet and give it a secure future. I am writing in such a forthright manner because I have noted that our Business Plan has not been accepted by all of our stakeholders and has in fact met with turbulence in some sectors. This turbulence has the potential to distract the attention of Malaysia Airlines' Management Team and its 20,000 staff from the very crucial task at hand. That task is our top priority. It is the economic recovery and sustained future performance of Malaysia Airlines. I know that Malaysia Airlines has a long history, and a special place in the hearts of many Malaysians. However, I ask you to take a long, hard look at the position of Malaysia Airlines in the intensely competitive global aviation business. Malaysia Airlines must be allowed to focus on pulling itself out of its current financial crisis. Key initiatives in the Business Plan that will be undertaken within the next six months include strengthening revenue management, the launch of a new regional short-haul premium airline and the introduction of the new flagship Airbus A380 to our fleet. The company also needs to strengthen its balance sheet urgently and various options are being considered. At the same time, we will continue to work closely with the Malaysian Government to balance our commercial instincts and financial pressures with the Government's wider interests. Do judge us on the results we deliver with our Business Plan, but please give the Management Team sufficient time to implement the Business Plan effectively. Similarly, to pass judgment on the CCF in general or the share swap in particular is premature at this juncture. Malaysia Airlines is a very sick patient, and its condition is quite critical. Indeed, there are a full range of prescriptions available. Judge us by the result, not by the choice of prescription. This announcement is dated 19 March 2012.

Why I do not like the MAS - Airasia deal?

I am an investor of Airasia. This deal in fact should have called the Airasia - MAS deal as who knows after 10 years, Airasia can be valued at 2x MAS. How much things have changed. While I like Airasia as a business and how well the company has executed in turning itself into a respectable airline, I do not like the deal at all. Let's see what are the differences between MAS and Airasia.

1. Airasia is a privately owned company and MAS is a government controlled company although it is listed. It is much easier to run a privately controlled company while there are too many hands trying to reach at the cookie jar of a government controlled. Imagine what will happen if there are changes in the group of people running the government. Will Tony Fernandez have much say in the running of MAS with his group's 20% stake?
2. Airasia again is a privately owned airline while MAS is a national airline. For a private airline, you can do a Thai Airasia deal. You can also do a Indonesia Airasia deal. So is doing a Japan Airasia deal. Can MAS do that? Little chance. A national airline will have to compete against SIA, Cathay Pacific, Emirates Air. These airlines are definitely financially stronger competing in a similar space as MAS. While Airasia is a competing airline as well, it is different as it reaches out to a different group of consumer group.
3. Analysts say that the MAS - Airasia deal will lower costs as MAS and Airasia can possibly share spare parts etc., i.e. some of the costs. That theoretically sounds good as in an investment bankers pitch but executing it is very difficult. Airasia only operates Airbus 320 and 330 (for Airasia X). MAS on the other hand has much more variety in their fleet. How is that costs sharing helping?
4. The deal could potentially reduce competition. I do not like anti-competition deal. It is bad for consumers. I like companies which are competitive as that DNA will make them more competitive naturally. Look at MAS, you think it will ever be successful? The mindset of the people behind the company was totally wrong from day 1 and it will be a tough task to change that. Not even Tony.
5. To me Airasia should just go ahead and do more international deals like what they have done in different countries as the expertise and strength in negotiating financial and airplane deal could have brought them into those positions. With the deal with MAS, I do not know how other government could have viewed that.
6. You think Tony could change MAS? Today if you ask around, private corporations are beginning to warm to getting their employees to take Airasia or any budget airlines. Reducing costs will help companies to be competitive. Who are the ones who still insists on taking business class of a national airline? People behind the government. Can Tony introduce no frills or reduce the service level on those flights?
7. If you look at the Tune group, they thrive on providing value - meaning if anyone is willing to accept a reduced service by paying less, they are able to provide that to you. Hence with these kind of expertise, they will not be able to bring that same model to MAS, a premium service provider. In short, running a low cost airline is very different from running a national airline. I do not think Tony is able to execute well in that space.

I feel that the share swap deal was a deal for Tony and his group as at the time the deal was executed, Airasia's price was rising while MAS' price was poor. When you see Nazir's face in that deal, it was just a deal to make certain group's happy. It was not meant to be a deal that will change the face of the airline business in Malaysia or anything that will benefit Malaysians.

Serious Investing!

MAS - Airasia deal: When politicians plot, public gets shafted

As an investor in Airasia, perhaps I can show my disgust by reproducing the below article by Mariam Mokhtar. I have to say I totally agree with her as I do not think Tony Fernandez and gang can turnaround MAS, and if they are able to do so, why should they.

Tony, as a CEO of Airasia, just concentrate on building Airasia. You are not a superhero.

When politicians plot, public gets shafted


The fly-by-night people in charge of MAS are no better than a posse of cowboys. Why do we continue to tolerate the wasteful antics of our politicians who indulge in a game of real-life Monopoly and who use taxpayers’ money to bail out ailing companies?

In a perverse reversal of the saying “King Midas and his golden touch”, it appears that whatever BN-Umno politicians “touch” will always turn to dust and ashes.

This deal that is struck with MAS and AirAsia is another smack in the face for the public. What sort of responsible government allows such a merger to take place? By agreeing to this merger, the government has neglected to address healthy competition which in essence should benefit the airline customers, companies and the Malaysian economy.

What about fair trading practices? Or conflict of interest? Or share prices? Maybe the Securities Commission should start probing both AirAsia and MAS about insider trading or any other irregularities. What about the jets each carrier uses, the agreements and maintenance contracts signed with Boeing and Airbus? Who honours what?

However, the most scandalous revelation is that all government-linked companies, have been instructed by Nazri Aziz, Minister in the Prime Minister’s department, to cease all civil suits against Tajuddin Ramli, the former chairman of MAS and settle out of court.

Yet again, Tajuddin has been let off scot-free and the public, denied justice. Any court revelations now would not look good for Barisan Nasional, especially as the general election draws near.

With this latest defrauding of the public purse, how much of the taxpayers’ money has gone unaccounted for? This government is neither transparent nor accountable. It does not adhere to its own catch-phrase, “People First, Performance Now”. It doesn’t even match up to its own Key Performance Indicators.

In the late 1960s and 1970s, working for MAS was both a privilege and carried great prestige. Today, there is a different portrait of the MAS employees. Many are unhappy and morale is at an all-time low. Disaffection with MAS is felt by cabin, flight and ground crews including engineering and maintenance staff.

Jala’s forte

When Singapore Airlines (SIA) and MAS emerged from the ashes of the now-defunct Malaysia-Singapore Airlines (MSA), SIA went from strength to strength while MAS was left in the doldrums.

When former prime minister Dr Mahathir Mohamad gave his blessing to Tajuddin to be installed as the chairman of MAS, the airline started to go downhill. Tajuddin received the support and protection from his influential patron, the former finance minister, Daim Zainuddin, which spelt further doom for MAS.

In these days of rising fuel costs and tight profit margins, the airline industry is more competitive than ever. However, the Malaysian Cabinet denies putting government officials in charge of a global brand.

These officials are clueless about most things and have no experience of running an airline. The first thing to effect a turnaround should have been to disband the senior management, all of whom are mere government puppets.

If there was one brief moment of respite for MAS staff, it was when Idris Jala took over and was “praised” for turning the company around. But even simpletons realise that selling your best assets just to make the books look good, is not financial wizardry. Many in MAS are still angry with Jala.

Asset stripping was Jala’s forte. He also engaged in cost-cutting by reducing many of the privileges enjoyed by the staff without addressing the problems created by Umnoputras and BN politicians who treated the airline like it was their own private transport.

Jala, having collected his performance bonus, then entered the government’s bloated political élite club via the back door and became a senator and Minister in the Prime Minister’s Department.

So if Jala has turned MAS around, why is the MAS-AirAsia merger necessary? Was it to help MAS or AirAsia? No one really knows as this deal is shrouded in mystery.

Mahathir remarked that the MAS-AirAsia merger was a “very good idea” as “AirAsia can learn about the experience of MAS and MAS can learn how to reduce costs as done by AirAsia”.

How prophetic. Anyone with half a brain will know that MAS is run along government lines. “You do as we say” is the norm and the person who kowtows to the government will be rewarded with a title and other benefits. And if others want to haul you to the court for non-payment of debts, the government does a good service in whitewashing and “proving” your innocence.

Being held accountable

When will we have a head of MAS who is brave enough to say “No” to the government? MAS was a fine airline decades ago and many Malaysians were proud to fly with it. These days, MAS is overpriced and uncompetitive.

AirAsia is nothing to shout about. Customer service is non-existent and it is not cheap flying AirAsia on some long-haul flights. The merger will be another nail in the coffin with regard to competition.

Billions of ringgits of taxpayers’ money are unaccounted for. The scandals of Bumiputra Malaysia Finance, Bank Bumiputra Malaysia Berhad, Felda, Defence Ministry, Perwaja, PKFZ, Proton, Sime Bank/UMBC are a few from a long list.

Perhaps Islamic institutions like JAIS should start condemning and investigating these criminal acts against the rakyat rather than running around and meddling in charity dinners like a blue-arsed fly, in the recent allegation of proselytisation.

Tajuddin must be tried, and if found guilty, punished by the courts for his alleged corruption when he led MAS. His alleged accomplices – ministers, former prime ministers and the current PM – should also be held accountable.

Maybe pigs will fly before there is any sign of judicial retribution.

Mariam Mokhtar is a FMT columnist