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Share swap off - what's next for MAS, AirAsia?

Posted on 03 May 2012 at 22:56 pm by Corinne Wan

The controversial cross holding of shares between Malaysia Airlines (MAS) and AirAsia is officially unwound after eight months of angst and strong opposition from MAS unions, whose members feared loss of jobs and privileges, and Malaysians who decried monopoly in the country’s aviation scene.

In a statement issued on May 2, a day after the official cancellation of the share swap deal between MAS and AirAsia, Khazanah Nasional, Malaysia Airlines'  parent company and the government’s investment arm, said the deal had to be unravelled as the cross holding of shares had become a distraction to management's efforts to the airline’s turnaround.

"The cross holding of shares was well intended to simply better align the economic interests on the part of the major shareholders of MAS (Khazanah) and AirAsia (Tune Air),"  it added.

Having failed to get stakeholders' support for collaboration, Khazanah said the parties have agreed to unwind the cross holding of shares and revert to the original structure of major shareholdings of both companies.

However, many would choose to believe that it is MAS’ eight unions and associations, representing more than 21,000 members that had influenced Malaysian Prime Minister Datuk Seri Najib Tun Razak, whom they met in February, to call off the deal.

This flip flop in the deal could also be linked to the country’s general election, widely rumoured to be taking place in June. MAS' main base of operations is in Selangor, Malaysia's richest state that is now in the hands of the opposition Pakatan Rakyat. The unions and their families roughly totalled 100,000 votes, a number that could be crucial in deciding the state’s fate in the coming elections. It is no secret that Najib badly wants to recapture Selangor at any cost.

So what’s cancelling a deal between two airlines in return for the country's richest state?.

Whatever the reason, this unwinding of the share swap will see Khazanah transfer its 10% or 277,650,600 ordinary shares in AirAsia back to Tune Air which will transfer, in turn, its 20.5% or 685,142,000 ordinary shares in MAS back to Khazanah.

AirAsia’s Tan Sri Tony Fernandes and Tune Air’s Dato’ Kamarudin Meranun have resigned from the MAS Board, while Khazanah’s Datuk Mohamed Azman Yahya has also resigned from the AirAsia Board.

The respective focus areas of MAS, AirAsia and AirAsia X as stated in the earlier Comprehensive Collaboration Framework (CCF) agreement will also cease.

The CCF was set up August last year to allow the three airlines to explore opportunities to cooperate, save cost and reduce competition between them. Part of the deal involved Khazanah and Tune Air entering into the share swap agreement.

The deal would have seen MAS focus on being a full-service premium carrier; AirAsia to focus on being a regional low-cost carrier (LCC); and AAX to focus on being a medium-to-long haul LCC.

In place of the CCF the three airlines have now entered into a Supplemental Collaboration Agreement (SA) to explore areas of mutual-need to realise savings and boost efficiencies.

The signing of this SA was also part of preparations by Malaysia's three biggest airlines to meet the challenges posed by the ASEAN Open Skies, which comes into force in 2015.

MAS and AirAsia will jointly explore the setting up of a joint venture company by MAS, AirAsia and AirAsia X to provide aircraft component maintenance support and repair services.

They will also establish the broad set of business principles for the three parties to set up a Special Purposed Vehicle (SPV) to improve value for money and to increase competitiveness and benefits to customers through procurement synergies

MAS will hold a 50% stake in the SPV, AirAsia 35% and AAX 15%. It will provide services to MAS, AirAsia and AAX primarily comprising strategic sourcing services involving the design, strategy and conduct of procurement processes directed at achieving overall efficiencies and improved value for money for identified goods and services.

Fernandes (pictured left) viewed the latest development philosophically. As he told StarBiz, "... the sad part for me is that I have left something unfinished and I know both me, and Kamarudin could have done a lot to turn around MAS. But on the positive side, after 10 years of pain and after eight months, we now are very close to MAS and Khazanah and that is very positive as all our energies can be now focused to tap the amazing growth potential of Asean and Asia."

Now that the dust has settled, what does the future hold for MAS and AirAsia?

Most analysts said AirAsia would not be affected by the unravelling of the deal and it would be business as usual for the low cost carrier. It just needs to stay competitive, keep its fares low, maintain its high level of service, fend off competition from the other LCCs, and it could continue to dominate the sky.

For MAS, it is a different story and challenging times are ahead for the airline.

One analyst said the share swap’s termination could dampen sentiment in MAS shares. “MAS will need to move on from here, and its immediate problem is to solve its cashflow.”

They were also sceptical of MAS’ turnaround plan, which was put in place to pull the airline back to the black after its massive total net loss of RM2.53 billion for FY2011.

Reducing the large staff force of 20,000 is also not an option for MAS, given the strong unions.

With the deal off, Malaysian aviation looks set to be a free market again. The new SA between MAS and AirAsia could lead to a de-segmentation of the local aviation scene and a return to more competitive fares. The agreement also removes the market focus for both airlines specified under the now defunct CCF.

In their filing to Bursa Malaysia (Malaysia Stock Exchange) on May 2 both airlines specified that the new agreement would no longer define market focus for each airline. it will also no longer work together on the provisioning of routes. These had raised fears that there would a monopolising of the country’s aviation industry, leading to reduced competition and, consequently higher fare.

For now the unbundling of the swap deal looks like a win-win situation for all concerned. But time will tell if the various parties could live happily together after all.

Tags: Malaysia Airlines , AirAsia , AirAsia X , Tune Air , Khazanah , share swap , Comprehensive Collaboration Framework , Supplemental Collaboration Agreement , Special Purposed Vehicle