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Struggling MAS Taps Banks For Restructuring

May 17, 2014 Aviation, Headline News No Comments Email Email

Malaysia Airlines and its key stakeholders are in talks with banks for a strategic overhaul that could include the partial sale of its engineering unit and an upgrade of its fleet, people involved in the discussions said.

Even before the loss of its flight MH370 from Kuala Lumpur to Beijing on March 8 there was talk that loss-making MAS might need a financial rescue from state investor Khazanah Nasional, which owns 69 percent of the company.

“They are sending all these feelers to banks to try and test the waters,” said a banking source familiar with the situation.

“The most imminent move looks to be on the engineering business, an IPO or trade sale,” said the source, who declined to be identified as the talks are private.

MAS aimed to break even this year after three years of losses, but analysts expect losses to widen as the airline cuts fares to spur demand shaken by the disappearance of MH370 over the Indian Ocean. It was already facing stiff competition from AirAsia on local and short-haul routes and from AirAsia X and Gulf carriers in the medium and long-haul market.

“The next step will be to kick off a formal auction process for the engineering unit. They wanted to cut down the stake for many years, but from all the other options now, this might be one of the easier things to do,” the banking source said.

In a research report in April, MayBank Investment Bank highlighted MAS Engineering as the biggest profitable business unit in MAS, valuing it at MYR2 billion Malaysian ringgit (USD$619 million).
Officials from MAS, Malaysia’s Ministry of Transport and Khazanah are involved in the informal talks with a handful of banks including CIMB, sources said.

Despite the most intensive air, sea and underwater search in commercial aviation history, no trace of flight MH370 has been found since it vanished on a scheduled flight from Kuala Lumpur to Beijing. The airline’s load factor fell year on year in March, potentially in response to the incident.

Shares have dropped 20 percent since MH370 went missing. It is down about 80 over the past five years, while the broader Malaysian index has surged by about 80 percent over the same period.

In the year ending December 2013, MAS’s losses widened nearly three times to MYR1.17 billion ringgit (USD$362 million) from a year ago.

A second banking source familiar with the discussions said the airline needs a plan to restore profitability. “They are now losing money more than before. Not only is the brand beginning to get hurt, but the government is also losing patience.”

A source at a northeast Asian bank said MAS’s overall financing support had weakened since the MH370 incident, but it was still not offering higher pricing for aircraft financing and thus finding it tough to line up lenders.

Second-tier carriers like MAS usually have to pay up to 200 basis points on average above LIBOR in aircraft financing deals versus 150 basis points for top-tier names such as Singapore Airlines. Banks are now requiring MAS to pay a higher premium, the source said.

Bankers say the government’s support for the airline is the main reason they are backing it.




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