This article first appeared in The Edge Malaysia Weekly on January 27, 2020 - February 2, 2020

IT is no secret that the airline industry, especially the full-service segment, is facing very challenging times. Most passengers are budget-conscious while big spenders are discerning — a tough balancing act for full-service carriers.

Consolidation has been called time and again in the air travel industry. In Europe, legacy carriers such as Air France and KLM Royal Dutch Airlines were merged under a single holding company while the respective airlines continue to operate independently.

In fact, the experience in Europe could be the most liberal in the world, whereby national carriers have become quite rare these days, as governments disposed of their stakes in legacy carriers, and cross-national mergers and acquisitions are quite common.

Air France and KLM merged in 2003 while International Consolidated Airlines Group SA (IAG) was formed in January 2011 with the merger of British Airways and Iberia, followed by the acquisitions of Aer Lingus in August 2015 and other smaller carriers.

Qatar Airways Ltd owns a 20% stake in IAG.

Now that there is talk that foreign airlines are engaging or have engaged with Khazanah Nasional Bhd about acquiring a substantial stake in flag carrier Malaysia Airlines Bhd (MAS), can the experiences in Europe be a barometer for a successful cross-border consolidation?

“It is really tough. I don’t think the foreign airlines can turn around Malaysia Airlines,” an analyst covering the region’s aviation industry tells The Edge.

“The cultures and mentality are very different.”

To recap, in an article by Focus Malaysia, Japan Airlines Co Ltd and Air France-KLM are named as foreign airlines that are interested in acquiring a substantial stake in MAS.

Apart from the foreign airlines, which at one point also included Qatar Airways, local airlines such as AirAsia Group Bhd and Malindo Airways Sdn Bhd are also said to be in the fray to acquire or merge with the national airline.

“I find it impossible for foreign airlines, especially those from Japan and Europe, to acquire a substantial stake in MAS and turn it around. MAS’ problems are unique to Malaysia, because of the government’s intervention in the running of the airline,” the analyst says.

For starters, MAS is required to service rural destinations in Sabah and Sarawak through MASwings. While these rural air services are subsidised by the government, the operations are still an inefficient allocation of capital and resources, some observers have said.

Meanwhile, as foreign airlines or investors can acquire only up to 49% equity interest in MAS, there could be clashes in terms of the management style as both groups would represent almost half of the board of directors.

This is different from the successful turnaround of Proton Holdings Bhd by Zhejiang Geely Holding Group. After acquiring a 49.9% stake in the Malaysian carmaker in 2017, Geely was given management control of Proton by DRB-Hicom Bhd, the larger shareholder.

Of the four board members of Proton (excluding the chairman), half are representatives of Geely. Dr Li Chunrong, former CEO of Dongfeng Passenger Vehicle Company, was made CEO, the first non-Malaysian to hold the position.

“Proton was different because the government relinquished control of the company in 2012. When Geely came in in 2017, DRB-Hicom allowed the Chinese carmaker to be in the driver’s seat to transform Proton,” says the analyst.

“It is unlikely that the government will let go of its control of the national airline, hence the ownership restriction.”

Ownership and control restrictions are common in other parts of the world, even in the European Union. A non-EU investor can take up only to 49% equity interest in an EU airline while in the US, the limit on foreign ownership of its airlines is 25%.

That is why consolidation mostly happens among airlines within the same jurisdictions. It is harder for cross-border acquisitions to be a success as the acquiring party often does not get control of the acquired party.

A case in point is Jet Airways of India, once a high-flying carrier in the subcontinent. While it counts Etihad Airways as a shareholder, Jet Airways collapsed last May after it ran out of cash to sustain its operations. 

Etihad has been reported to have had conflicts with Jet Airways founder Naresh Goyal over who makes decisions for the airline. 

“In the end, there will still be government intervention in MAS,” opines the analyst.

It is worth noting that Khazanah managing director Datuk Shahril Ridza Ridzuan has called on the government to let go of the practice of using the golden share to control a company.

He said in a company, where the government owns a golden share, board members can recommend a candidate for a certain position, but the government can decide to appoint someone else.

The government’s decision to override board members’ decision in such matters is wrong from a commercial and business point of view, Shahril said at the Bank Rakyat Integrity Forum 2020 on Jan 14.

Responding to Shahril’s recommendation, Prime Minister Tun Dr Mahathir Mohamad said the government would do away with the golden share only after studies have been done on a company-by-company basis.

The analyst points out that the government did not own any shares in Proton when DRB-Hicom decided to sell the 49.9% stake to Geely. “There was minimal government intervention, and most of it was in the form of incentives. Without government intervention, Geely could be ruthless and cut off all the fat in Proton back then.

“The same can be done in MAS, but there will be political consequences.”
 

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