REELING from years of losses, Malaysian Airline System Bhd (MAS) was shaken to its core when it lost two Boeing 777s this year — Flights MH17 and MH370 — within 131 days, along with the loss of a total of 537 passengers and crew.

While MH17 was allegedly shot down by rebel groups in Ukraine, MH370 is presumed lost in the Indian Ocean, with no trace of it till now. The loss of the two aircraft shattered MAS’ image of an airline with an impeccable safety record.

With passenger numbers already dropping from the MH370 fallout, the downing of MH17 in July aggravated the situation. Losses ballooned in the second quarter ended June 30, 2014 — the first quarter following the loss of MH370 — to RM307.04 million, a 74% increase year on year.

For the third quarter ended Sept 30, 2014, net loss widened 53% to RM576.11 million from a year ago.

Some observers see the loss of the two aircraft as the last straw for MAS’ shareholders. Khazanah Nasional Bhd, the largest shareholder in MAS with a 69.3% stake, proposed on Aug 8 to undertake a selective capital reduction and repayment exercise, which would result in the sovereign wealth fund wholly owning the national carrier, and thus delist it from Bursa Malaysia.

Trading in MAS’ shares was suspended by Bursa on Dec 15, after shareholders accepted the last-ditch offer by Khazanah. After the privatisation, Khazanah aims to rescue and revive what was once Malaysia’s pride and joy — an award-winning airline.

On Aug 29, Khazanah announced a 12-point MAS recovery plan, which includes cutting down 30% of the carrier’s workforce, rationalising routes and setting up a new company — Malaysia Airlines Bhd (MAB) — to take over the assets and operations of MAS.  

The sovereign wealth fund intends to turn around the airline within three years, and get MAB relisted within five years. The total amount to be spent by Khazanah is about RM6 billion, of which RM3 billion is in the form of capital injection to be disbursed on a staggered basis over three years.

Khazanah also appointed German national Christoph Mueller, the outgoing chief executive of Irish national carrier Aer Lingus, as the CEO-designate of MAB. Mueller previously occupied top positions at Lufthansa AG and the former Belgian carrier Sabena.

While many have accepted that Khazanah’s privatisation move as the only way to salvage the national carrier, a little known company, Jentayu Danaraksa Sdn Bhd, has proposed a complementary restructuring plan to rescue MAS.

To recap, between financial years 2011 and 2013 ended Dec 31, MAS had total net losses in excess of RM4 billion.

MAS, in its heyday, was one of the few airlines in the world serving all six inhabited continents.   

Thus, the existing plan by Khazanah to downsize the workforce by 6,000 personnel from the current 20,000, indicates that the operations of the new company are going to shrink.

Also, the recovery plan hinted that MAB will be a regionally focused airline company, while global connections are likely to be through its membership of the Oneworld Alliance and other code-sharing arrangements.

Currently, MAS has an extensive network and flies to destinations such as London, Paris, Frankfurt, Amsterdam, Istanbul, Sydney, Melbourne, Adelaide, Brisbane, Auckland and Male.

Despite mounting losses, MAS has played a significant role in the Malaysian economy, bringing millions of tourists and businessmen into the country over the last four decades. The revival of the national carrier is thus in the public’s best interests.

Jentayu Danaraksa revealed some details of its plan to revive MAS on Dec 15. Instead of shrinking MAS’ operations, the company claims that airlines should be expanding, rather than shrinking, to take advantage of the Asean Open Sky policy next year.

The company proposes to take over Penerbangan Malaysia Bhd (PMB), the firm set up by the Ministry of Finance to acquire aircraft and lease them back to MAS, by assuming US$1 billion worth of bonds due by 2016. PMB will then be transformed into JD Leasing Sdn Bhd, a full-fledged aircraft leasing company.

Also, Jentayu Danaraksa proposes to acquire a significant number of aircraft owned by MAS for US$1.5 billion. The proposal envisages MAB to be asset light, by leasing aircraft from JD Leasing, and not owning or acquiring them.

Jentayu Danaraksa says JD Leasing would offer preferential rates to MAB, subject to certain conditions. In financial year 2013, MAS spent RM1.35 billion on leasing aircraft, according to the group’s annual report.

Apart from forming JD Leasing, Jentayu Danaraksa proposes to form a niche premium economy airline, tentatively called FlyJD, to feed into the network of MAB by serving destinations that the new company would drop.

Jentayu Danaraksa’s proposal was met with lukewarm response from Khazanah. A meeting between both parties was supposed to be held on Dec 16, but it did not take place.

Interestingly enough, Jentayu Danaraksa claims that a substantial number of workers due to be let go by MAS could be absorbed by JD Leasing and FlyJD. The firm’s executive director, Shukor Yusof, says the number of workers is not the single determining factor for the downfall of MAS.

This article first appeared in The Edge Malaysia Weekly, on 22 - 28 December 2014.

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