Friday 12 Apr 2024
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This article first appeared in The Edge Malaysia Weekly on October 23, 2023 - October 29, 2023

IT hasn’t been the best of times for the Malaysian aviation industry. Cash-strapped MYAirline Sdn Bhd, the new kid on the block, had to suspend all flights indefinitely on Oct 12 — 10 months after it took to the skies.

And as medium-haul low-cost carrier AirAsia X Bhd (AAX) looked forward to getting its financial groove back, it was handed a major setback last week after Bursa Securities rejected its application to be lifted from Practice Note 17 (PN17) status for financially distressed companies.

MYAirline now faces a Nov 14 deadline to find a white knight to shore up its capital and avoid a shutdown. Already, the airline has been left with the bitter taste of “what could have been” after a prospective investor withdrew “at the eleventh hour”, according to its interim accountable executive Datuk Seri Azharuddin Abdul Rahman.

As for AAX, following the rejection, it has three months until Jan 17 next year to submit its regularisation plan to the authorities. But AAX has disclosed that it will appeal Bursa Securities’ decision.

The rejection is a major blow to AAX as it was part of a broader plan for its sister company Capital A Bhd to shed its PN17 status by combining its short-haul airlines with AAX. Capital A investors would then receive a distribution in specie of AAX shares.

“Capital A’s regularisation plan would have been knocked back by Bursa’s rejection of AAX’s application. Capital A was waiting for AAX to get out of PN17 first and then sell its four short-haul airlines to AAX to get out of its own PN17 status,” an investment analyst tells The Edge.

Shares of AAX and Capital A tumbled on Thursday (Oct 19) as nervous investors rushed to cut their losses after the rejection. AAX’s shares plunged 16% on Bursa to as low as RM1.88, dragging Capital A down as much as 6% to an intraday low of 87 sen. However, the counters recovered some of their losses to close the day at RM2.09 and 88.5 sen respectively.

MYAirline saga another wake-up call for the industry

The suspension of MYAirline’s flights comes when the aviation market is in a strong up cycle. Industry observers believe that the MYAirline affair is symptomatic of a much larger issue in the Malaysian aviation industry.

“This year alone, Malaysian aviation has seen several major failures: Malaysia Airports Holdings Bhd (MAHB) failing to run its aerotrains at Terminal 1 of the Kuala Lumpur International Airport — and by the looks of their issues with Pestech International Bhd, rectification of the aerotrains is becoming problematic — Malaysia Airlines Bhd failing to transition its catering services from Brahim’s Food Services Sdn Bhd to an alternative arrangement smoothly and MYAirline suspending its operations,” an industry observer says.

“All these issues are very serious and have happened at the same time. One might think that aviation operators, that is, airports and airlines, do not take the interest of passengers seriously any more and view regulations designed to protect these consumers or passengers with disdain. Perhaps the operators no longer fear the consequences of mismanaging their services and business,” he adds.

Recent incidents suggest that governance by aviation authorities has also been weak.

It wasn’t too long ago — back in November 2019 — that Malaysia’s aviation safety rating was downgraded by the US Federal Aviation Administration to Category 2, which served as a wake-up call for the Malaysian government as the downgrade placed the country in the same category as Indonesia, Bangladesh, Ghana and Costa Rica.

It took technical regulator the Civil Aviation Authority of Malaysia (CAAM) three years to regain its Category 1 status.

CAAM is now back in the spotlight, this time for granting a two-year extension of MYAirline’s air operator’s certificate (AOC), only to see the airline halt its operations three days later. Critics ask why CAAM, along with economic regulator the Malaysian Aviation Commission (Mavcom) green-lit MYAirline to operate in 2022 although its co-founder and major shareholder Datuk Allan Goh Hwan Hua was linked to companies that were mired in controversies, including allegations of illegal deposit-taking and money laundering.

CAAM oversees the technical aspects of air operators to ensure that all universal safety and security standards are met, including ensuring they have the financial and operational capacity to maintain reliable and regular operations such as training of pilots and engineers, according to a person familiar with the matter. “For instance, if you don’t have the money to pay for training, how can you expect your pilots to be safe? If you don’t have the money to purchase spare parts, how can your aircraft be airworthy?” he asks.

He also points out that when granting an AOC, CAAM looks into the accountable manager who could be the CEO, executive chairman, managing director, director general or general manager, who has overall responsibility (including finance) for managing the organisation, and not the shareholders’ background.

However, former MYAirline CEO and co-founder Rayner Teo Kheng Hock had quit four days before the airline suspended its flights while Stuart Cross, who was named interim CEO, resigned within days. It is not clear whether the duo are still accountable for everything that has happened. CAAM has since suspended MYAirline’s AOC for 90 days, pending investigation.

Still, industry observers say the issues surrounding MYAirline’s financial viability should have been picked up on by Mavcom and CAAM earlier.

“For example, not making payments to staff and vendors, and with i-Serve Online Mall Sdn Bhd, in which Goh holds a 31.75% stake, also being penalised by Bank Negara Malaysia — these are issues that should have raised questions about MYAirline’s financial viability and the legitimacy of their source of funds,” says an industry observer.

Another industry observer concurs, noting that the sanctions on i-Serve by the central bank should have prompted the aviation authorities to conduct an assessment of the fitness of character of key responsible individuals and post holders at MYAirline, which they regulate.

He cites Mavcom’s assessment of the fitness and propriety of Capital A (then known as AirAsia Group Bhd) co-founders Tan Sri Tony Fernandes and Datuk Kamarudin Meranun back in 2020 after the UK authorities pulled the low-cost airline into a bribery investigation targeting Airbus. Fernandes and Kamarudin vacated their executive positions for two months during the probe. They were subsequently cleared of corruption allegations relating to the Airbus scandal by an independent expert appointed by the board committee for AirAsia and AAX.

“Given the importance of aviation in Malaysia and its very public exposure, the government should primarily concern itself with the overall governance framework for this industry. The individual episodes are serious, yes, but the government should address the big picture,” says an industry observer.

“Some structural improvements need to be made to Mavcom and CAAM. Perhaps they should not be within the purview of the Ministry of Transport (MoT) but report directly to a parliamentary select committee. Even a full-scale reform of MoT, which supposedly oversees the aviation industry and Mavcom and CAAM, should be performed. It’s quite odd that despite these major failures, no one from MoT needs to take responsibility for them,” he notes.

A source also says many of Mavcom’s staff had left after MoT decided in December 2019 to shut it down and transfer its key functions to CAAM. “It is likely Mavcom has not been able to properly replace them as it is no longer an attractive place to work at due to its imminent closure,” the source adds.

Survival of the fittest in a crowded market

Even before the pandemic in 2019, airlines in Malaysia had struggled to make profits on a year-round basis, given overcapacity in the local market, high costs and low yields.

An industry observer says although Malaysia’s market is relatively small, issuing new flying licences should not be frowned upon as consumers benefit from additional competition.

“In the long term, an airline that proves to be uncompetitive will have to drop out. Also, a way Mavcom can control market supply is at the route level — not at overall market level — and therefore Mavcom can manage the supply of seats on a given route via the controlled issuance of air traffic rights.

“Mavcom needs to strike a balance between allowing commercial activity and the protection of passengers. Too much regulation will discourage entrepreneurship and innovation while too little regulation exposes passengers to many risks. This is the inherent challenge facing any regulator. Without doubt, it is difficult to achieve,” the industry observer says.

Others say every new company, especially new passenger airlines, cannot be expected to be profitable in its initial years of operations as it has not yet achieved adequate scale and revenue size to cover its fixed costs during those early years.

“Hence, it is important for new airlines to have a deep balance sheet from the beginning, so as to weather those initial years of losses and negative cash flow. Airlines without a strong balance sheet should not be awarded licences or indeed be allowed to operate.

“A weak balance sheet, coupled with weak cash flow will probably result in the airline’s cash depleting very quickly. The passengers are then placed at risk as they face flight disruptions, un-refunded fares or worse, an aircraft that is not adequately maintained. The role of aviation regulators should be to anticipate and check these possibilities when evaluating whether to issue a licence,” says an industry observer.

He also points to the upcoming change in MAHB’s managing director on Oct 24, with Datuk Seri Iskandar Mizal Mahmood stepping down and being replaced by chief financial officer Mohamed Rastam Shahrom, who will assume the role of acting group CEO. “The next CEO of MAHB will be its sixth in 10 years. This is poor even for a Malaysian government-linked company. Someone should ask the previous CEOs why they did not last long or what factors contributed to them not continuing. This is also suggestive of the poor state of governance in Malaysian aviation.”

Meanwhile, aviation advisory firm Endau Analytics founder and analyst Shukor Yusof says the arrest last week of Goh, together with his wife Datin Alice Neow Ean Lee and son Sean Goh Tze Han, to facilitate investigations under the Anti-Money Laundering, Anti-Terrorism Financing, and Proceeds of Unlawful Activities (AMLA) Act 2001, further complicates MYAirline’s resurrection.

He believes the chances of MYAirline being resuscitated are slim but its exit will not deal a major blow to the domestic market as the airline had only about an 8% share. 

 

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