This article first appeared in The Edge Malaysia Weekly on November 20, 2023 - November 26, 2023
SKS Airways Sdn Bhd, a new airline that took off in January last year during the Covid-19 pandemic, in recent months has approached a handful of investors — including Malaysia Aviation Group Bhd (MAG), the parent company of Malaysia Airlines Bhd — to become an investor, according to people familiar with the matter. The talks also include a possible stake sale in the young scheduled commercial airline.
While sources would not identify the potential investors that had been approached, they tell The Edge that one of them was MAG, whose cash balance stood at RM5.2 billion as at end-October and is on track to achieve its first full-year net profit, since the airline group was privatised in 2014, this year.
It is understood that MAG is not keen to invest in SKS Airways as the national carrier embarks on another wave of fleet expansion — it is looking to increase both its narrowbody and widebody aircraft.
A spokesman for SKS Airways says it is open to any interest to take up an equity stake in the airline. “We do not have any preset formula for equity participation. When considering such interest, we will lean heavily towards parties with strategic contributions to the airline,” the spokesman says in an email reply to The Edge.
According to sources, SKS Airways needs funds to pay pre-delivery commitments for aircraft. In May, the carrier signed a 12-year operating lease agreement with US-based aircraft lessor Azorra Aviation Holdings for 10 Embraer E195-E2 jets, with deliveries to begin in January 2024. Based on the list price of an E195-E2, the 10 jets are worth more than US$840 million (RM3.94 billion). It also signed a deal with Brazilian aircraft manufacturer Embraer Commercial Aviation for the repair and maintenance of the aircraft.
The SKS Airways spokesman points out that the airline has secured financing to fund the aircraft leases, engine maintenance and working capital. “(But) we have been advised by our lessor (Azorra) that there will be some delay of deliveries due to supply chain constraints faced by the aircraft manufacturer. The nature of delays is not significant and will not impact the overall SKS Airways’ business plan. We are currently in discussions with our lessor to fine-tune the new delivery schedule.”
Sources say typically, an airline needs to put down a three-month security deposit that is equivalent to three months of leasing rental. It is estimated that the E195-E2s would incur a monthly lease of US$250,000 to US$260,000.
In addition, there are the maintenance reserve payments, which are funds collected by the lessor to cover the future costs of major maintenance events such as aircraft engines, landing gear replacements and airframe checks, and are usually paid on a monthly basis. They are also used to pay for C-checks, heavy maintenance which is performed every 20 months.
“If you add the monthly lease of US$250,000 and the monthly maintenance reserve payments of between US$100,000 and US$120,000 together, SKS Airways would have to fork out some US$370,000 per month for the E195-E2s,” one source points out.
In May, SKS Airways announced that the E195-E2s will form the core of its expansion plans and will be based at Sultan Abdul Aziz Shah Airport (Subang Airport) in Subang, Selangor, making it the first regional jet operator operating out of the airport. The move follows the government’s decision to allow narrowbody jets up to the size of a Boeing 737 or Airbus A320 to operate again at Subang Airport, after it was discontinued in 2002. It aligns with Malaysia Airports Holdings Bhd’s Subang Airport Regeneration Plan to transform the airport into a premium city airport and regional aviation hub.
SKS Airways will also be the first E195-E2 operator in Southeast Asia.
News of SKS Airways’ seeking investors comes on the heels of an unsuccessful attempt by cash-strapped low-cost carrier MYAirline Sdn Bhd to secure new investors to sustain its operations, which have been suspended since Oct 12. The failure of MYAirline has been put down to its breakneck expansion, from three aircraft to 10 within 10 months. On Oct 31, MYAirline said it had received over 15 proposals from potential investors, two of which were in advanced stages of negotiations. However, nothing has been firmed up yet.
“It would be bad for the country’s reputation if another airline were to collapse. Already, airlines that have failed include Rayani Air, Suasa Airlines and Eaglexpress,” says a market observer.
Founded in November 2017, SKS Airways was awarded an air operator’s certificate (AOC) by the Civil Aviation Authority of Malaysia in October 2021, followed by a full air service licence (ASL) by the Malaysian Aviation Commission in January last year. Airlines require both the ASL and AOC to operate a scheduled passenger and cargo airline business.
Companies Commission of Malaysia (SSM) data shows that Johor-based SKS Southern Sdn Bhd has 40% equity interest in SKS Airways, while SKS Group founder and chairman Alan Sim See Kiong and SKS Airways director Datuk Majid Manjit Abdullah, who is on the boards of Ekovest Bhd and PLS Plantations Bhd, each have a 30% stake. Majid Manjit is also chairman of Tree Movement (M) Sdn Bhd — a manufacturer of electric vehicles — whose shareholders include the Pahang royal family.
A check with SSM also reveals that SKS Southern, a property development and construction company, is wholly owned by Sim’s daughter Cindi Sim, who is the group managing director of SKS Group.
According to SSM data, SKS Airways posted a net loss of RM23.95 million on revenue of RM3.09 million for the financial year ended Dec 31, 2022 (FY2022). Its total assets of RM42.51 million exceeded the carrier’s total liabilities of RM40.9 million, resulting in a positive shareholders’ equity of RM1.61 million.
A check on SKS Airways’ website shows that the carrier currently operates flights from Subang Airport to Redang and Tioman Island using a 19-seater DHC-6-300 Twin Otter turboprop.
Association of Asia Pacific Airlines (AAPA) director-general Subhas Menon says while the entry of new airlines is good for the industry, owners need to do their homework to make sure they are able to cover the costs of operating an airline.
“Low-cost airlines are a contradiction in terms. There is no such thing. The airline business is not low-cost. It is capital-intensive, labour-intensive and it uses the most expensive commodity — fuel. It serves no one any good if you start an airline, you are not able to keep it going. Because not only for you, it is [also] bad for consumers,” he tells The Edge.
Subhas notes that other new start-up carriers in the region include Taiwan’s Starlux Airlines, Vietnam’s budget airline Bamboo Airways and Australia’s new low-cost airline Bonza. “There are so many no-frill airlines like Southwest Airlines in the US and Ryanair in Europe that have made sure they have enough money and cash flow to cover their costs.
“I don’t think there is an overcapacity in Asia as the region is still recovering. Perhaps there is an overcapacity problem on specific routes,” he says.
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