How will MAS pay for new planes?

by **Cals** Wed 03 Sep 2014, 22:41

Business & Markets 2014

Written by Kang Siew Li & Meena Lakshana of theedgemalaysia.com

Wednesday, 03 September 2014 09:09

KUALA LUMPUR: As Malaysian Airline System Bhd (MAS) looks set to become a smaller airline again, questions abound on the remaining aircraft that are slated for delivery from now till 2017.

It is understood that MAS was due to take delivery of two narrow-body 737-800s last week. It is not clear if the planes were delivered.

Questions also remain on what will happen to the remaining 11 737-800s yet to be delivered following its impending privatisation by its largest shareholder Khazanah Nasional Bhd.

Of the 11, one is scheduled to be delivered in December, and the rest between 2015 and 2017.

“On top of this, there’s an option for an additional 10 737-800s, which has yet to be exercised,” a source told The Edge Financial Daily.

If MAS were to cancel the order for the remaining aircraft, it would have to pay a penalty. According to Boeing’s website, the 2014 list price for a 737-800 is US$93.3 million (RM295.76 million) per unit.

However, expanding its fleet size will not help fix its ballooning losses.

“It doesn’t make sense for MAS to take on additional planes at a time when it is restructuring its debt and cutting routes and staff,” Shukor Yusof, analyst and founder of aviation research firm Endau Analytics, told The Edge Financial Daily.

The 737-800s are part of an order for 35 aircraft with an option for a further 20 units made in 2008, at a time when MAS was ready to soar again after a restructuring that saw it turn into a smaller airline by cutting routes and staff.

In 2011, MAS exercised the option to purchase 10 additional 737-800s, leaving another 10 to be exercised.

Under the deal, the airline will also have the option to swap the 737-800s for the 737-900 models.

Back in 2002, MAS’ aircraft assets were transferred to and leased back from Penerbangan Malaysia Bhd (PMB), which saw it become an asset light airline. The company has since become inactive.

Besides the 737-800s, MAS is due to take delivery of four ATR72-600s and one DHC6-400 this year.

As at June 15, MAS has a fleet size of 151 aircraft, from the biggest A380s to the most efficient ATR72-600 turbo-props. The average age of the fleet for the group is currently over six years and will go down to below 4.5 by year-end.

Meanwhile, former deputy prime minister Tun Musa Hitam said the restructuring of MAS must be treated primarily as a business proposition and not to placate sentiments.

The priority for stakeholders is to recover MAS from its financial loss, failing which the airline should be closed down.

“The most important thing to remember, under current circumstances and the way we are building it up, is this involves national pride,” he told reporters after revealing the Royal Award for Islamic Finance 2014 yesterday.

“It has to be in the context of dollars and cents, how much we could make. If we couldn’t, we close shop,” he added.

Khazanah had on Friday revealed a new rescue plan for the loss-making national carrier, which sees it setting up a new entity (NewCo) and injecting RM6 billion into the NewCo.

MAS recorded a wider net loss of RM307.04 million for the second financial quarter ended June 30, 2014 from RM175.98 million a year ago, due to weaker yields and load factor.

Musa said he is no stranger to making tough decisions on the fate of government-linked entities when he was in government and had built a contentious reputation among stakeholders back then.

“In the old days, I used to go around the country to look at GLS and government-linked companies,” he said.

“Once I’m briefed we have lost RM100 million a year, RM50 million another year, for three or four years, I said close it. I was known as a terrorist in those days,” he added.

However, Musa said the union of employees at MAS must be “intensely engaged” on the restructuring plans.

“I’m a firm believer in consultation. Some people say it is old-fashioned, but I would recommend this,” he said.

“I wish, for the sake of the country, that we have learnt from the mistakes of the past, and we are going to do right this time,” he added.

This article first appeared in The Edge Financial Daily, on September 3, 2014.