Airline alliance takes off

KUALA LUMPUR: The main shareholders of Malaysian Airline System Bhd (MAS) and AirAsia Bhd have agreed to acquire from each other existing shares in both companies, paving the way for a meaningful partnership between the two divergent airlines.

Khazanah Nasional Bhd, which has a 69.5% stake in MAS, will take up 10% of AirAsia while Tune Air Sdn Bhd, which owns some 23% of the budget airline, will hold 20.5% in MAS.

Many see the MAS-AirAsia partnership as a way to help stop MAS from plunging further into the red, while others feel AirAsia will benefit as much as the national carrier from the alliance.

Khazanah and Tune Air officials yesterday were quick to point out that no party is “worse off”, as both will gain as the collaboration was made in a very pragmatic manner and that both airlines will focus on their core competencies.

The share swap was based on MAS and AirAsia’s closing prices of RM1.60 and RM3.95 respectively last Friday. It is understood that a moratorium will be imposed, refraining any parties from selling their shares over a specific time.

In a very rare but interesting move, both airlines will issue free warrants to each other’s shareholders, making the partnership even more seamless as it also gives minority shareholders the chance to participate in the alliance.

MAS shareholders will be granted one AirAsia warrant for every 30 shares held. Meanwhile, AirAsia shareholders will be given one MAS warrant for every 10 shares held. The free warrants will have a tenure of 2.5 years and a strike price at a 25% premium to the closing prices on Aug 5.

The alliance confirmed The Edge weekly’s report this week. Shares in both companies will resume trading today after a two-day suspension.

Khazanah managing director Tan Sri Azman Mokhtar denied the tie-up was a form of bailout for the national carrier, which has recently suffered massive losses.
(From left) AirAsia Bhd group deputy CEO Datuk Kamaruddin Meranun, Khazanah Nasional Bhd MD Tan Sri Azman Mokhtar, Malaysian Airline System Bhd chairman Tan Sri Md Nor Yusof, AirAsia group CEO Tan Sri Tony Fernandes, Khazanah executive director (investments) Mohd Rashdan Mohd Yusof and CIMB Group Holdings Bhd group CEO Datuk Seri Nazir Razak at the signing ceremony yesterday.

“This is a growth-driven strategy. Khazanah is still firmly behind Malaysia Airlines.

“There’s no bailout. There’s no government money in this deal. They remain distinct companies, with different P&L (profit and loss account), different balance sheet,” he said after the signing of the collaboration and shareholders agreement between Khazanah and Tune Air yesterday.

Khazanah will remain as MAS’ single largest shareholder with a 49% stake.

Azman said the transaction has been pragmatically structured in that the business models, brands, boards, governance structures and cultures will remain distinct and separate, but is now complemented by the comprehensive collaboration frame (CCF) work.

“They (the two airlines) are not combining, but competing in some cases and collaborating in some cases. Can you imagine the power of MAS’ 13 million passengers and AirAsia’s 39 million passengers a year. This is a very powerful combination.

“We don’t have time anymore to look at petty things and differences. It’s time to go forward,” he added.

In addition, Khazanah also proposed to acquire 10% of AirAsia X on terms and at a price to be mutually agreed later. Azman said this would be done “quickly”, adding that its investment in the aviation sector currently accounts for about 3% of its portfolio.

“This collaboration is both synergistic and pragmatic. It will sharpen the focus on core competencies, deliver better products and ultimately greater value for all stakeholders. Aviation has a very high economic multiplier, estimated at 12 times,” added Azman.

Meanwhile, AirAsia group CEO Tan Sri Tony Fernandes said there are no plans to scale down AirAsia’s fleet or realign routes following the collaboration with the national carrier.

“There’s enough market for airlines. I don’t see any cutback of flights,” he said.

Under the partnership deal, Fernandes and group deputy CEO Datuk Kamaruddin Meranun have been appointed non-independent non-executive directors of MAS effective Aug 11.

Meanwhile, other appointments on MAS’ board include Tan Sri Wan Azmi Wan Hamzah, Tan Sri Krishnan Tan, Datuk Rohana Rozhan and David Lau Nair Pek as independent non-executive directors.

The partnership also entails the establishment of an executive committee (exco), to be chaired by MAS’ current chairman Tan Sri Md Nor Yusof, which will comprise Datuk Mohamed Azman Yahya, Mohamed Rashdan Mohd Yusof, Fernandes and Kamaruddin.

The exco will oversee the management of MAS until the latter appoints a new managing director to replace Tengku Datuk Azmil Zahruddin, who will be joining Khazanah as executive director of investments effective Sept 12.

The collaboration agreement or CCF, which will remain in effect for five years (with an option for another five years), enables MAS, AirAsia and AirAsia X to respectively focus on business segments where they are capable of deriving the most value.

As a result of the partnership, Firefly, the turboprop unit of MAS, will be transformed into a regional full-service carrier. This differs from MAS’ positioning as a long haul premium-full service carrier and AirAsia’s low-cost model.

Under the deal, the parties will assess and review their network services to enhance their offerings and this includes partial interlining and flights to new destinations currently not served by any of the airlines.

The early phase of the collaboration, however, will not have significant effect on any party’s operations. The two airlines will be able to realise savings and increase revenues from areas such as aircraft purchasing, engineering, cargo services and training.

Azman said there were previous partnership attempts between the two airlines, but they did not materialise.

He said back then the airline industry “wasn’t ready” but it is timely for an alliance now.

Be that as it may, observers said it was quite puzzling as to why such a partnership did not take place years ago when MAS’ market capitalisation was higher, if not closer to AirAsia’s.

Today, AirAsia’s market capitalisation at RM11 billion is slightly more than double that of the national carrier’s RM5.35 billion.

Although AirAsia and MAS officials said it is too early to estimate synergy gains as a result of the partnership; it is estimated that the tie-up can potentially save both airlines as much as RM1 billion annually.

Maybank Investment Bank Research in a recent note said by realigning capacity to match market demand, both airlines can save as much as RM300 million to RM400 million annually.

It estimated that roughly 70% of the combined capacity of MAS and AirAsia group currently is deployed in overlapping routes, which undermines yields, load factor and ultimately profitability.

However Maybank IB Research cautioned that the upcoming 2Q ended June 30, 2011 results will be weak for both airlines due to fuel cost pressure and soft yield environment.