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2 Sep, 2002

Malaysian Airlines to Sell Off Assets as Part of Restructuring

Malaysia Airlines is to sell-off all its aircraft and many of its properties, including its headquarters, in a revolutionary attempt to become a debt-free ‘virtual airline,’ according to a detailed report on the restructuring plan published this week by Aviation Analyst – Asia Pacific.

Under the plan, all the carrier’s assets and liabilities are to be transferred to and then leased back from a new Malaysian government vehicle, Penerbangan Malaysia Berhad (PMB) by October 2002.

With no aircraft assets on its balance sheet, MAS will essentially become a marketing entity and operator of leased passenger and cargo capacity on international routes. MAS will also provide domestic passenger services under a government contract, Aviation Analyst reported.

MAS’s Managing Director, Mohamed Nor Yusof views the restructuring plan, called “Widespread Asset Unbundling” (WAU) as a significant contribution to the evolving international airline industry. He describes WAU as an innovative tool, which could “force a rethink on the concept of integrated airlines.”

“Whether MAS’s new direction can be implemented in other countries remains to be seen – but as airline managements the world over ponder their next move in stormy skies – Malaysia could provide some interesting food for thought,” wrote Aviation Analyst’s editor Peter Harbison.

The seeds of the new MAS were sown during the Asian financial crisis. Before the crisis, MAS – like many of Asian tiger flag carriers – was undergoing rapid expansion. It was privatised in 1994, when Tan Sri Tajudin Ramli’s Naluri Berhad purchased 29.1% of the airline. In 1996, MAS placed an order for 25 aircraft – fifteen B777- 200s and ten B747-400s – at a cost of US$10 billion.

The steep depreciation of the ringgit in late 1997 and dwindling passenger traffic over the following 12 months plunged MAS deeply into the red.

According to Aviation Analyst, MAS deferred several aircraft in the original 1996 order and, since the crisis, has sold several aircraft and sold and leased back 11 B777-200s and one B747-400 to raise cash for working capital.

By February 2001, when the Malaysian government finally repurchased Naluri’s 29.1% equity interest in MAS (at more than three times its stock-market valuation), the airline was limping badly under a mountain of debt approaching RM8 billion.

The move cost the government RM1.8 billion – and was part of a massive cleanout of corporate Malaysia by the government to restore foreign investor confidence in Malaysia’s financial markets.

The new management set about restoring the carrier’s profitability, but was dealt further heavy blows by the global economic downturn and September 11.

By November 2001, Malaysia Airlines was in deep crisis and restructuring was urgently required to save the airline.

By early January 2002, a RM6.1 billion asset sale plan had been finalised to provide the necessary breathing space. MAS also announced a radical restructuring initiative that month, involving the separation of its domestic and international operations and the creation of a new company that would own its international passenger and cargo businesses, and its stock listing on the Kuala Lumpur exchange.

According to the final details of the restructure, finalised in late July, and now released publicly, MAS will transfer 73 aircraft currently on its balance sheet to PMB at the book value of RM5.1 billion, and simultaneously lease them back. PMB will also take on just under RM7 billion of liabilities from MAS.

According to Aviation Analyst, MAS will issue 482.5 million new shares to PMB at RM3.85 each to make up the RM1.9 billion difference between its assets and liabilities.

PMB will emerge with a 69.4% shareholdng in MAS, but will seek a waiver from Malaysia’s Securities Commission from having to make a general offer for the remaining shares in MAS – which is required under Malaysian corporate rules. (PMB is owned by the Finance Ministry and state-owned pension trust fund, Kumpulan Wang Amanah Pencen, which are currently direct shareholders in MAS).

PMB may eventually sell some of its shareholding in MAS, although there are no plans to do so while the carrier is being restructured. Md Nor stated in January that foreign investors are more likely to be institutions rather than other airline operators, given the turmoil in world aviation and the weak balance sheets of potential airline suitors.

MAS’s previous unsuccessful attempts to sell a strategic stake to Qantas or Swissair before its bankruptcy have also made the carrier more sceptical and cautious about airline equity partnerships.

MAS will operate international passenger and cargo services with aircraft leased from PMB. MAS will also provide domestic passenger services under a fixed fee contract for the government – helping shield the carrier and its investors from the loss-making domestic operation. All revenue earned from domestic routes will go to PMB.

The restructure aims to generate a net profit of RM94.2 million in the financial year to end-March 2003, ending five years of losses. If MAS achieves this result, it will have done so a year earlier than anticipated in previous restructuring plans, which targeted 2004 for a financial turnaround.

MAS is also selling and leasing back its properties, including its headquarters. Several subsidiaries, including its catering unit, are also being sold.

According to Aviation Analyst, Datuk Mohammed Nor predicts MAS will save about RM238 million per year on aircraft lease costs and receive cash proceeds of RM1.5 billion from the sale of its property assets and RM175 million from the sale of its 70% holding in its catering unit. MAS forecasts a net cash balance of RM676 million in 2003.

This follows a reported net loss of RM835.6 million in the 12 months ending 31 March 2002 and a net loss of RM417.4 million a year earlier, with the latter restated from a net loss of 1.3 billion. A change in accounting policies by MAS resulted in a large fall in its pretax profit in the latest financial year and 2001.

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