Thursday, August 11, 2011



It is not a merger as widely reported although a stock or share swap normally occurs as part of a merger or acquisition when shareholders' ownership of the target company's shares is exchanged for shares of the acquiring company.

There is no reasonable rationale for a merger since all three airlines operate totally different business models. It is a swap to pave the way for what some analysts has described as a "partnership". In fact, yesterday's signing ceremony was termed as "comprehensive collaboration framework".

Through the share swap, AirAsia group chief executive Tan Sri Tony Fernandes is not the single largest shareholder in MAS.

The government's investment arm Khazanah Nasional Bhd, with a 49 per cent stake in MAS after the share swap and holding a special shareholder position of the government, will continue to maintain its position as the single largest shareholder in the national carrier. The aviation sector is a strategic sector to the economy and MAS will remain as a core holding in Khazanah's portfolio.

Also, Khazanah's commitment to AirAsia is considered "firmer" given its stake is via the unlisted Tune Air, hence illiquid. As Tune Air's stake is via MAS, it would seem to have the option to sell into the open market if it is not in alignment with the views of MAS' board majority.

In addition, Khazanah also proposes to acquire some AirAsia X's shares on terms and at a price to be mutually agreed later.

Negotiations on a partnership had been ongoing since the days of Datuk Seri Idris Jala as MAS managing director. Khazanah's managing director Tan Sri Azman Mokhtar confirmed negotiations concluded at 2.05am on Sunday morning.

Shukor Yusof of international rating agency Standard & Poor's, who has been tracking both airlines for years, sees it as the "financial reengineering of MAS" that is "the hallmark of the Binafikir boys", who now run Khazanah.

Azman is one of the co-founders of Binafikir. The other is Mohammed Rashdan Mohd Yusof, who is Khazanah's executive director (investments) and recently named to the board of MAS. He has been named as MAS executive director. "They (Azman and Rashdan) crafted the Widespread Assets Unbundling (WAU) for MAS in 2002 - essentially moving the debts to another government agency Penerbangan Malaysia Bhd - and it would seem they are having another go at realigning MAS' financial profile," he said.

Shukor is not far from wrong really. The man that brought in the Binafikir boys into MAS back then has returned as chairman of the national carrier. Tan Sri Md Nor Yusof had served as MAS managing director before. At the press conference, Azman, Md Nor and Fernandes talked about growth and the immediate synergistic opportunities which can be realised without significant effect on any party's operations. This includes aircraft purchasing, engineering, ground support services, cargo services, catering and training.

The collaborative agreement signed between the three airlines will be for five years, with the option for a further five-year renewal.

Md Nor said the joint collaboration will help MAS focus on its strengths in its core markets . It will be able to offer services in engineering and other areas to both AirAsia and AirAsia X. Fernandes said AirAsia and AirAsia X see growth opportunities in new routes and destinations.

Azman called it "historic collaboration" which is both synergistic and pragmatic. It will sharpen the focus of core competencies, deliver better products and choices for customers and ultimately create greater value for all the stakeholders.

Through the collaborative framework, MAS and its subsidiary Firefly, AirAsia and AirAsia X will focus on business segments in which they are capable of developing the most value. MAS and Firefly will continue to operate the short-, medium- and long-haul full service segment while AirAsia and AirAsia X will provide the short-, medium- and long-haul budget services.

Analysts said with the Asean free skies policy coming into effect in 2015, this will see increased competition with unlimited flight frequencies between Asean's 10 major cities. "Notably, more regional airlines are now aggressively growing and starting their own low-cost carriers, which are turning out to be effective vehicles to garner regional traffic to feed into legacy, premium airlines' long-haul routes. Strengthening and coordinating the two local airlines are necessary to stave off incoming competition, particularly considering that the KL International Airport is stuck between Singapore as a major business hub and Thailand as a major tourism hub," he said.

Despite the owners saying that the playground is big for four airlines, it may be a tad too many for a small country like Malaysia. Some see the share swap as a prelude to some kind of arrangement that may see, for example, route rationalisation which could see AirAsia taking most of the domestic and short-haul routes, a committed traffic to feed into MAS' long-haul network, usage of MAS maintenance, repair and overhaul facilities and MAS employees' unions.

As Azman rightly puts it, this will not be the end-all transformation for the airline industry but it is the beginning. But for now, the government can breathe a sigh of relief as it will have less headache after having to referee the consistent discord between MAS and AirAsia all this while.


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