03 May 2012

Market positive on termination of MAS and AirAsia share swap deal

(MAS closing stock price today (3.5.2012) was RM 1.24)
(AIRASIA closing stock price today (3.5.2012) was RM 3.60)

AirAsia Bhd and Malaysian Airline System Bhd. (MAS), the nation’s two biggest carriers, surged in Kuala Lumpur trading after saying they will boost collaboration in areas including procurement, even as they end an equity tie-up.

AirAsia, the region’s biggest discount carrier, jumped 8.1 percent to close at 3.60 ringgit, the most since August 2010 and largest gainer on the benchmark FTSE Bursa Malaysia KLCI Index. Malaysian Air climbed as much as 9.8 percent, the most in about four months, before ending up 1.6 percent at 1.24 ringgit.

The two airlines said yesterday that they plan to cooperate in areas including maintenance and purchasing as rising fuel costs dent industry earnings. The carriers will push ahead with the plan even after their parents announced plans to unwind a less than nine-month-old share swap that had triggered opposition from Malaysian Air’s largest union.

“Both airlines could see benefits from areas under the memorandums of understanding,” Wong Ming Tek, a Hwang-DBS Vickers Research Sdn. Analyst, wrote in a report today. “In particular, joint procurement of fuel oil could see cost savings.”

To reverse the share swap, Khazanah Nasional Bhd., Malaysia’s state-investment fund, will exchange back its 10 percent stake in AirAsia for the 20.5 percent of Malaysian Air owned by the budget carrier’s biggest shareholder, it said in a statement yesterday. The shares Khazanah will get are worth about $29 million less than the ones it will give up, based on April 30 market prices. There won’t be any cash adjustment.

Union Opposition

The deal will raise Khazanah’s stake in Malaysian Air to about 69 percent. The fund said it will seek a waiver from stock-exchange rules so it doesn’t have to offer to buy the rest of the carrier.

The 15,000-member Malaysia Airlines Employees’ Union had opposed the share swap, saying it benefited AirAsia more. The group met Prime Minister Najib Razak at least three times to discuss concerns over potential job losses following the tie-up, according to Alias Aziz, the labor group’s president.

“The cross-holding of shares has become a distraction to management’s efforts to turnaround MAS and win stakeholders’ support for collaboration,” Khazanah Managing Director Azman Mokhtar said in the statement. “With this reset, we hope and believe that it will give all parties renewed impetus to refocus and move forward together.”

Directors Resign

Tony Fernandes, chief executive officer of AirAsia, and his deputy Kamarudin Meranun both quit as directors of Malaysian Air, which is based in Subang outside Kuala Lumpur. The two are shareholders in AirAsia’s parent, Tune Air Sdn.

“Investors will be pleased by the fact that Tony Fernandes could now fully focus on being group CEO of AirAsia,” Ahmad Maghfur Usman, an analyst at OSK Holdings Bhd., said in a report today.

The two stakes were both worth about $360 million when the swap was agreed to in August. Malaysian Air had since dropped 29 percent as of April 30, while AirAsia, the region’s biggest discount carrier, had fallen 6 percent.

“We can now have a clear focus on developing the Asean and Asian low-cost carrier market which has enormous growth potential,” Fernandes said in a statement. “The collaboration efforts will set us in good stead for the future.”

Stake Values

Malaysian Air will no longer be restricted to focusing on full-service operations after this deal, according to a statement. The carrier had earlier agreed to cede the low-cost market to AirAsia as part of the share swap.

“Under the old arrangement, AirAsia was seen as benefiting more as MAS agreed to convert its low-cost carrier business to premium services,” said Ang Kok Heng, who oversees about 1.3 billion ringgit ($430 million) as chief investment officer at Phillip Capital Management Sdn. The new arrangement will benefit the two carriers equally as they will be cooperating on an operational level, he said.

Malaysian Air is now considering fundraising options, it said in a statement, following reports that it may sell 3 billion ringgit of bonds.

‘Quite Critical’

The carrier’s condition is “quite critical,” Chairman Md Nor Yusof said in a March 16 statement, after the airline posted a net loss of 2.5 billion ringgit for last year. That was more than twice the 1.21 billion ringgit average of 15 analyst estimates compiled by Bloomberg.

The airline expects another full-year loss in 2012 though will strive to break even, Chief Executive Officer Ahmad Jauhari told reporters on Feb. 29. It plans to save 302 million ringgit this year by paring flights to cities including Johannesburg and Buenos Aires, he said.

“Recovery is our main focus along with initiatives to strengthen the balance sheet and operations through improved productivity, increasing revenue and lowering costs,” he said in a separate statement yesterday. “These efforts will translate into improved financial results.”

Source: www.bloomberg.com


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