Malaysian Air Business Separation Case Grows: Real M&A

Photographer: Charles Pertwee/Bloomberg
People look out of a window as a Malaysian Airline System Bhd. (MAS) aircraft stands on the tarmac at Kuala Lumpur International Airport (KLIA) in Sepang, Malaysia, on Tuesday, March 11, 2014.

(Corrects total potential airline liability to $40 million in the third-to-last paragraph.)

The disappearance of Malaysian Air flight 370 may hasten a breakup of the 76-year-old unprofitable airline.

Even before the jet vanished March 8 on its way to Beijing from Kuala Lumpur, Malaysian Airline System Bhd. had run up losses of $1.3 billion in the previous three years. The incident has put the carrier under global scrutiny, jeopardizing its reputation and prompting boycotts by travel agents in China.

Analysts now project losses through 2016 and the Subang, Malaysia-based company is trading near the lowest since 2001 relative to its assets, according to data compiled by Bloomberg. Split up, the government-controlled airline could fetch $1.3 billion, an amount that’s more than 10 percent higher than the company’s market value last week, said Malayan Banking Bhd.

“In this kind of environment, they have the sympathy of the whole world if they want to do a restructuring,” James Lau, who helps manage $300 million at Pheim Asset Management Sdn. in Kuala Lumpur, said by phone, referring to Malaysian Air. “Shareholders would like to see them take the hard decisions.”

The jet with 239 passengers and crew vanished from civilian radars while headed north over the Gulf of Thailand. It then doubled back over Peninsular Malaysia and flew south into some of the world’s most remote waters.

No physical trace of the aircraft has been found. The search, now focused on an area 3 miles (4.8 kilometers) below the surface of the Indian Ocean, is the longest for a missing passenger plane in modern aviation history.

Ticket Sales

In China, home to most of the missing aircraft’s passengers, travel agents ELong Inc. and Ly.com have stopped selling tickets for Malaysian Air flights. Qunar Cayman Islands Ltd., a travel website controlled by Baidu Inc., also boycotted the business. Baidu owns China’s most popular search engine.

Already, there are more vacant seats on Malaysian Air’s international flights. Planes on those routes in March were on average 74 percent full, the lowest figure in almost two years, company filings show. In the same month in 2013, average seat occupancy was 80 percent.

Before the plane disappeared, Malaysian Air had been struggling with increased competition and higher costs. Rivals such as AirAsia Bhd. have flooded the region with planes and driven down fares. Malaysian Air missed its target to be profitable last year, as higher costs for items including fuel, maintenance and financing wiped out revenue gains.

Loss Forecast

The airline, majority owned by government investment company Khazanah Nasional Bhd., will lose another $346 million by the end of 2016, according to analysts’ estimates compiled by Bloomberg.

“Things are not working,” Mohshin Aziz, an analyst at Maybank in Kuala Lumpur, said by phone. “Doing the same thing over and over again and hoping for a different result is just plain madness.”

Listing Malaysian Air’s profitable divisions and selling stakes in two aviation businesses could raise 4.15 billion ringgit ($1.3 billion), Mohshin said in an April 16 report.

The engineering business could fetch 2 billion ringgit on the stock market, while the airport terminal services unit could be valued at 587 million ringgit, according to Mohshin. A low-cost rural service, Firefly, could be worth 1.24 billion ringgit, he said.

Malaysian Air said in an e-mailed statement that it couldn’t immediately comment. Khazanah won’t comment on speculation, spokesman Mohd Asuki Abas said by phone.

Singapore Precedent

Singapore Airlines Ltd. has shown the value of such sales. In 2000, it sold stakes in SIA Engineering Co. and Singapore Airport Terminal Services Ltd., known as SATS, in initial public offerings. Since the end of their first financial year as publicly listed entities, the two companies’ combined market value has more than quadrupled to $7.14 billion.

For Malaysian Air, IPOs would be easier if the government first bought the rest of the airline and delisted it, Mohshin said. That would enable the company to focus on the loss-making airline and cargo units, and its bloated workforce, free from stock-market scrutiny, he said.

“Any opportunity to put themselves out of the spotlight will be good,” Mohshin said. “MH370 is going to put the company under the microscope for an extended period of time.”

Hiving off those profitable businesses would allow management to cut the “excess fat” weighing on the airline, said Lau at Pheim Asset Management.

Malaysian Air employees each generate $230,000 of revenue a year, less than half the amount at Singapore Air, according to the most recent data compiled by Bloomberg. Workers at Thai Airways International Pcl and PT Garuda Indonesia also bring in more sales.

All Shareholders

The airline could be broken up while it’s still listed, so that all shareholders can reap the benefit, Lau said. The stock has fallen so much that a buyout first would short-change minority investors, he said.

Shares of Malaysian Air have dropped 10 percent since flight 370 disappeared March 8, extending this year’s decline to 27 percent. That has left the airline trading at 0.93 times its book value, near the lowest level since 2001, data compiled by Bloomberg show.

“I don’t see any other way than creative destruction,” said Shukor Yusof, an independent airline analyst formerly with Standard & Poor’s in Singapore. “How much longer do you want to support a company that doesn’t make money?”

Addressing Costs

While Malaysian Air is facing multiple challenges now, a breakup or government buyout shouldn’t be the priority because those hurdles are temporary and can be overcome, said Ahmad Maghfur Usman, an analyst at RHB Research Institute Sdn. in Kuala Lumpur.

“The issue is more about addressing the costs,” he said by phone. Everything from salaries and union pacts to catering agreements needs to be renegotiated to be more in Malaysian Air’s favor, said Ahmad.

One challenge to a breakup may be the costs associated with compensating families of the lost passengers. Malaysian Air is liable under international treaty for as much as $175,000 per passenger, or a total of more than $40 million, and possibly more.

Still, the share decline creates an opportunity for Malaysian Air to remake itself now, and the company may ultimately be better off after a buyout or breakup, Maybank’s Mohshin said.

“It doesn’t get cheaper than this,” he said. “Perhaps it’s a proper time to approach things differently.”

To contact the reporters on this story: Kyunghee Park in Singapore at kpark3@bloomberg.net; Angus Whitley in Sydney at awhitley1@bloomberg.net

To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net; Anand Krishnamoorthy at anandk@bloomberg.net Whitney Kisling, Anand Krishnamoorthy

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