Malaysia Airlines Faces Painful Steps After $429 Million Buyout

Malaysian Airline System Bhd. needs to take tough measures in a thorough overhaul after two high-profile plane crashes this year drove away passengers and prompted the government to offer a buyout to the shareholders.

The government and sovereign wealth fund Khazanah Nasional Bhd. are in the final stages of working out a restructuring plan, Prime Minister Najib Razak said in a statement yesterday. Details will be announced before the end of August, he said.

Khazanah’s 1.38-billion ringgit ($429 million) offer to shareholders will delist the company and is the first step in revamping an airline that’s suffered a blow to its image after the downing of MH17 in Ukraine last month and the vanishing of Flight 370 in March. Even before that, Malaysia Airlines had accumulated losses as more low-fare carriers started in Southeast Asia and lured customers by driving down fares.

“Piecemeal changes will not work,” Najib said in the statement, offering his support for the buyout plan. “This process of renewal will involve painful steps and sacrifices from all parties.”

Khazanah offered shareholders 27 sen a share to buy the 30.6 percent stake it doesn’t already own in the company, offering a 12.5 percent premium to the stock’s Aug. 7 closing price. The shares, which were suspended from trading Friday, will resume Aug. 11, the Subang, Malaysia-based airline said.

The shares have declined 23 percent this year. Investors shouldn’t expect a higher offer and the second-quarter financial results will be “awful,” Malayan Banking Bhd. said in a note dated yesterday.

The carrier said it will continue to operate all its flights, it said in a statement. The board will take Khazanah’s proposal to shareholders in an extraordinary general meeting.

Spook Everyone

“When that happens, it will definitely spook everyone and evaporate any hope for a revised offer,” Malayan Banking said in the note. The company may report earnings later this month.

The airline missed its target to be profitable last year as rising prices for items including fuel, maintenance and financing wiped out revenue gains. In May, it pointed to an unfavorable foreign exchange rate environment as an additional challenge this year.

Flight 17 was shot down in Ukraine in July, four months after a jet en route to Beijing from Kuala Lumpur vanished. The earlier incident put the carrier under global scrutiny, jeopardizing its reputation and prompting boycotts in China, whose nationals accounted for most of the passengers in the March flight. No trace of the plane has been found in the world’s longest search for a missing plane in modern aviation history.

Revival Plan

Even before that disappearance, Malaysia Airlines had racked up 4.13 billion ringgit in losses over the previous three years. The carrier will probably lose more than 1 billion ringgit in 2014, according to average analyst estimates compiled by Bloomberg.

Options for a revival plan for the airline had ranged from Khazanah taking it private to bankruptcy, with both routes involving a delisting, a person familiar with the matter said last month, asking not to be identified because the talks were private. Malaysia Airlines director of commercial operations Hugh Dunleavy had in May ruled out a bankruptcy.

Prime Minister Najib has faced public scorn from China, whose nationals made up about two-thirds of the travelers on Flight 370, over his government’s handling of the case. Senior Malaysian officials had issued conflicting statements about what is known about the plane and the state of the inquiry, contributing to the criticism abroad.

The carrier was incorporated as Malayan Airways Ltd. in October 1937.

“MAS is part of Malaysia’s history,” Najib said, referring to the carrier by its popular short form. “It’s a symbol of national pride, of our ambitions and our place in the world. It’s more than just a company to us.”

Before it's here, it's on the Bloomberg Terminal.