What now, MAS?

Any action needs to be done fast as MAS, which has lost money in four of the last five quarters, reported a whopping RM443mil net loss for first quarter . –EPA

Although the authorities are not sure what should be done with Malaysia Airlines (MAS) whatever plan that is finally decided must be thoroughly studied first because past restructurings have not been very successful.

What the national carrier needs to do to restructure itself in the face of massive losses is a talking point but one seasoned analyst feels the first step the airline needs is a detachment from its current major shareholders.

Suggestions of using Section 176 of the Companies Act to handle its mountain of debts could also be prohibitive, according to a specialist in corporate law.

Bankruptcy should not be an option because the ramifications of such an action are severe, not just for the airline which is the national carrier but also for its employees and the country.

What the Government and Khazanah Nasional Bhd, the major shareholder of MAS, plan to do with MAS is unknown but whatever will be done should be a well thought of plan because past restructurings have left the airline in the red for five out of the past 10 years.

“Deconstruct MAS, detach it from majority shareholder Khazanah, and rebuild the carrier from the bottom up,” says an independent aviation analyst, Shukor Yusof.

For that to happen, Shukor says “it needs political and financial will and the structure of a resconstructed MAS needs to be absolutely transparent. It has to be market driven, operated based on merit and exploit technical skills of the many outstanding and loyal MAS staff,” Shukor, a former analyst with Standard & Poor’s says. He has been covering the industry since 1996.

Any action needs to be done, and fast too. The disappearance of MH370 has wounded the airline immensely as MAS, which has lost money in four of the last five quarters, reported a whopping RM443mil net loss for first quarter of 2014.

Analysts do not see the airline recovering until 2016 should the status quo remain. But a restructuring is unavoidable given the size of its network is smaller now given the cancellation of nearly 900 flights over the past two months and demand for its services are at rock bottom. Compounding MAS’ problem is its cost, which is a major issue the airline has been trying to combat unsuccessfully for a long time.

Critical priorities

Given the cancellations and lack of demand especially from China, MAS needs to relook at its business model. That is being done but starting afresh is what it needs more than a rejig of its business model.

That has led to chatter that MAS is considering bankruptcy, opting for Section 176 or even a privatisation.

Shaharudin Datuk Hj Ali, a lawyer who specialises on corporate law, says the cost of a business restructuring for MAS, including a restructuring made pursuant to section 176 of the Companies Act or simply by renegotiating all agreements (outside section 176), will be extremely prohibitive and massive by any comparison.

“Since this will definitely be the case, logic dictates that MAS would have to look at critical priorities first in order to stay afloat and make money again, whilst carrying the Malaysian flag.”

With hints of bankruptcy a possible option, that route could be challenging given that MAS has not been deemed a company unable to service its debt obligations.

Shaharudin adds that there is no evidence or facts to support the view that MAS is incapable of paying its debts when called upon to do so by its creditors. “In other words, there is no evidence, for now, that MAS is insolvent. Besides, strictly MAS cannot be declared a bankrupt because MAS is not an individual.”

In his view, he says MAS is quite capable of handling the current financial turbulence facing the national carrier.

“I wish to add that MAS has a strong asset base and it is unlikely to be find itself in deep financial trouble,’’ Shaharudin says.

Shukor adds that the ramifications of bankruptcy are quite obvious, but it is also an opportunity to relook and renegotiate contracts, debts and accords signed by the airline previously with banks, unions, catering companies etc.

But there are job implications, clearly for employees, and this must be dealt with humanely, he says.

At the same time such a move will put all MAS companies, not just the parent company, under scrutiny. That means, each unit, such as Firefly and MAS Engineering, will be under the microscope, Shukor says.

He says that if MAS still goes ahead to file for bankruptcy, it would allow for the airline to renegotiate long-term contracts and restructure debts/loans with secured and unsecured creditors.

Filing for bankruptcy allows for a stay of proceedings, meaning the banks or unions cannot sue or take legal recourse against the airline.

He says typically an airline emerges from Chapter 11 financially stronger than before, e.g. Japan Airlines, but such an undertaking is very complicated and requires, in MAS’ case, astute manoeuvring by the Government and shareholders as it has political implications.

Capital reduction

But Shukor also adds that there must be political will and courage to overcome such a monumental challenge.

Heading to the courts for protection under Section 176 of the Companies Act is an option as it will offer MAS protection from its creditors to meet its financial obligations as it restructures.

Shaharudin believes that Section 176 is a little technical and there are two parts to it.

The “first leg”, he says, deals with a mechanism to save insolvent companies through the order of the court by allowing a company to pay a smaller sum to its creditors, provided the strict provisions stipulated in the section are complied with.

The “second leg” deals with restraining orders (stop orders from court) that behaves like a rider to the first leg, to help maintain the status quo of the company if you like, until the court makes a proper decision relating to the first leg. But restructuring a company may or may not involve reducing its shareholders fund or capital.

He goes on to say that, whether it involves capital reduction or not, it is a sign that a company is accepting that time has come to re-open its debt payment with creditors or even preference shareholders.

“The point that I wish to stress is this: The moment a company invokes the Companies Act to protect itself against creditors, or to adjust or restructure its corporate liabilities, or to reduce its capital, or to seek an injunction to stop creditors from potentially harassing its business (not to mention initiating a voluntary liquidation) these are generally taken by the market as red flags, or warning signs. The financial market will get the jitters if the company is a large, significant market player,’’ Shaharudin says.

He adds that a multiple-structure share option scheme should be introduced to all; excellent and deserving employees will have a clear career paths. “MAS ought to create excitement again. I’m not a branding expert but I think a good fresh theme for MAS could be like ‘Malaysia Airlines– travelling excitement starts here’ or something like that.”

Shaharudin says that there are many ways a company can restructure its capital, its finances and, most importantly, the amount due to its creditors.

Because creditors can be a major hurdle to future corporate plans and strategies of a large company, then sometimes, the consent, understanding and even cooperation of creditors becomes necessary for the company to move forward. This involves rescheduling periodic payment of debts, asking for a discount or downward revision of interest or principal sum of the debt.

In other words, if MAS decides to renegotiate its financial commitment to key stakeholders or creditors (note, employees are also stakeholders in corporate restructuring), it is in essence, renegotiating the original loan agreements, financing deals or supply agreements so that it gets more breathing space to move forward and compete.

Shukor says that “at the end of the day, whether a rejuvenated flag carrier is minority-owned or majority-owned by the Government or even 100% privately-owned by Malaysians, matters little unless it is profitable and can serve the economic needs of the country and its people.’’

Shaharudin says that MAS should also ensure leakages are addressed totally and completely. Tender procedures must be tightened and made more transparent. Pre-qualification should be a no nonsense exercise. Pricing quoted by suppliers must match the quality of services or products – for example in flight snacks/meals.

Whatever route it takes, MAS has to evaluate all models before taking the plunge because this is seen as its last chance for salvation.

by b.k. sidhu