Comments: This is bad news for MAS investor. We will wait see & how MAS can turn around the challenging business. My guess is another around re-structure corporate exercise in future if MAS still can not sustain itself in tough environment.
PETALING JAYA (May 3, 2012): The share-swap deal between Malaysian Airline System Bhd (MAS) and AirAsia Bhd, which had been deemed ill-planned from day one, has been officially called off eight months after its signing in August 2011, amid heavy political and union pressure.
With the deal off, AirAsia group CEO Tan Sri Tony Fernandes and group deputy CEO Datuk Kamarudin Meranun have resigned from MAS' board of directors, a move seen to avoid any possible conflict of interest or breach of anti-competition rules. Likewise, MAS director Datuk Mohamed Azman Yahya has resigned from AirAsia's board with immediate effect.
In a statement last night, MAS' major shareholder Khazanah Nasional Bhd said it acknowledged the "unintended and unfortunate confusion and distraction of the share-swap arrangement that has become an impediment to the more important task of turning around the national carrier".
"The cross-holding of shares was well-intended to simply better align the economic interests on the part of the major shareholders, Khazanah and Tune Air Sdn Bhd. After eight months,however, our assessment now is that the cross-holding of shares has become a distraction to management's efforts to turn round MAS and win stakeholders' support for collaborations," said Khazanah managing director Tan Sri Azman Mokhtar.
"We have therefore agreed to unwind the cross-holding of shares and revert to the original structure of major shareholdings of the two companies.
"As such, the share swap reversal to reinstate the original shareholding positions is done simultaneously with strengthening proper collaboration areas between the competing airlines. In addition, MAS will be further strengthened with, among others, a fleet renewal programme.
"In return for the substantial public funds that have been expended, we will need all parties including the board, management, staff, unions and other stakeholders of MAS to close ranks, improve productivity and turn around the airline together. With this reset, we hope and believe that it will give all parties renewed impetus to refocus and move forward together in the interest of MAS and in the interest of the nation."
Meanwhile, the collaboration between MAS, AirAsia and AirAsia X Sdn Bhd remains intact as part of a broader turnaround plan for MAS.
Azman also noted that the Comprehensive Collaboration Framework (CCF) between the three parties "did not cause or contribute to the recent losses that were announced by MAS as this was incurred well before the CCF was in place".
"Neither did the government at any time cede control of MAS by virtue of its 49% shareholding and the golden share," he added.
The unwinding of the share swap will see Khazanah transfer its 10% or 277.65 million Air Asia shares back to Tune Air, while Tune Air will return its 20.5% or 685.14 million MAS shares to Khazanah. As a result, Khazanah will no longer hold an equity stake in the low-cost carrier and neither will AirAsia's major shareholder, Tune Air, in MAS.
This transaction will be conducted based on the same swap ratio of 2.05 based on the prices at the time the share swap was announced last August, where MAS was valued at RM1.60 per share and AirAsia's shares at RM3.95 each. No cash will change hands.
Except for the resignation of Fernandes, Kamarudin and Azman Yahya from the boards of the airlines, MAS' current management led by its group CEO Ahmad Jauhari Yahya and his deputy Mohammed Rashdan Mohd Yusof remains unchanged.
Analysts and aviation observers told SunBiz the reversal will have no material impact on MAS or AirAsia as they haven't really got round to executing and implementing what they wanted to do.
"MAS is still in a dismal position post-CCF, probably even worse in terms of staff morale," Standard and Poor's aviation analyst Shukor Yusof had said recently.
An aviation observer said the reversal will not improve MAS' ailing financial condition as the current management is being retained.
The move came as no surprise as intense speculation had surfaced in blogs and news reports lately about the unwinding of the share swap, which has come under heavy criticism for its lopsidedness, with MAS employee unions and aviation experts saying it benefited AirAsia more than MAS.
As a result of the share swap, MAS now focuses on the premium segment, leaving the low-cost segment to AirAsia. MAS' subsidiary Firefly was also transformed into a full-service short-haul carrier. Some quarters said the move has created a monopoly and caused airfares to go up.
The share swap also saw MAS unveiling a new management structure and the exit of its senior executives, including managing director and CEO Tengku Datuk Azmil Zahruddin, Firefly MD Datuk Eddy Leong and the heads of its two units — MAS Aerospace Engineering's Mohd Roslan Ismail and MASkargo's Shahari Sulaiman.
The national carrier also unveiled a new business plan, which saw the suspension of eight routes, including those from Kuala Lumpur to Dubai, Surabaya, Johannesburg and Rome. In addition, it also suspended four regional routes from Kota Kinabalu to Osaka, Perth, Tokyo and Seoul.
MAS also took over the jet services of Firefly last October, which saw several domestic routes from the KL International Airport (KLIA) in Sepang to points in Sabah and Sarawak, namely Sibu, Kota Kinabalu and Kuching, suspended. Sabah and Sarawak had alleged that the element of competition had been removed with the suspension of Firefly jet operations.
During this time, AirAsia's budget long-haul affiliate, AirAsia X, was granted permission by the government to fly into Sydney and Seoul. AirAsia X, the budget long-haul affiliate of AirAsia, had also announced plans to withdraw its flights to Mumbai, Delhi, Paris and London from KLIA.
Kenanga Research said while the cancellation of the share swap deal will not bring any material impact to its earnings forecasts for MAS and AirAsia, the sentiment on MAS will be negatively affected as the management stands to lose the value-added contribution from Fernandes to turn around MAS' operations.
"With fuel jet prices hovering above US$130 to US$140 per barrel, coupled with the low seasons in the first and second quarters, MAS is likely to face a challenging time to turn around its earnings in the financial year ending Dec 31, 2012 (FY12)," the research firm said in a report yesterday.
Kenanga reckons that the cancellation will less likely affect AirAsia's business fundamentals throughout FY12 and FY13 as compared with MAS.
"For AirAsia, there are more expectations and surprises in FY12 apart from its CCF with MAS, that is, the launch of Japan AirAsia and listing of Thai AirAsia and Indonesia AirAsia.
"At first glance, the share swap will only bring the additional benefits for AirAsia via maintenance and bulk purchasing," it said.
Trading in shares of MAS and AirAsia was suspended yesterday pending the material announcement. MAS and AirAsia shares had closed at RM1.22 and RM3.33, respectively, on Monday.
Kenanga is maintaining its "neutral" call on the aviation sector and keeping its "underperform" and "outperform" ratings for MAS (target price: RM1.06) and AirAsia (target price: RM4.06), respectively.
