AirAsia's Fernandes is set to partner with the government carrier
The move to align and national carrier (MAS), after years of fierce competition, will have huge implications and comes at an opportune time for AirAsia's Tony Fernandes.
The Malaysian government's investment arm, Khazanah Holdings, and AirAsia's two most influential shareholdersâ€”co-founders Fernandes and Kamarudin Meranunâ€”have agreed to align the carriers. Both men have been appointed to the MAS board of directors, which is undergoing a shake-up. Several members are being replaced, as is MAS's managing director, Tengku Azmil Aziz. An executive committee, which includes Fernandes, will run the new airline until a new managing director is appointed, according to AirAsia.
As for equity, Khazanah, which owns 69.3% of MAS, is granting Fernandes and Kamarudin jointly a 20.5% stake in MAS, in return for 10% of AirAsia. Kazanah also says it will seek to acquire 10% of, the medium- to long-haul carrier that is a separate enterprise, distinct from short-haul operator AirAsia.
The AirAsia co-founders, who own 23.6% of the airline, are buying into MAS at an opportune time. On Aug. 2 AirAsia's share price rallied even further, giving it a market capitalization of 11.5 billion ringgit ($3.8 billion), more than double MAS's 5.1 billion ringgit, a notable achievement considering it was only 10 months ago that AirAsia overtook MAS in market capitalization.
AirAsia's latest share price rally followed the news that AirAsia is establishing a low-cost carrier in Japan in partnership with. The Malaysian outfit also holds joint ventures in Indonesia and Thailand and is in the process of setting some up in the Philippines and Vietnam.
MAS's share price, meanwhile, has fallen dramatically in recent months as fuel price hikes have pushed operations into the red. In this year's first quarter, MAS reported a net loss of 242 million ringgit compared with a 310 million ringgit net profit for the corresponding period last year. This loss was worse than many analysts had expected. A few weeks later, Kazanah Director Mohamed Nor Yusof was appointed MAS's chairman, replacing Munir bin Abdul Majid.
One factor contributing to MAS's first-quarter loss was Firefly's move into jets. In January Firefly launched jet services linking west and east Malaysia, competing for the first time head-to-head against AirAsia. Firefly is MAS's low-cost carrier and, prior to January, was purely anturboprop operator. Industry executives say Firefly's turboprop operation is profitable, but its flights are not. The increased competition from Firefly has also adversely affected AirAsia's profitability on those routes, the executives add.
While MAS's Firefly is making life difficult for AirAsia, the expansion of AirAsia's medium- to long-haul operation, AirAsia X, has made life tougher for MAS. In the past, MAS could limit AirAsia X's expansion because the former held most of the international traffic rights as well as an understanding with the government that it would get first priority for future traffic rights. But the government announced earlier this year it would treat each airline equally, so AirAsia is free to compete on medium- to long-haul routes against MAS.
â€śThe Malaysian government has been a bit stuck,â€ť says one industry executive, adding that it wants MAS to succeed, but does not want to be viewed as making AirAsia's life difficult. However, there are government officials who are concerned that AirAsia's success in Malaysia has come at the expense of MAS, he adds.
A cross-shareholding between AirAsia and MAS helps to strike a balance and align the two carriers' interests. AirAsia says that as part of the deal, the entities signed a comprehensive collaboration framework agreement under which â€śall parties will strive to complement each other's businesses so as to leverage on their respective core competencies.â€ť
The future collaboration means it is likely Firefly will stop flying jets and focus on turboprops.
AirAsia and MAS may work together on international route planning in the future. MAS may withdraw from some marginal leisure routes that AirAsia may be able to operate more profitably. AirAsia in return may agree to concede some business-traveler routes to MAS, such as Kuala Lumpur-Tokyo Haneda.
The deal also has implications forand . MAS was renewing its narrowbody fleet with Boeing 737-800s. It has 12, and 40 on order. Firefly has six -800s and was planning to order narrowbodies. There is now the possibility that once the -800s approach the 10-year mark, MAS may replace them with the Airbus (new engine option).
AirAsia has 85 A320s and 200 A320NEOs on order, according to aircraft advisory group Ascend. A possible catalyst that could have pushed Fernandes to deal with Kazanah now is that he will need financing for those 285 aircraft. Kazanah makes AirAsia more appealing to banks because it is seen as less of a credit risk. â€śWe are getting into a credit squeeze,â€ť says one banking executive, adding that airlines are going to find it harder to get financing for aircraft.
AirAsia also will face more price competition in Malaysia. Indonesia's largest airline, Lion Air, is buying 49% of Malaysian carrier Berjaya Air, in a deal expected to be completed later this year. According to the Berjaya Group, it and Lion will offer new stock to existing shareholders to raise 60 million ringgit to recapitalize the airline. â€śBerjaya Group hopes the proposed joint venture with Lion will allow Berjaya Air to expand its business horizon beyond Malaysia by capitalizing on its Indonesian partner's experience and 'economies of scale' in the aviation services industry with a large fleet of aircraft and an expansive reach of destinations.â€ť
Lion operates the world's biggest 737-900ER fleet, with more than 100 still on order. The Indonesian carrier went head-to-head against Indonesia AirAsia and wonâ€”a few years ago Indonesia AirAsia withdrew from Indonesian domestic routes to focus on international runs. AirAsia has one of the lowest cost-per-available-seat-km (ASK) metrics, but Lion can achieve even lower cost per ASKs, says an executive who is outside of Lion, but familiar with its operations.