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2010 Year of the Asian Airline Bailout: China Eastern, Air India, JAL, THAI, MAS & Garuda


Embattled Asia Pacific airlines will receive multi-billion dollar bailouts under the guise of restructuring programmes this year. Japan Airlines, China Eastern Airlines and Air India are requiring the biggest surgery, while Garuda Indonesia, Thai Airways and Malaysia Airlines form a second tier of carriers needing government assistance to help them resolve past - and recent - struggles. In all, these six airlines are set to receive well over USD10 billion in bailouts in the first three months of 2010, according to the Centre for Asia Pacific Aviation's estimates of recent news reports in its Asia Pacific Airline Daily report.

The government backers are supporting their flag carriers in the interest of preserving jobs and maintaining air services.

Japan Airlines on track for expensive bankruptcy filing: Bailout: USD8.7 billion+

Japan Airlines' restructure is set to account for the lion's share of government bailout funding in the region, with the state-backed Enterprise Turnaround Initiative Corp of Japan (ETIC) reportedly planning to arrange for JPY800 billion (USD8.7 billion) in capital to be made available to JAL to supports its ongoing operations, according to latest reports.

The ETIC has reportedly calculated that up to JPY1.4 trillion (USD15.2 billion) will be required to rebuild the airline, so JAL could be the recipient of government support for several years to come as it progresses through a very complex rehabilitation programme, possibly including a managed bankruptcy next week.

China Eastern and Shanghai Airlines - expensive merger: Bailout: USD3 billion+

Saving China Eastern Airlines is the next most expensive item in the region, with Beijing injecting around USD2 billion last year and a further USD1 billion this month through its participation in the airline's reorganisation share issue - a key plank of its merger with cross-town loss-making rival Shanghai Airlines.

China Eastern announced in Jul-2009 that it would swap 1.3 of its Shanghai-listed A-shares for every Shanghai Airlines share. Shanghai Airlines, which has 1.3 billion outstanding shares, will be delisted from the Shanghai Stock Exchange following the merger.  The merger plan has already been approved by the China Securities Regulatory Commission and is now within its implementation stage.

China Eastern will suspend stock trading until Thursday of this week and Shanghai Airlines will suspend trading until its delisting procedures are completed.

Air India's losses continue to mount: Bailout: USD1 billion+

Asia's other billion dollar bailout airline, Air India, expects to receive its first infusion of INR20 billion (USD430 million) from the Indian Government by 31-Mar-2010, as it enters the initial stages of its challenging restructure, targeted at the rationalisation of its fleet and route network to reduce its cost base and provide the carrier a more stable footing. At least USD1 billion is expected to be required by the airline, as losses are expected to reach USD800 million in the 12 months ending 31-Mar-2010.

Malaysia Airlines taps government in rights issue: USD900 million

A second tier of Asian carriers, Thai Airways, Malaysia Airlines and Garuda Indonesia, are also turning to their governments for additional support to clear past debts (in the case of Garuda) or to top up working capital after a very difficult 2009 and ahead of increasing aircraft deliveries later this year.

Malaysia Airlines' proposed 1-for-1 rights issue, at RM1.60 per share, will raise up to MYR3 billion in cash. Khazanah Nasional Bhd and subsidiary PMB, which collectively own 69.3% stake of MAS, have undertaken to subscribe in full their entitlement, equating to a USD600 million investment.

Thai Airways submits recapitalisation programme to Finance Ministry: USD800 million

Thai Airways has submitted its recapitalisation programme to the Thai Finance Ministry, with the government reportedly unofficially agreeing to participate in the share issuance part of the programme, in a move that would see the government maintain its 51% stake in the carrier. The programme, aimed at reducing the carrier’s debt-to-equity ratio, also includes the refinancing through bank loans and bond issues, in addition to the share issue.

The amount to be provided by the government is not yet known, but previous reports suggested the airline wanted to raise up to USD1.6 billion, meaning the state could be tapped for at least half this amount.

Garuda clears key hurdle in IPO preparations: USD350 million+

Garuda Indonesia has meanwhile completed its debt restructuring with international and domestic Noteholders, meaning a key hurdle in its IPO ambitions has been passed. The airline earlier recently completed the restructuring of Garuda's trade debt with Pertamina and airport operators Angkasa Pura I and Angkasa Pura II, as well as the conversion of the mandatory convertible bonds held by Bank Mandiri. CEO, Emirsyah Satar, stated, Garuda will "continue to work to complete the restructuring of its other debts as soon as possible", ahead of its planned IPO in 1Q2010, in which the carrier plans to sell 25% of its shares to raise approximately USD300 million. Funds raised will be used to fund new aircraft and enhance operations. Garuda is currently selecting underwriters for the offer. The carrier plans to order 50 aircraft to increase its fleet to 116 by 2014.

Asiana and Tiger

Asiana Airlines' parent is also in financial difficulty and seeking relief from its debts. Meanwhile Tiger Airways is also tapping the equity market to raise fresh capital. But the IPO is likely to be heavily supported by Singapore-government backed entities like Singapore Airlines/Temasek to maintain their current shareholding levels. Tiger is also reportedly seeing a slow response from private investors, given the state of the airline industry - as documented above.

Outlook: Deep pockets keeps wheels turning

That governments are swallowing hard and investing in their airlines is good news for travellers and airports, as it maintains competitive levels in the market. But keeping inefficient operators in the game is not good for the industry's long term health and makes it more difficult for the well run (and new entrant) airlines to grow and compete.

The "flag carrier" fixation remains a powerful political motivation, with many airline still considered "too big to fail". Whether government funds could be better applied in other ways tends to become secondary to the concerns over national prestige or simple job protection. In several of the national markets of the bailout airlines above there are private airlines operating concurrently - without government support and in several cases, profitably.

Clearly, we have a long way to go before the commercial airline industry becomes fully commercial. If the ills of the past year have not been sufficient to jolt governments into stepping back from intervention, indeed the prospect of a self-sustaining business remain remote.

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