Malaysia Airlines' response to CAPA 'bailout' report

"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." View the full original report.

We regret to read that the article had equated Malaysia Airlines (MAS)' proposed rights issue to a government bailout.

For clarity, the proposed rights issue is not a government bailout for the following obvious reasons:

• MAS is not in a cash crisis. The company reported RM2.4bln of cash balance as at 30th Sept 2009. The cash to revenue ratio for MAS is better than most other airlines. The company has successfully implemented its cash conservation strategy. We are not in a dire need for additional funds as our existing cash balance can more than adequately cover any immediate financial commitments we have made.
  When announcing the rights issue, MAS also announced the fleet order of up to 25 new Airbus A330. It is inconceivable that a company on the brink of financial crisis would be in a position to announce further investments in aircraft.
• Had this been a "bail out" as claimed in your article, there are many forms of direct cash injection which an airline could have chosen instead of a rights issue. Typically, a bail out occurs when all other forms of raising capital in the open market, such as a rights issue, are exhausted and the company is left with no other options other than to seek direct financial assistance from the Government, e.g. via direct placement, soft loans and others. More often than not, a bail out implies that in the absence of this financial aid, the company would not be in a position to continue operating. This is clearly not the case for MAS as we seek to raise capital on our own merit to fund our future expansion plans.
• MAS has outlined its strategy in the Business Transformation Plan (BTP2) (available to public at www.malaysiaairlines.com). The aircraft investment and the rights issue are consistent and underpinned by our growth strategy in BTP2. The fund raising exercise is timed on the back of an improved capital market sentiment and the new aircraft order at the bottom cycle of the airline industry (when it is buyers' market). Proceeds from the rights issue largely will be used for our fleet renewal programme as we transform our fleet into one of the youngest in this region by 2015/2016. With the new fleet programme, our operating cost and cost structure will be lower, enabling us to offer highly competitive fares, grow our capacity and optimize yields. The fund raising exercise will also aim to enhance shareholders' value.

We find the research outcome too simplistic as it equates a fund raising exercise as a "bail out" merely because it is an entity where the government indirectly owns a significant stake. A slightly more researched analysis on MAS' press statement and media presentation on the rationale of the rights issue would have helped to differentiate a fund raising exercise to fund growth in the normal course of business and a "bail out"."

Mohd Azha Abdul Jalil
Chief Financial Officer
Malaysian Airline System Berhad