MAS to raise RM2.67 billion to fund future fleet growth & expansion

Proceeds will be used to fund the national carrier's future fleet growth which includes up to 25 A330-300 double aisle (wide-body) aircraft and expansion plans as the airline prepares itself to capitalise on the economic recovery in 2010 and beyond.

The rights shares will be offered to shareholders on the basis of one rights share for every one share held at a date to be announced later.

At RM1.60 each, the rights shares are priced at approximately 32.1% discount to the theoretical ex-rights price of about RM2.36 based on a five-day volume weighted average market price up to and including 21 December 2009.

Managing Director/ Chief Executive Officer, Tengku Dato' Azmil Zahruddin said, "This is the right time to raise funds as we are able to tap into the improved capital market sentiments.

"Proceeds will be used for our fleet renewal programme and working capital. This gives us a strong and sustained platform for growth as we transform from a 100% leased fleet to owning at least a third of the aircraft in our core fleet. Owning the aircraft will also provide us the flexibility to optimize our balance sheet and financing commitments."

Earlier, Malaysia Airlines signed a Memorandum of Understanding with Airbus covering the order of 15 A330-300 and acquired purchase options for another 10. The total cost of the 25 aircraft is USD5 billion at list prices. The aircraft will be delivered from 2011 to 2016.

"The A330 will complement our incoming fleet of 6 A380 and 35 B737-800. By 2016, all the aircraft that we have ordered would have arrived and we expect to have one of the youngest, most fuel efficient and environmentally friendly fleet in Asia," he also said.

When the 15 A330 aircraft are received, Malaysia Airlines expects to gain annual savings of RM300 million.

He added, "With the new fleet, our operating cost and cost structure will be lower, enabling us to offer highly competitive fares, grow our capacity and optimize yields."

Tengku Azmil pointed out, "This is the best time to order aircraft. When you order in a downtime, you get better deals and the aircraft is received when the economic cycle picks up.

"Our fleet strategy is to operate the right aircraft type for the right market. Long range aircraft is assigned to long haul routes while medium range aircraft to medium haul markets resulting in high average seat factor."

The rights issue will improve MAS' liquidity and financial flexibility. It will also optimize the MAS Group's capital structure by significantly strengthening its balance sheet and reducing its future gearing levels.

"With improved equity, we will be able to fund our growth plans. Operationally, we will be stronger and our gearing will be optimised," he added.

Khazanah Nasional Berhad (Khazanah) and Penerbangan Malaysia Berhad (PMB) which collectively own some 69.33% stake in MAS have undertaken to take up their full entitlement. Khazanah owns a 17.33% equity interest in MAS while PMB has a 52% stake.

Khazanah has also provided an additional undertaking to subscribe for the excess rights shares to the extent that the combined total of its and PMB's subscription of the rights shares would represent about 71% of the total rights issue. The remaining portion will be underwritten by underwriters to be determined in due course.

In accordance to Section 6 of the Malaysian Code on Take-Overs & Mergers, 1998, Khazanah and PMB will not be under any obligation to extend a mandatory general offer for the remaining MAS shares not owned by them upon the completion of the proposed rights issue as PMB's existing equity interest in MAS is more than 50% and Khazanah's individual holding will not be increased to more than 33% stake upon completion of the proposed rights issue.

In line with its plan to own at least one third of its core fleet, Malaysia Airlines is also proposing to acquire 6 A380s and bundle 4 Boeing aircraft from PMB for RM3.19 billion.

The proposed acquisitions are expected to add approximately RM648 million to MAS' P&L (after deducting ownership and funding costs) over a period of 3 years from 2010 to 2012, primarily from owning the aircraft as opposed to leasing. There will additional savings in the long term.

Tengku Azmil said, "Owning an aircraft gives a lower lifetime cost than leasing. While leasing ensures that we have flexibility with our fleet, we pay a premium for this. In practice, we do not need full flexibility for the entire fleet.

"With this, we have the option of either owning the aircraft or doing a sale and leaseback, depending on our requirements. Many major airlines own at least a third of their fleet."

Malaysia Airlines will pay PMB a cash sum amounting to about RM1.54 billion for novation of the purchase of the A380s from PMB to MAS.

MAS is expected to receive one A380 monthly beginning August 2011. Delivery is expected to be completed by January 2012.

"We plan to deploy the A380s on our high density routes such as London and Sydney. In major airports such as Heathrow where we face slot restrictions, the A380 allows us to carry up to 35% more passengers. In addition, the A380s' advanced technology will result in 15-20% lower seat kilometer cost for long haul routes," he added.

MAS is also proposing to enter into agreements with PMB for the 4 Boeing aircraft. In consideration of MAS making an upfront payment of RM190 million to PMB, PMB will sell the aircraft to MAS upon the aircraft being unencumbered. This is a pre-payment for the operating lease rentals under the existing lease agreements between PMB and MAS. At the completion of the transactions, MAS will assume liabilities amounting to approximately RM1.46 billion. The aircraft are 2 B777 and 2 B747.

The proposed rights issue and aircraft acquisitions are expected to be completed by the first quarter of 2010.