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Paving The Way For MAS' sale
23/12/2000 9:14 am Sat
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Paving the way for Malaysia Airlines' sale
by eCountries' Malaysia correspondent (Thu, 21 Dec 2000)
The Malaysian government is trying to sell a big chunk of equity in
loss-making Malaysian Airline System to an overseas carrier. But
potential buyers are wary, fearing that Mahathir Mohamad's
interventionist administration is not prepared to surrender enough
In Mahathir Mohamad's Malaysia, the term "privatization" is an oxymoron.
Buyers of state assets usually have close links to the government, but
little freedom to act independently of it.
Tajudin Ramli, a merchant banker turned entrepreneur, knows a thing or
two about tight leashes. After taking up the offer of a supposedly
controlling stake in Malaysian Airline System (MAS) six years ago,
he promised to make it the world's biggest carrier.
Some hope. His executive chairmanship has been characterized by
big losses, bigger debts, mounting customer dissatisfaction and
plunging staff morale. Ramli signed a deal on December 20 finalizing
the sale of his 29% interest in MAS back to the government, which
has grudgingly accepted that only by bringing an overseas airline
on board can MAS's fortunes be reversed. Talks have been held
with KLM, Qantas and Swissair, but there is no sign of a taker as
Who, after all, would want to be hobbled like Tajudin? The
government has the last word in all MAS decision-making, meaning
it can impose its will regardless of the commercial implications. If the
government wants the airline to fly to a loss-making overseas
destination, so be it. The many unprofitable Malaysian routes MAS
must cover are also a big drain. They cost the airline M$1m
(US$263,000) each day, mainly because domestic fares have been
frozen since 1992 (and are therefore among the cheapest in the
world). The phenomenon is known locally as "national service," and
MAS is not the only company enlisted.
Such social obligations are by no means the only reason MAS is
heading for a fourth straight year of losses. Poor management and
the recent economic crisis have also dragged it down. In late 1995,
as part of Tajudin's ambitious expansion plans, the company placed
an order with Boeing for ten 747-400s and 15 777-200s, to be
delivered over five years. The price tag was US$4bn, or M$10bn at
the then exchange rate of M$2.5:US$1. But the eruption of the Asian
crisis in 1997 sent the ringgit into a tailspin, bloating the bill. The
currency's slump also inflated the cost of fuel, likewise denominated
in US dollars. Lulled into a false sense of security by the ringgit's
previous solidity, MAS had hedged little of its huge foreign
exchange requirement. Revenue tumbled, too, owing to a
crisis-induced slump in passenger and cargo loads.
Tajudin needed a quick fix. Early in 1998 he decided to set up a
wholly-owned subsidiary to buy all of MAS's planes and lease them
back to the carrier. The ringgit's depreciation meant the subsidiary
could make a substantial book-value gain from the arrangement,
enabling the chairman to reduce his own sizeable personal debts.
But minority shareholders cried foul when details of the plan were
leaked, forcing it to be scrapped. So MAS cut costs where it could,
entering into numerous sale-and-leaseback deals with foreign
companies, and deferring the delivery of ordered aircraft. It also
scrimped on pay-outs to staff, triggering a flood of defections by
pilots to more generous Asian rivals.
The government has finally read the writing on the wall. The
decision to ease out Tajudin and seek an overseas partner cannot
have been easy for ultra-nationalist Mahathir. Indeed as recently as
mid-year he killed two deals that would have seen Singaporean and
Japanese companies buying into another "strategic" industry -
telecommunications - because they were deemed to be demanding
too much management control.
There are signs he may be willing to be more flexible about MAS.
He has hinted that the government could relinquish the so-called
"golden share" that allows it dictate the airline's policy. Also
encouraging is the recent exceptional increase in the permissible
foreign shareholding in MAS from 30% to 45%. Following the Brunei
Investment Agency's sale of its 9.1% stake on December 1,
foreigners - essentially institutional funds - now own just 7.5% of
the airline, meaning a strategic partner could take up almost 40%.
But potential buyers, while acknowledging that MAS has good growth prospects, have expressed little enthusiasm for it. Nor can they have been reassured by the fact that Tajudin received M$8 a share for his stake - the price he paid in 1994 - more than double the current market value of the stock. That premium will hardly make the hoped-for sale to a foreign carrier any easier. Indeed the government's willingness to pay over the odds suggests a determination to keep a tight rein on the airline.