Saturday December 13, 2008
The pressure for consolidation is sweeping through global carriers. Will that happen to Malaysia Airlines?
IF a super alliance between Malaysia Airlines and Australia’s largest carrier Qantas Airways or any other major airline were to take off, it will shock pundits who believe such a deal will not materialise due to tough hurdles, even if it excludes an equity swap.
The scepticism has much to do with the failed merger talks between government-controlled Proton Holdings Bhd and Volkswagen which kept investors hanging on tenterhooks and much later, very disappointed.
This is also not the first time that MAS and Qantas are at the negotiating table. In 2000, when Tan Sri Tajudin Ramli helmed MAS, the national carrier talked to “several potential alliance partners” including Qantas. But the deal was abandoned on grounds that it appeared too much in Qantas’ favour.
While the landscape of the global airline industry, in general, and MAS, in particular, has altered drastically since then, one overriding factor remains the same: How much to give in.
In a filing with Bursa Malaysia, MAS said it was pursuing strategic partnerships with a number of airlines on collaborations that range from joint ventures and code shares to interlining partnerships.
It said it was part of its Business Transformation Plan to pursue such a tie-up.
MAS also recently inked a memorandum of understanding with Qantas for a joint venture in maintenance, repair and overhaul (MRO).
A merger of equals? No way
But what kind of merger will it be?
“It won’t be a merger of equals,” says one industry watcher. There’s a whole lot more truth in that statement than meets the eye.
In terms of market value, Qantas is worth around US$3bil (RM10.8bil). The Australian airline is also in talks with Europe’s third largest airline British Airways (BA), which has a market value of around US$2.6bil (RM9.36bil). On the other hand, MAS’s market value is around RM4.4bil.
The Qantas-MAS deal will likely spark some “nationalistic” anxiety among Malaysians, not too different from the current hot debate among Australians over the proposed Qantas-BA tie-up. While the British press has touted the deal as one between “equals”, Australian regulators are wary and the general public unnerved that it could end up being a takeover of Qantas, this despite many assurances from Qantas chief Alan Joyce.
Underscoring the fact that mergers minus equity swaps are still onerous affairs, Qantas admitted earlier in the week that the US$5.6bil deal with BA is facing major obstacles and there is a reasonable chance it will fall through.
Where does MAS stand in this equation? What will the merger or profit-sharing ratio be? Will the alliance close the quality gap between the airlines and will the bigger brand inadvertently gobble up the other?
“Qantas will have the upper hand, just judging by its scale. If it can squeeze a favourable deal out of BA or walk out if it can’t, then it can do so with MAS,’’ an industry watcher says. “Realistically speaking, the market will find it hard to believe that MAS is on the cusp of a so-called super alliance, let alone a three-way mega merger.”
“We believe there is a low possibility of a merger materialising,” says OSK Research analyst Ng Seng Guam, adding that since Qantas is still in talks with BA, any tie up with other airlines like MAS may jeopardise its due diligence process on the existing proposal.
He adds that given the complication and regulatory approval required for the Qantas-BA deal, it may take years to complete and, hence, drag out the potential collaboration.
Aseambankers is equally doubtful. “Despite the potentially far-reaching synergistic gains for MAS, fear of the unknown, like what would be the actual outcome of any potential ‘merger’ for MAS, could also be a stumbling block.”
Flight to merger
The airline industry is notorious for its vulnerability to sharp downturns. Bitter competition, towering debts and record fuel costs this year alone have seen 30 airlines buckle. And while fuel prices have come off substantially, lumpy capacity increases as well as plummeting demand still cloud the industry’s prospects.
Over the week, it was reported that the International Air Transport Association (IATA) expects global airlines to post losses of US$5bil this year and US$2.5bil in 2009 as the economic crisis bites. “The outlook is bleak. The chronic industry crisis will continue into 2009 ... We face the worst revenue environment in 50 years,” it has said.
Under such intense pressure and as the skies have been opened wide, many airlines are clamouring for consolidation as a means of achieving big savings.
The year 2008 may also be known as one of mega airline mergers. In United States, Delta Air Lines and Northwest Airlines merged in a US$3.1bil deal which galvanised the US airline industry but it didn’t quite set off a wave of consolidation as expected.
More recently, BA, whose merger with Spanish carrier Iberia is still a work-in-progress, said it is in talks with Qantas on a merger, which would create the world’s biggest airline. BA has also expressed interest to form an alliance with American Airlines.
In Ireland, Europe’s largest budget carrier Ryanair is considering a plan to take over its rival Aer Lingus while Germany’s flag carrier Lufthansa is in talks to take over Austrian Airlines.
Template for mergers
The cross-border takeover of the Netherlands’ KLM by Air France in 2004, which does not involve an equity swap, appears to be a popular template for mergers and one that is widely perceived to be the path MAS and Qantas have chosen for their alliance.
The outcome of the Air France-KLM deal, deemed to be the industry’s most celebrated merger, has been stunning and has “befuddled industry observers and rivals”, says Aseambankers in a recent report on the aviation sector entitled, Consolidation - friend or foe?
“The Air France-KLM example is encouraging not just because it created a healthier financial entity, which is less susceptible to the lows of the industry. Operating data – actual capacity filled and available capacity flown – all show startlingly positive trends. Improved seat factors were recorded...”
“...the Air France-KLM experience garnered more than just envious glances, but outright copy-cat attempts to emulate their operating successes.”
The key: It explicitly sought to optimise available resources and fleet instead of duplicating services or simply focusing on potential cost savings.
Why MAS needs this deal
OSK’s Ng wraps it up aptly: “...MAS may already be near its saturation point growing ‘solo’ ... collaboration may be timely in moving the company up another notch.”
Many are impressed by the speed and depth of MAS chief Datuk Seri Idris Jala’s turnaround plan, which has lifted the company out of its abysmal state. The airline is generating profit and is in a cash position of RM4.8bil. His penchant for dissecting detailed information in every key aspect of the airline’s operations, through what some say is an onerous and tedious process but one that has been extremely fruitful particularly in slashing costs, is likely to be employed in any discussion of a potential alliance.
“The big boys want Idris’ time now. It speaks volumes about what he has done. Three years ago, it would have been almost blasphemy to catch another CEO talking about an alliance with MAS,” says an analyst.
But the truth is, for Qantas or any other major airline, MAS is an option, but not necessarily the ultimate or the most preferred choice.
“Qantas, I think, or another major airline, if given the choice, would prefer to go with Singapore Airlines, Thai Airways or Cathay Pacific.
So, MAS needs to move fast or it could be eternally left behind. The current situation favours MAS.
Thailand is facing internal strife; Cathay Pacific is facing the music of some misteps in hedging policies and its expansion into mainland China.
“So the current MAS team should grab the opportunity. And they should get the blessing from the regulators to forge this tie up,” he says.
Looming concerns in the industry make a merger of sorts highly compelling. Asean will open its skies in a matter of weeks, which means competition will intensify in the region. Compared to Bangkok, Singapore and Hong Kong, passenger traffic in the KL International Airport is not attracting enough feeder traffic that a hub would ordinarily enjoy.
If MAS ties up with one of the big boys, it will be one way of feeding foreign passengers to domestic routes. In addition, there is a big sweetener in tying up with Qantas, which apart from BA, controls the Kangaroo route (air routes between Australia and the United Kingdom).
“The multiplier effect is tremendous if it can do this. Not only will it be serving the airports, it will also benefit the tourism and business sectors,” an analyst says.
The plus points for a tie up are plenty as it can snowball into key aspects of operations. OSK Research’s Ng points out that an alliance can win larger discounts from Airbus and Boeing Co. “The enlarged alliance certainly may leverage up buying power, not limited to aircraft but also other materials at sizeable quantities,” he says.
In addition, an alliance will enable, for example, Qantas to eventually sell the MAS inventory closer to its own yields, which are among the world’s highest, instead of MAS’ historically low yields, Aseambankers points out.
Moreover, “with Qantas already having a strong LCC (low-cost carrier) business model via Jetstar, the combination with MAS or Firefly may create a new giant in LCC that covers the north to south of the Asia-Pacific market,” Ng says.
Selling the idea
On Wednesday, Idris and his senior team hosted an informal dinner for a large group of analysts at the Shangri-la Hotel, Kuala Lumpur. Idris took the opportunity to explain the rationale for a potential alliance with a strategic partner, referring to it as a “hard-wired” deal.
Did the analysts walk out convinced? One sceptical analyst has since sort of changed his stance. “The talks have been going on for 20 months. Detailed studies are being carried out on synergies such as routes, etc. Idris and his team have proven themselves. The stars seem aligned. Maybe it can happen.”