Airline Debt – Who’s Wrong Anyway?

DURING the 1986 economic crisis that led to the collapse of Pan-El Electric in Singapore, a banker recounted how a large Malaysian corporation rejected a bailout against lenders when faced with repayment.

The firm’s big boss told bankers that since the amount owed was large, it was up to the banks themselves to come up with a restructuring plan to get him to pay – or he would have to fall back.

A similar situation seems to be developing with airlines in Malaysia. Airlines appear to have passed the buck to the creditors’ court to work with them if creditors wish to see their debts settled out of court.

Malaysia Aviation Group Bhd (MAG), the parent company of Malaysia Airlines (MAS), announced a restructuring last week that came as no surprise. He reportedly told creditors that Khazanah Nasional Bhd, his sole shareholder, was not ready to pump more money into the airline if restructuring talks with the lessors failed.

MAS’s liabilities at the end of 2018 were just under RM 5.5 billion, but the company was in a net cash position. Cash is probably all burnt up now, following the collapse of air travel due to the Covid-19 pandemic.

If anyone thought MAS was in big trouble, they were wrong – AirAsia Group Bhd and his associates have bigger problems. It has already closed its operations in Japan and there is speculation about the fate of its operations in India, Thailand, Indonesia and the Philippines.

Adding Spice Is The Development In AirAsia X Bhd (AAX), an AirAsia partner, which this week announced a restructuring of around RM 63.5 billion in debt. He wants the creditors to extinguish the debt and in return accept a RM 200 million “I owe you” note.

Most of AAX’s debt actually comes in the form of capital commitments such as future leases and the purchase of aircraft. AAX has penalties for termination of contracts or failure to take delivery of aircraft on schedule.

Based on its latest quarterly results, AAX’s long-term and short-term liabilities as well as rental and maintenance costs are less than RM 9 billion. In fact, the remainder of the debt of RM 63.5 billion is made up of commitments to aircraft manufacturers and lessors.

AAX is not alone in this situation. Most airlines are reeling from the collapse of air travel and huge cash consumption from commitments to aircraft manufacturers and leasing companies.

Many have returned to their government to seek financial assistance. From the United States to the Middle East and Singapore, governments have stepped in to help airlines. Emirates Air received $ 1.2 billion in April and is seeking more funding from the government.

The U.S. government has paid airlines $ 58 billion in government guarantees, while Singapore has put together a $ 13 billion package for Singapore Airlines, most of which has been taken down.

In Malaysia, the government has left it up to Khazanah to decide whether or not to invest more money in the national carrier, while AAX seeks financial assistance of RM500 million under the bond program. guaranteed by the government.

Both MAS and AAX seek some sort of respite from the aircraft rental companies. In the case of AAX, it is also requesting a stay from the aircraft manufacturers for its capital commitments relating to the purchase of 78 A330Neos.

Manufacturers and leasing companies, on the other hand, cannot afford to back down easily as this would set a precedent in their dealings with customers in other countries.

Rather, aircraft manufacturers are pushing governments to step in and help airlines. For example, Airbus and Rolls Royce, which supply the engines, lobbied the British government to bail out Virgin Atlantic. Their rationale is that the collapse of the airline industry would affect the supply chain which employs thousands of people in Europe and the UK.

For Malaysia, the good thing is that the manufacturers and leasing companies are all owned by foreigners and therefore lack the power to lobby the government to intervene.

We can be pretty sure that no local politician or influential businessman will pressure the leaders to step in to solve their problems.

The Malaysian government also cannot have a stand-alone stimulus package for the airline industry. Other industries are also hit hard by the pandemic and need help.

You also have to consider what airline shareholders put into any restructuring since they’ve reaped the rewards during the good times.

In this regard, it should be noted that AirAsia had distributed dividends of over RM 5 billion to shareholders in 2018 and 2019.

Airlines cannot afford to go to war with manufacturers and leasing companies because there are only a few on the market. When air travel resumes, it will have to go back to the same manufacturers and leasing companies.

But the flip side is that manufacturers and lessors also need their airlines to survive and fly.

Demand is expected to gradually pick up from 2022, even in the worst-case scenario, according to international aviation consulting firm Roland Berger. At the end of 2019, there were approximately 22,250 aircraft in circulation.

This existing fleet is expected to decline to 13,540 by 2030 due to the retirement of planes as they age.

By 2030, including deliveries of old and new aircraft, the circulating fleet is expected to exceed 35,000, indicating healthy growth for the airline supply chain industry.

So manufacturers and the supply chain, if they are to reap long-term benefits, need airlines to survive this worst crisis. Without the airlines, there would be no manufacturers, leasing companies or engine manufacturers.

Since the start of the Covid-19 pandemic in March, airlines have already touched their fuel cover and aircraft maintenance commitment charges, and have recorded end-of-lease conditions in their balance sheets.

Without even factoring in parking, salary and other overhead costs, airlines are already dipping into the red. They now have no choice but to pass the buck to builders and lessors to ease payments or they risk going into liquidation.

AAX has made it clear that the proposed restructuring is aimed at avoiding liquidation while MAS, which has had numerous bailouts since 2000, may well take this opportunity to fall back and focus on Firefly.

If the situation comes to this, consumers will be the losers. But no one wants to see that happen.

Perhaps the veiled threat of liquidation is the best tool to use right now until there is more certainty in air travel. By then, maybe manufacturers and lessors will realize that not all governments are going to bail out struggling airlines.

Ms. Shanmugam is the former specialist editor of The Star. The opinions expressed here are his own.

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