AA-MAS Deal: Rakyat are The Only Losers

This is a follow up on a previous post dubbed: http://aboiwealthpot.blogspot.com/2010/12/flying-above-rest-airasia.html. I once suspected (with numerical evidence) based on Dali's argument that MAS will require some form of bailout from the government like most govt initiated "national project" on the basic of debt servicing. This time they the govt really had it going with tax payers money on the run.

"Let me put some numbers into perspective. The cost of buying these new aircrafts will be approximately RM23bil spread over 5 years (RM4.5 bil/year), MAS has RM2bil in borrowings but only RM2.2bil of cash. For the last 5 years, MAS's profit minus loss after tax is -RM500mil. Now you tell me how to save MAS? Just die la, like Proton and most GLCs you are a national liability not an asset."

That was some time ago and what do we have now? An AirAsia-MAS deal in which everyone calls it shady. MAS’s lacklustre financial performance in recent quarters and if you ask me for the past decade had resulted in the share swap between MAS and AirAsia on August 9. GLC Khazanah takes on a 10% stake of AA in exchange for a 20.5% in our national airline. This essentially means Tony Fernandez (TF in short) is able to sit on the MAS board. TF is certainly happy as his local rival Firefly is now gone with the wind and will probably close shop sooner rather than later.

"Tan Sri Fernandes has admitted that one of the contributing factors for Tune Air agreeing to this deal is Firefly. Firely a low cost airline of MAS covering the domestic sector, was stealing its market share. Out of every three Firefly passengers, two were from AirAsia and one from MAS. 60% of AirAsia's revenue comes from the domestic market, so Firefly was a threat."

On Nov 3, Bursa Malaysia and the SC is probing this deal for a possible insider trading but this is a "wayang kulit" show laaa as explained by Sakmongkol (will be difficult to understand if you are attuned to Mahathir's political life): http://sakmongkol.blogspot.com/2011/11/when-rats-are-away-cats-come-out-to.html.

Anyway my story here is to tell folks that this very apparent 'shady deal' has ramifications for consumers. With budget domestic flight competition soon striped away, AA has virtual monopolisation. And as many would know by now, monopoly means no competition hence fares won't go cheaper from now on. In Malaysia you see similar monopolisation for example TMNet and Astro Binariang. The lack of competition will lead to inefficiency and eventual decline in the fortunes of a company when the competition comes, as it inevitably does. Some may argue that this deal is in response to the flight industry liberalisation in 2015 whereby Asean airlines will have unrestricted access to airports within the grouping. But how can you marry loss making MAS and profit making AA? Like a Hollywood love story in the making. Will Ananda Krishnan's daughter marry a Chow Kit drug addict? Highly unlikely. Again we just want to *SAVE FACE* by helping the ailing national carrier.

Maggie Wu Ya Xin 吴亚馨 is a model from Taiwan (born 8 Oct 1983).

I do not favour investing in companies with loads of debt and GLCs and is a reason why I totally shun away from putting any form of money into the aviation industry whether it is for short term gain or long term basis. My strategy is simply to avoid debt laden companies (D/E ratio) as part of my risk mitigation. Consider the below DE ratios (the higher ratio the more debts it has vs capital):

Malaysia Airline System: 1.477 with net profit in the red (in the RM millions range).
AirAsia Berhad: 2.039 but net profit of over RM1bil.
Thai Airways: 2.204 but also earning money over RM5bil.
Ryanair Holdings: 1.101 
Southwest Airline: 0.649 
Cathay Pacific: 0.713
Singapore Airline: 0.153 (the only one standing apart from the rest)

MAS airline is the only airline in the list that is bleeding and limping. But both airlines: *AA and MAS face a lot incoming debts*, the deal has to happen. The problem with MAS is not because of competition, nor high fuel cost (which is frequently being reported by the media). MAS is not making money because of political/govt interference in the management of the airline. E.g. SkyChef catering biz of the airline is linked to a relative of a govt personality way back in 2006. I bet the other services like maintenance, vendoring supplies to etc are now all linked to cronies some way or another. Will this deal spread the cronyism disease AA management side one day? This is MAS's benefit.

Why is this deal so important for TF?? TF is making a huge gamble to be in the business with the government. He used to be competing with MAS which was easy in the first place hence most of AA's profit is within the country only not overseas. Now he wants to take on the big guns. Read this article carefully: http://biz.thestar.com.my/news/story.asp?file=/2011/6/24/business/8966621&sec=business. As of 31 March 2011, based on data from their 1st Quarter report, AA’s capital commitments stood at RM 19 billion. With that announcement, another RM 54 billion is needed and now roughly RM 75 billion will be spread over a 15 year period ending 2026. Short to say, AA needs to earn as much as Thai Airways does right now, a whooping RM 5 billion per year to meet these dues. Now consider this, for the last 5 years, AA only managed to grow its profit 10 fold  from ~100 million to roughly 1 billion. Second, it's cash holdings has grown only x6 in the same 5 years but its debts has x7 from 1 billion to 7 billion. To me it is unsustainable, borrowing more money on top of money, a bubble in the making. Where does the money come from then? Khanazah...which is of course from us taxpayers la. Win-win for both of them and Kanneh the rakyat will most likely end up as the losers. Government should stick its hand out from the business sector. Now I will suspect that *both* will come and "Minta Nasi". Sien lorrrrr.

Maggie Wu