SINGAPORE (July 8): The proposed wider collaboration between the national carriers in Singapore and Malaysia has stirred up considerable attention, as well as speculation that it paves the way to a merger of Singapore Airlines and Malaysia Airlines. The two airlines have had a long working relationship in the past and, indeed, one analyst, Mohshin Aziz of Maybank Kim Eng, said in May that their merger would result in greater efficiency.
On July 3, it was reported that the former non-executive chairman of AirAsia, Pahamin Ab Rajab, had asked Malaysian Prime Minister Dr Mahathir Mohamad for approval to conduct due diligence on MAS. Pahamin was part of a group of businessmen with a proposal to turn the ailing airline around. Mahathir is also chairman of Khazanah Nasional, the sole shareholder of MAS and which has yet to approve the airline’s latest long-term business plan.
But there are doubts over whether that reported discussion would amount to a genuine offer to take over MAS’ operations. “We’ve seen this many times when it comes to Malaysia Airlines,” Aziz tells The Edge Singapore. “Logically, who in Malaysia has so much money to take over [the airline]?”
MAS, plagued by a myriad issues as well as bad luck, has been struggling to turn profitable. Indeed, Mahathir recently said Malaysia was ready to sell MAS if a good offer came along, but with the caveat that its Malaysian identity be retained.
So far, given scant details on the tie-up between SIA and MAS, analysts have been reserved in their views of just how far a partnership between the two storied national carriers will, or can, go. Nevertheless, an expanded partnership, towards a merger, is not that far-fetched an idea, industry observers say.
For one, both airlines have had a history of working together, notably in operating the effective duopoly over the route between Singapore and Kuala Lumpur, until the sector was liberalised in 2008. Also, both SIA and MAS are effectively competing for the same small piece of pie — the premium passenger.
And, combining forces is a reflection of how the industry needs to evolve to survive. There are examples of airline mergers, notably between two different, and often competing, national carriers. In 2004, Air France and the Netherland’s KLM merged to form Air France-KLM. In 2011, British Airways and Spain’s Iberia came together and formed International Airlines Consolidated Group.
Brendan Sobie, chief analyst at CAPA Centre for Aviation, says the SIA-MAS agreement is “a logical step”, as both airlines have been seeking to forge partnerships. But, as he says in a LinkedIn post, there are many challenges that need to be overcome before SIA can really be the “white knight strategic investor” that MAS needs.
The codeshare agreements could serve as incremental steps towards a full partnership or merger. Still, any long-term plan for MAS has to be carefully thought through. In August 2011, there was a collaboration agreement among MAS, AirAsia Group and AirAsia X, along with a share swap between Khazanah and Tune Air, the major shareholder of AirAsia. Tune Air had a 20.5% stake in MAS, while Khazanah ended up with a 10% stake in AirAsia. AirAsia founder and group CEO Tony Fernandes and AirAsia chairman and Tune CEO Kamarudin Meranun joined the MAS board of directors.
But that deal was called off months later, in May 2012, after strong opposition from MAS employees and the public. Significantly, the deal was later ruled anti-competitive and both MAS and AirAsia were fined RM10 million.
An SIA-MAS deal might be the ticket for both companies to get out of the headwinds they have been buffeted by in the last decade. The objective is to give both carriers pricing power in a marketplace dominated by low-cost carriers. That, however, does not necessarily translate into better services for consumers.
