Malaysia to stop funding state airline if lessor talks fail

State fund Khazanah to clos spiggot on parent and force it into a winding down process, source says

by Anshuman Daga and Liz Lee
Malaysia to stop funding state airline if lessor talks fail
Malaysia Airlines aeroplanes on the haze-shrouded tarmac at Kuala Lumpur International Airport. Photo: Reuters

SINGAPORE: The parent of Malaysia Airlines has warned leasing companies that state fund Khazanah will stop funding the group and force it into a winding down process if restructuring talks with lessors are unsuccessful, according to a letter seen by Reuters.

The warning from Malaysia Aviation Group (MAG), the holding company for the carrier, raises the stakes in negotiations for a financial shake-up known as "Plan A" and sets out an alternative plan to divert funds to a sister airline unit called Firefly.

"In the event Plan A fails, shareholder (Khazanah) will cease funding for MAG and will trigger winding down/liquidation process for MAG," according to the document, the contents of which were confirmed by six people familiar with the matter.

Khazanah, MAG's sole shareholder, declined to comment.

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In an email response to Reuters, MAG said details concerning its restructuring plan were strictly bound by non-disclosure agreements between the parties involved.

"MAG will depict its final position upon achieving resolution with the parties it is negotiating with," it said, adding the restructuring plan was a crucial step for it to come out as a "sustainable and profitable organisation in future."

It also said the restructuring comes after various cash conservation and cost reduction initiatives to keep its business afloat proved to be inadequate due to the prolonged effect of the coronavirus crisis.

MAG's comments in the letter reviewed by Reuters came days after the airline group asked lessors in a letter for steep discounts on aircraft rentals as part of a broad restructuring plan, some of the people said.

Plan B

According to the latest document, under a "Plan B" scenario, Khazanah would "inject funds into Firefly directly to start new jet operations at Kuala Lumpur on a much smaller scale, focusing first on domestic services."

Low cost carrier Firefly, which operates a fleet of 12 twin turboprops, mainly within the country, is currently a fully owned subsidiary of MAG.

According to the document, Firefly would obtain narrow-body planes and subsequently wide-body aircraft from the market.

Malaysia's national airline has struggled to recover from two tragedies in 2014 – the mysterious disappearance of flight MH370 and the shooting down of flight MH17 over eastern Ukraine.

Khazanah took it private that year as part of a $1.5 billion restructuring, but efforts to turn around its business have been further upended by the COVID-19 pandemic.

Reuters reported last week that MAG had told lessors it was unlikely to be able to make payments owed after November unless it received more funding from Khazanah.

Khazanah told Reuters last week it was supportive of Malaysia Airlines' restructuring efforts but that if they proved unsuccessful, it would need to evaluate options on how to maintain connectivity for Malaysia.

MAG said last week the airline had reached out to lessors, creditors and key suppliers recently as it embarks on an urgent restructuring due to the impact of the pandemic.

  • Reuters