Malaysia explores support options as AirAsia faces strain

Malaysia’s government has asked Malaysia Airlines and Batik Air whether they could absorb AirAsia’s domestic market share, according to two people familiar with the matter. The discussions form part of scenario planning as authorities monitor the financial health of the low-cost carrier.

Talks between the government, Malaysia Airlines and Batik Air have increased in recent weeks amid growing concerns over the financial pressures facing AirAsia, according to Reuters.

The airline has been hit by soaring jet fuel costs stemming from the U.S.-Israeli war with Iran, with the average price surging 66% in the second quarter from the previous quarter to $183 a barrel.

The talks involve the finance ministry and state-linked airport operator Malaysia Airports Holdings Berhad (MAHB) and form part of broader scenario planning around AirAsia’s financial pressures, the people said.

Other options under discussion include government support for AirAsia’s plan to raise fresh capital from external investors, although the exact nature of any such support remains unclear, Reuters reported this month.

Reuters was unable to independently verify details of AirAsia’s financial position.

Malaysia Airlines and Batik Air told the government they would only consider taking over AirAsia’s operations on a large scale if they could also assume its aircraft leases, one of the people said. Absorbing the airline’s routes and passenger volumes without its aircraft would be significantly more difficult.

Both airlines have also told the government they are willing to expand organically to absorb AirAsia’s routes and passengers rather than acquire the carrier’s entire business, the people said.

AirAsia has said it accounts for about 40% of Malaysia’s overall aviation market and 60% of domestic flying, making its financial challenges a significant concern for the government, according to people interviewed by Reuters.

Farouk Kamal, deputy group CEO of AirAsia Group, said in a statement that the airline does not comment on operational or financial speculation or unannounced corporate arrangements.

“All material updates ​regarding our business and fleet strategy are disclosed transparently through official exchange filings and corporate announcements at the appropriate time,” he told Reuters. “We also wish to reiterate that AirAsia remains focused on maintaining business continuity and stable operations across all its markets, and we continue to see strong underlying demand across our network. We are also working closely with our stakeholders to manage our financial and operational requirements.”

MAHB said it ‌regularly engaged with ⁠all airline partners as part of normal network and route development, including on “potential capacity and route opportunities where there are gaps in the market or unmet demand.” MAHB declined to comment on AirAsia's financial outlook. Malaysia's finance ministry, Batik Air, and Malaysia Airlines declined to comment.

AirAsia faces financial pressure

AirAsia had current liabilities of 18.4 billion ringgit ($4.51 billion) as of June 30 and owed Malaysia Airports Holdings Berhad (MAHB) at least 500 million ringgit for services, including landing and parking fees, according to the people and two other sources. MAHB had already granted the airline extensions to repay some of the amount, two of the people said.

AirAsia said this month that it was in discussions with financial institutions to raise up to $1 billion from international debt markets and 700 million ringgit through local credit facilities, primarily to restructure its debt.

Two people familiar with the matter estimated that AirAsia required at least $3 billion in fresh capital to address its financial position. The airline said its financing targets were sufficient to meet its requirements. AirAsia had cash and bank balances of 954 million ringgit as of June 30.

The carrier reported a net loss of 831 million ringgit for the second quarter ended June 30, partly due to rising jet fuel costs and foreign-exchange losses of 331 million ringgit.

AirAsia has also been restructuring its operations, cutting underperforming routes, returning 25 older aircraft to lessors, and renegotiating vendor contracts to reduce costs.

Reuters reported this month that Malaysia’s finance ministry had hired Alton Aviation Consultancy to assess AirAsia’s funding needs as the government considers whether to provide support, given the airline’s role as a major employer and provider of affordable air connectivity across the region.