Even before the loss of its Flight MH370, Malaysian Airline System (MAS) was bleeding cash, prompting talk that it may need another financial rescue from state investor Khazanah Nasional, its majority shareholder.
The flag carrier's cash and short-term investments at end-December were close to $1.2 billion - less than its average operating costs of the two previous quarters, and a signal that it may soon need fresh funding or bank loans.
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MAS, Southeast Asia's fourth-largest airline by market value, has had negative operating cash flow for three years - which means it is not generating enough cash to meet its day-to-day operating costs - and has had negative free cash flow - operating cash flow minus capital expenditure - for six years.
No one has yet calculated the cost to the airline of the lost plane, which is now assumed to have crashed into the Indian Ocean earlier this month with 239 passengers and crew on board. While the plane was insured, there will likely be compensation payouts to the relatives of those who died.
"What this accident is going to create is an acceleration of the downward trend that we've seen at MAS for years, and the need to restructure," said Bertrand Grabowski, who heads German bank DVB's aviation and land transport finance divisions.
"The only way out is shrinking, in terms of capacity and route network."
Booking seen declining
MAS has based its recent strategy on having more plane seats filled by cutting ticket prices as it battles rivals AirAsia and Indonesia's Lion Air, which have expanded capacity. Bankers and analysts say the loss of Flight MH370 will dent bookings at MAS, making a fresh capital raising more likely.
"Even assuming this is a one-off and the travelling public realizes it's out of (the airline's) control, we expect some quarters of declining bookings, further cuts in ticket prices and - without any change to its high cost base - MAS is likely to bleed even more red ink than it did in 2013," said Timothy Ross, Asia-Pacific transportation analyst at Credit Suisse, which forecasts another three years of losses at MAS.
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"It certainly becomes highly likely that liquidity will suffer and its capex program and possibly financing even day-to-day operations might require an injection of more funds."
There are no forecasts yet on how much insurers are likely to pay for the lost flight, but Torsten Jeworrek, board member at Munich Re, the world's largest reinsurer, has said the $500 million reported in some media was too high.
"Primarily, it's Malaysian Airlines' reputation and, to a lesser extent, that of the aircraft hull and engine manufacturers on the line until the cause is identified to be something outside their control," said Anna Tipping, partner at law firm Norton Rose Fulbright in Singapore. "MAS will take the initial brunt of the loss, being the carrier, but once the cause of loss is identified the blame and consequences will shift."
"For PR reasons, particularly if there are going to be payouts to the families of the victims, then that will probably be paid sooner rather than later and by Malaysian Airlines because of the reputational aspect."
MAS declined to comment on its financial situation. CEO Ahmad Jauhari Yayha told a briefing on Tuesday that it was "a very painful period for the airline."
Until Flight MH370 vanished, MAS had been looking to break even this year. In February, Ahmad Jauhari, a triathlete and long distance runner, said the airline expected further pressure on its yields - passenger revenue per seat - and would try harder to cut its structural costs and improve productivity.
"Management's focus is understandably diverted to this crisis and so the running of the airline is more or less on auto pilot," said Shukor Yusof, analyst at Standard & Poor's Capital IQ. "The cost of money for MAS would rise considerably because of this incident in spite of it being sovereign guaranteed."
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MAS shares have slumped to life lows and have lost three-quarters of their value in the past five years.
The airline last raised funds almost a year ago through a $1 billion rights issue. It also raised 7.8 billion ringgit through Islamic bonds and a special purpose vehicle owned by the finance ministry to buy planes in mid-2012.
Khazanah, which owns 69 percent of MAS, backed the recent rights issue. In 2012, Khazanah had tried to cut its stake in the airline, but the powerful Malaysian Airline System Employee Union (MASEU), which represents the airline's 20,000 workforce, rejected a share swap deal with AirAsia.
"Khazanah will have to support MAS (just) as Temasek backed Neptune Orient during the financial crisis," said an investment banker, referring to the Singapore state investor's support for the local shipping firm's 2009 rights issue.
R. Sivarasa, a member of parliament for Malaysia's PKR opposition party, said MAS was one of the country's "sick" government-linked companies which "basically bleed public funds." "As far as MAS is concerned, they'll bail them out,' he said.
Bankers warned that MAS' financial situation meant it was unlikely to secure government approval for its multi-billion dollar plans to buy 100 new aircraft.
Some banks with exposure to MAS say government support for the airline is the only reason they are still standing by it.
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"We don't need to put MAS on a watch-list. Most banks have lent money to the airline because of the government support, and now it will be stronger than before," said one banker. "If you look at the areas of criticism during this incident, they're mainly on the investigative side, on passport checking. This is about Malaysia Inc, not MAS."
The airline's main bankers, according to its latest annual report, are RHB, CIMB, Maybank and Citibank.
As of end-December, MAS had total debt of 11.7 billion ringgit. Its next major debt repayments are due in mid-2022, when $455.2 million worth of bonds mature, according to Thomson Reuters data.
DVB's Grabowski said this could be a turning point for MAS, citing Japan Airlines' emergence from bankruptcy to become Asia's most profitable airline in 2012, but Ross at Credit Suisse warned that the carrier's union could be an obstacle to any major restructuring.
"The prime stumbling block is labour, and turkeys don't vote for Christmas. These guys are not pushing for change because they know which big-line items need to have a knife taken to them - and one of them is employee costs. MAS employs several thousand people too many," said Ross.
MASEU President Alias Aziz did not respond to requests for comment.