Malaysia in talks with Malaysia Airlines, Batik Air on absorbing AirAsia's market share

Malaysia's government has approached Malaysia Airlines and Batik Air about taking over AirAsia's routes and passengers, as it monitors the budget carrier's financial health. The two airlines are willing to expand organically but would only take on AirAsia's operations on a large scale if they could

KUALA LUMPUR: Malaysia's government has asked Malaysia Airlines and Batik Air whether they can absorb AirAsia's domestic market share, two people with knowledge of the matter told Reuters, as part of scenario planning while authorities monitor the financial health of Southeast Asia's largest low-cost carrier.

Discussions between the government and the two airlines have increased in recent weeks amid concerns over financial pressures faced by AirAsia, which has been hit by jet fuel costs that surged 66 per cent in the second quarter from the prior quarter to an average of US$183 a barrel. The talks involve the finance ministry and state-linked airport operator Malaysia Airports Holdings, the people said.

Malaysia Airlines and Batik Air have told the government they would only take over AirAsia's operations on a large scale if they could also assume its aircraft leases, one of the people said, as absorbing its routes and passenger volumes without the aircraft would be far more difficult. Both carriers have expressed willingness to expand organically to absorb AirAsia's routes and passengers rather than acquire its whole business.

AirAsia has said it commands about 40 per cent of Malaysia's overall aviation market and 60 per cent of domestic flying, making its financial challenges a significant concern for the government. Other options discussed include the government providing some form of endorsement to bolster the airline's plan to raise fresh capital from external investors, Reuters reported this month.

AirAsia, which had current liabilities of RM18.4 billion (US$4.55 billion) as of Jun 30, owes Malaysia Airports Holdings at least RM500 million for services including landing and parking fees. The airport operator has already granted the carrier repayment extensions, two people said. AirAsia has said it is advancing discussions with financial institutions, targeting up to US$1 billion from international debt markets plus RM700 million in local credit facilities, primarily to restructure its debt.

Two of the people estimated the airline required at least US$3 billion of fresh capital to address its financial position. AirAsia reported a net loss of RM831 million for the second quarter ended Jun 30, hit by rising jet fuel costs and heavy foreign-exchange losses of RM331 million. The carrier has been restructuring aggressively, cutting underperforming routes, returning 25 older aircraft to lessors and renegotiating contracts with vendors.

Farouk Kamal, deputy group CEO of AirAsia Group, said the airline does not comment on operational or financial speculation or unannounced corporate arrangements. Malaysia Airports Holdings said it regularly engaged with all airline partners as part of normal network and route development, while Malaysia's finance ministry, Batik Air and Malaysia Airlines declined to comment.