KUALA LUMPUR: Malaysia’s airlines could be in dire straits if the government does not provide financial assistance to keep carriers airborne amid the Covid-19 pandemic.
It is understood that the local airlines had requested government assistance to provide liquidity.
This is to allow them to continue operations, despite capacity reduction in certain affected routes, aircraft grounding and weakening demand for air travel which is exacerbated by travel restrictions globally.
Some analysts said the local airlines could be on the brink of bankruptcy without financial aid.
They added that global airlines had already sought for governments financial support to cope with the current situation as air ticket sales nosedive.
To cope with the tough conditions, local airlines recently initiated cost cutting measures including voluntary unpaid leave as well as top management’ salaries cut and abolishment of allowances.
Aviation experts said the government's financial assistance to airlines should be studied thoroughly.
A source said the urgency of the government was to contain the Covid-19 outbreak, although tourism and air travel sector had been severely hit due to flight cancellations and travel restrictions.
The source told the New Straits Times (NST) that bailouts and financial assistance should be the last resort.
“At the current depreciation rate of Brent crude oil with US$20 price outlook, it will be a real challenge to consider a bailout or financial assistance to airlines,” he said.
He added that the government was facing budget constraints and deficits.
This would impose severe limitations on the extension of financial assistance not only to national carrier Malaysia Airlines but others such as Malindo Air and AirAsia.
He said the government should be prudent and cautious in distributing financial support to avoid unnecessary spending.
On February 27, the government announced 2020 Economic Stimulus Package valued at RM20 billion to ensure economic risks associated with the Covid-19 was effectively addressed.
The government acknowledged that hotels, airlines, travel companies and more broadly the tourism-dependent retail industry had badly affected.
Specifically to local airlines, the government had among others, provided a 15 per cent discount on monthly electricity bills and rebates provided by Malaysia Airports Holdings Bhd on rental for premises at the airports as well as landing and parking charges.
However, there was no specific financial assistance given to airlines.
Airline is one of the components in the aviation sector that plays an integral role in the Malaysian economy, especially in supporting the tourism sector.
According to International Air Transport Association (IATA), the air transport industry supported 450,000 jobs in Malaysia in 2018.
It also estimated that the air transport industry and its supply chain alone accounted for US$5.2 billion of Malaysia’s gross domestic product in 2018.
Bloomberg Intelligence transport analyst James Teo said Asia Pacific governments might not need to bail out airlines.
He said carriers should have been prepared for “turbulence”, especially after having gone through severe acute respiratory syndrome (SARS) in 2003.
“Instead, governments should mainly help them (airlines) cope with their liquidity issues during this period when travel demand is severely down,” he told the NST recently.
Teo said airlines can tap existing lines of credit, use unencumbered aircraft assets as collateral to secure financing, or do aircraft sale-and-leasebacks to obtain immediate cash, on top of internal cost-cutting measures to reduce cash burn.
“When all these avenues have been tapped and they still have difficulty, then this is where governments can come in to provide financial guarantees so that airlines can still obtain loans,“ he added.
Citing an example, he said China had provided subsidies to its airlines to continue operating minimal international flights to maintain some form of air connectivity.
“If a real bailout is needed, it could perhaps come with some added conditions such as equity in exchange for cash to ensure adequate returns on taxpayers' money,” he said.
It was reported that a few countries had been offering financial aid to their ailing aviation sector as global airlines announced deeper capacity cuts due to plummeting demand and stricter border controls associated with the coronavirus.
Moody’s Investors Service said many airlines would require financial support from governments, particularly if more aggressive measures to contain the spread of the virus were implemented.
“Indeed, globally, various regulatory relief measures are either in process or under consideration to cushion the ensuing economic consequences and an abrupt industry downturn that is now well underway,” it said in a research report on Monday.
The rating agency said the passenger airline sector was one of the most affected sectors given its exposure to travel restrictions and sensitivity of consumer demand and sentiment as the coronavirus pandemic widens and deepens.
Moody’s said the key drivers of how significantly credit quality will be affected are the duration of the demand trough and whether airlines have sufficient liquidity to cope until schedules start to return to normal.
“Cash on hand will be a key differentiating factor, augmented by committed backstop liquidity provisions.
“Some companies have historically maintained sizable cash balances so they can more comfortably manage through industry cyclicality and operational disruptions, albeit generally not as severe as the current crisis.”
Moody’s said an extended aircraft grounding increases the possibility of more severe credit deterioration.
However, it said government support would likely support liquidity, jobs and company viability and would presumably mitigate prospective incremental erosion of credit quality.
“Carriers with a purely domestic focus in a given country, for example, might have an easier path if international flight restrictions remain in place longer than domestic restrictions,” it added.
IATA said global airlines may require up to US$200 billion financial assistance from governments to brace for the Covid-19 pandemic.
Airlines operations have progressively deteriorated due to plummeting demand and stricter travel restrictions imposed by governments globally to contain the virus spread.
IATA director general and chief executive officer Alexandre de Juniac said governments had the financial means to avoid an industry calamity.
He urged governments to provide direct financial support (compensation) for carriers due to reduced revenues, loans, loan guarantees and support for the corporate bond market, and tax relief comprising rebates and deferral or reduction in income taxes as well as temporary waiver of ticket taxes and other government-imposed levies.
MIDF Research analyst Adam Mohamed Rahim said the government should extend financial assistance to local airlines that were suffering losses due to flight cancellations and travel restrictions from the Covid-19 crisis.
“Thus far, the stimulus package announced by the company entails rebates given to landing and parking fees for airlines. Therefore, financial assistance should be considered,” he told NST recently.
He warned that local aviation players especially airlines will be facing bigger losses this year if not much financial assistance was given.
“Prior to any financial assistance, Malaysia can first emulate the US by suspending slot requirements at its airports. Under the ’use it or lose it’ rule for airport slots, carriers are required to continue to operate an airport slot for at least 80 per cent of the time.”
However, due to the Covid-19 emergency, airlines have been unable to respond by adjusting their capacity.
He said the suspension of the slot use rules would allow airlines to begin putting in place measures to cope with the unprecedented fall in traffic.
“Malaysia could not bear to afford the calamity within the aviation sector. The cancellation of Visit Malaysia Year 2020 was inevitable but we will never know if the government would want to reignite such campaigns next year of the year after.
“Hence, it is crucial to keep airlines afloat in light of the pandemic with hopes that Malaysian aviation sector will emerge stronger once the situation recovers,” he said.
Meanwhile, Adam said airlines with lease payments obligation such as AirAsia with a majority of fleet leased, would need to renegotiate with the lessors to restructure their payment schedule or get more affordable lease rates.
Sobie Aviation consultant and Singapore-based independent analyst Brendan Sobie said government assistance is essential for airlines and the overall industry also needs to support airlines.
“We have leasing companies, banks, and suppliers working with the airlines. With the government closing all the borders and shutting down air travel in the last several days, they should now pay attention to the airline industry,” he told CNBC in a broadcast interview recently.
Sobie said government's assistance would be necessary as the industry had been warned about mass bankruptcy.
“Airlines are too important for the economy and we cannot turn our back on them. There is no airline and market that is not affected.
“I expect the government aid will include all carriers - private and government owned - and won't be limited to their own airlines,” he added.
He did not expect significant consolidation in the Asian airline industry in the short term due to various barriers to exit although in the longer term consolidation is possible
“We have airlines that cannot be merged due to ownership restriction and lots of other challenges," he said.
He also pointed out that governments would have been reluctant to put more money into government owned airlines before the crisis are now more likely to put more money in because of this crisis and because any potential sale of the airline will have to be delayed due to a lack of investor appetite during this challenging period.
However, he said governments have to do something for all airlines regardless of if they were in a weak or strong financial position prior to the onset of the crisis.
“It has to happen sooner or later and hopefully by the end of this week, we will see countries come onboard and will have the confidence for airlines,” Sobie added.