News is rife that  theshare swap agreement between MAS and AirAsia could be scuttled followingdemands by  the former's strong  workers union amid speculation that  theGovernment may set up a SPV to acquire shares from MAS'main shareholders. Assuch a politically-motivated move could draw  even more public  criticism, we think  this  is unlikely to materialize  and see MAS' union eventually realign its interest with  that of management  in turning around  the airline. We maintain our OVERWEIGHT call on the aviation sector, with AirAsia as ourtop pick, at a FV of RM4.57, and MAS still  a SELL at an unchanged FVof RM0.90.

Resisting change.MAS' union, which strongly opposed the proposed share swap, has brought itsgrievances directly to the Prime Minister to lobby  against the deal. It would appear that theunion is  resisting  change and has protested against  the new management.Staff morale is  low as uncertaintiescloud their  job  security, with most MAS employees seeing jobcuts as  the worst-case scenariogiven  the airline's huge workforce of20,000. At the very least, MAS may need to cut employee benefits/compensations or freeze pay hikes.

SPV a  bailout in disguise?  In the event theshare swap  is abandoned  to meet the union's  demands (they have  threatened to voteagainst the federal government  in the upcominggeneral election), media reports speculated that the PM's office may consider settingup a SPV to acquire shares from the main shareholders of MAS.  Such as politically-motivated  move will trigger a MGO for the remainingshares of MAS, which could then be viewed as a bailout using taxpayers' moneyand consequently, draw more intense public criticism.

Chairman offers wordsof comfort. In a statement yesterday, MAS' chairman Tan Sri Md NorYusof  said he has faith in theManagement Team led by Group CEO, Ahmad Jauhari Yahya. The board  has emphasized that the turnaround of  MAS lies  in the collaborative agreement it has sealedwith AirAsia,  in view of the potentialto achieve synergy in many areas. As  a  case in point,  MAS is in the process of setting up  JV companies to collaborate with AirAsia in the areas of procurement, training and maintenance.But in the face of resistance from MAS employees, it remains to be seen whensuch collaboration would materialize. It has been 7 months since the share swapdeal was sealed, and as we understand it, the only collaboration initiated sofar is in the procurement of jet fuel. This would be the easiest to tackle asit does not require the full participation of employees.

Cut in workforceunlikely. MAS appears to have an over-sized workforce, which may be themain drag on overall productivity. The airline's 20,000 employees is close tothe much bigger  SIA's 22,000  and is substantially more than AirAsia's5,172.  Trimming a bloated workforce  may be akin to plucking  the  low hanging fruit, but we think managementmay be  unlikely  to resort to this, although  a  cutback in incentives and commissions (infuture, payouts will be driven by performance) could be in the offing. As depictedin Figure 1, MAS is positioned last in terms of revenue per employee for 2011 butjust marginally comparable to Thai Airways on a per cost basis per employeeamong Asian airlines (see Figure 2). Note that Thai Airways is on the verge ofturning around by'

Source: OSK188