KUALA LUMPUR: If you believe that two negatives make a positive, then speculation that the two loss-making airlines namely Malaysian Airline System Bhd (MAS) and AirAsia X Bhd (AAX) may merge does make sense.

That possibility appears to be what the market expects with MAS and AAX share prices climbing on high volumes.

Rumours of a merger between the national carrier and long-haul budget carrier has been rife in the past two days. This comes on the heels of news reports that MAS is looking at various possibilities of restructuring, including a privatisation exercise — pushing up MAS and AAX counters to month highs.

Should this merger happen, this would be the second attempt by Tune Group and Khazanah Nasional Bhd since the failed share swap between MAS and AirAsia Bhd in 2012.

A Khazanah spokesman when contacted by The Edge Financial Daily declined to comment on the merger rumours, saying that the sovereign fund “does not comment on speculation”.

Tan Sri Tony Fernandes, AAX co-founder and shareholder with a 33.7% stake, also declined to comment when contacted.

Etiqa Insurance & Takaful Bhd head of research and investment division Chris Eng said the merger rumours, while being rampant, were rather surprising as he did not see the merger benefiting AAX.

“MAS’ issues are in relation to its high costs. [Thus,] having the merger would not benefit AAX as the issues would not be solved easily,” he told The Edge Financial Daily.

MAS closed half a sen lower at 22.5 sen yesterday, giving it a market capitalisation of RM3.76 billion. It was the most heavily traded stock yesterday, with 180.16 million shares changing hands.

AAX continued its climb from 72 sen a week ago to a two-month high of 83 sen yesterday, up 15% in the past five trading days, with a market capitalisation of RM1.97 billion.

MAS’ long-term borrowings stood at RM10.34 billion, while its short-term debt was RM1.47 billion. Netting off its cash and bank balances of RM3.38 billion, MAS’ debt was 2.41 times its equity of RM3.498 billion.

In the span of a year, the national carrier’s reserves in shareholders’ funds have dropped 62.04% to RM328.24 million.

Khazanah is the only shareholder which owns more than 5% of MAS. It holds 11.59 billion shares or 69.37% equity interest.

MAS’ net loss for its first quarter ended March 31, 2014 widened to RM443.39 million from RM278.83 million a year ago.

AAX has not fared well either, financially. It has been loss-making for two of the three quarters since it was listed in July last year. AAX’s share price has been trading below its initial public offering price of RM1.25.

AAX posted a net loss of RM11.28 million in the three months ended March 31, 2014, and had total borrowings of RM2.12 billion, of which a quarter comprised short-term borrowings. It had a gearing level of 1.63 times after deducting its cash worth RM131.96 million. The group’s retained earnings were in a deficit of RM1.25 million.

Recently, AAX chief executive officer Azran Osman-Rani was quoted by the media as saying that the group is expected to return to the black in the second half of this year.

Tune Group Sdn Bhd (with a 17.83% stake) and AirAsia Bhd (13.76%) are the two largest shareholders of AAX. The two companies are controlled by Fernandes who has a 2.11% direct interest in AAX, and director Datuk Kamarudin Meranun, with an 8.33% direct stake.

AAX’s 2QFY14’s financials are due to be out in August.

This article first appeared in The Edge Financial Daily, on July 24, 2014.

http://www.theedgemalaysia.com/first/299992-highlight-mas-airasia-x-to-merge-fr.html