Exclusive-Malaysia talks to rival airlines as it monitors AirAsia's financial health, sources say

KUALA LUMPUR/HONG KONG, September 16 - The Malaysian government is exploring the possibility of Malaysia Airlines and Batik Air absorbing AirAsia's domestic market share, as part of scenario planning while authorities keep a close eye on the financial health of the country's largest low-cost airline, according to sources familiar with the matter.

Recent weeks have seen increased discussions between the government and the two airlines due to growing concerns over AirAsia's financial pressures. Jet fuel costs, which surged 66% to an average of $183 a barrel in the second quarter of 2023, have contributed to AirAsia's struggles. The finance ministry and airport operator Malaysia Airports Holdings Berhad (MAHB) are involved in these talks, which also include broader scenario planning around AirAsia's financial situation.

Other options under consideration involve the government providing some form of endorsement to help AirAsia raise fresh capital from external investors, though the specifics remain unclear. Malaysia Airlines and Batik Air have stated they would only take over AirAsia's operations on a large scale if they could also assume its aircraft leases, as absorbing routes and passenger volumes without the aircraft would be far more challenging.

Both airlines have expressed their willingness to expand organically rather than acquire the whole business. AirAsia commands about 40% of Malaysia's overall aviation market and 60% of domestic flying, making its financial challenges significant for the government. Farouk Kamal, deputy group CEO of AirAsia Group, refused to comment on operational or financial speculation.

MAHB said it regularly engages with airline partners for normal network and route development but declined to comment on AirAsia's financial outlook. Batik Air Malaysia CEO Chandran Rama Muthy said his airline could bring in aircraft quickly if required to help with market share. The finance ministry and Malaysia Airlines declined to comment on the matter.

AirAsia owes the finance ministry and MAHB at least 500 million ringgit for services like landing and parking fees. The airport operator has granted the carrier repayment extensions. AirAsia is seeking up to $1 billion from international debt markets and 700 million ringgit in local credit facilities to restructure its debt, estimating it needs at least $3 billion in fresh capital.