Six months on, the MAS restructuring continues steady progress

• Implementation of the 12-Point MAS Recovery Plan (“MRP”) continues and is on track and on schedule in the first six months
• Critical milestones and progress achieved:
  • RM1.38 billion was disbursed for payment to shareholders pursuant to the successful selective capital reduction and repayment (“SCR”) exercise, as part of the first phase of conditional investment funding amounting to RM2.0 billion
  • Malaysian Airline System Berhad (“MAS”) shares were delisted from Bursa Securities on 31 December 2014
  • The Malaysian Airline System Berhad (Administration) Act 2015 (“MAS Act”) came into effect on 20 February 2015, after being passed by both houses of Parliament last year
  • Christoph Mueller assumed the role of Chief Executive Officer-designate of Malaysia Airlines Berhad (“NewCo”) on 1 March 2015. He is also a Non-Executive Director of MAS, following his appointment on 1 January 2015
  • Pending the outcome of on-going discussions for a new catering agreement, MAS and Brahim’s Airline Catering Sdn Bhd (“BAC”) have on 27 February 2015, entered into a Settlement Agreement (“SA”) for an interim period commencing 1 October 2014 to 31 March 2015. The SA provides for:
    • A 25% reduction on monthly bills to MAS
    • A settlement over disputed amounts owed to BAC, whereby MAS agrees to release to BAC a sum of RM37.95 million, which is less than the total monies amounting to RM94.03 million withheld by MAS due to the dispute
• Further progress in all other work tracks

Khazanah Nasional Berhad (“Khazanah”) today issued the second scheduled update on the on-going restructuring of MAS for the period 29 November 2014 to 27 February 2015, showing steady and sustained progress in all key areas under the five-year 12-point MRP announced on August 29 last year. The first MRP Quarterly Progress Update was released on 28 November 2014.

The restructuring of MAS involves a “complete overhaul” to return the national carrier to sustained profitability. This entails the transformation of MAS’s corporate structure, financial position, operating performance and human capital management, guided throughout by the principles of fairness, transparency and compassion.

The first six months and upcoming developments

Over the last six months, strong progress has been made across the four main areas of the 12-point MRP (refer to Appendix I), namely Governance and Financial Framework, Operating Business Model, Leadership and Human Capital, and Regulatory and Enabling Environment.

As highlighted in the first MRP Quarterly Progress Update, the first three months of the restructuring saw several critical milestones achieved, including the approval of Khazanah’s SCR proposal by MAS minority shareholders, the incorporation of a new company (“NewCo”), Malaysia Airlines Berhad, and the passing of the Malaysian Airline System Berhad (Administration) Bill 2014 by the Dewan Rakyat.

Since then, further progress has been made, including the disbursement of RM1.38 billion in conditional investment funding, as payment to shareholders following the successful completion of the SCR, the delisting of MAS, and the MAS Act coming into effect on 20 February 2015 after being passed by both houses of Parliament last year.

Another key development was the announcement of former Aer Lingus CEO Christoph Mueller as CEO-designate of NewCo on 5 December 2014. He assumed the role on 1 March 2015.  Mr Mueller was also appointed Non-Executive Director of MAS, together with Celcom Axiata Berhad CEO, Dato’ Sri Mohammed Shazalli Ramly, on 1 January 2015.

More recently on 27 February 2015, MAS and Brahim’s Airline Catering Sdn Bhd (“BAC”), entered into a settlement agreement for an interim period commencing 1 October 2014 to 31 March 2015. The agreement provides a 25% reduction on monthly bills to MAS as well as a settlement on disputed amounts owed to BAC. Both parties are currently negotiating a new catering agreement that would be based on international standards.

Within the next three months, Khazanah is scheduled to disburse up to RM1.6 billion, as part of the second phase of conditional investment funding. The conditions for the disbursement are the delivery of several key milestones – a NewCo business plan approved by Khazanah and the MAS Board of Directors (“MAS Board”), a corporate governance review, implementation of a talent selection process as well as talent management and development programmes, and financial and operational targets to be agreed upon.

In addition, the migration of staff from Subang to Kuala Lumpur International Airport (“KLIA”) is targeted to begin in May, while the Corporate Development Centre (“CDC”) is set to begin operations by 1 April 2015. Meanwhile, the novation of supply contracts that meet NewCo’s requirements would be well underway, and renegotiation of selected contracts continue.

As the one-year mark of the disappearance of MH370 draws closer, MAS will hold an internal private remembrance on 8 March 2015 involving MAS Board members, management, employees and the next-of-kin of the MAS crew on the flight. Our thoughts and prayers are with those affected and their loved ones.

The following are details on the progress achieved during the 29 November 2014 to 28 February 2015 period:

1. Conditional funding of up to RM6.0 billion and reduction of net gearing

As called for under the MRP, the completion of the SCR and the delisting of MAS are necessary conditions for Khazanah’s commitment to disburse investment funding of up to RM6.0 billion on a phased basis and under strict conditions.

Of the first phase of conditional investment funding amounting to RM2.0 billion targeted for end December 2014, RM1.38 billion was disbursed for payment to shareholders pursuant to the successful SCR exercise. The remainder of this first phase of funding will be disbursed based on MAS cashflow requirements and conditions set by Khazanah.

Furthermore, as part of MAS’s long term goal of reducing its gearing, discussions on the terms of a proposed debt-for-equity swap with several parties are ongoing, with broad agreement on key terms targeted by the end of Q1 2015 and execution of definitive agreements in Q2 2015.

2. Delisting of MAS and creation of NewCo

The delisting of MAS was completed on 31 December 2014 with the removal of MAS shares from the official list of Bursa Securities, following the successful completion of the SCR. Prior to this, the NewCo, Malaysia Airlines Berhad, was incorporated on 7 November 2014.

Meanwhile, the restructuring effort is progressing across multiple work tracks, driven by the MAS Restructuring Management Office (“RMO”) towards the transitioning of relevant operations, assets and liabilities of MAS to NewCo by 1 July 2015, when it is scheduled to be operational.

3. Government support on key initiatives

The MAS Act came into effect on 20 February 2015, after being passed by the Dewan Rakyat on 27 November 2014 and by the Dewan Negara on 2 December 2014, respectively. The MAS Act is critical to the restructuring effort and will help to ensure a smooth transition to NewCo. It provides a legal environment that specifically addresses the necessary conditions for NewCo to start on the right footing and set the airline on the path to recovery.

Engagements with key stakeholders to ensure seamless transition to NewCo are also continuing, involving relevant Government ministries, domestic and international agencies such as the Department of Civil Aviation (“DCA”), International Air Transport Association (“IATA”), and International Civil Aviation Organization (“ICAO”).

4. Leadership

On 5 December 2014, Christoph Mueller was announced as the NewCo CEO-designate. He assumed this role on 1 March 2015. Mr Mueller is a Non-Executive Director of MAS, together with Dato’ Sri Mohammed Shazalli Ramly, Chief Executive Officer of Celcom Axiata Berhad, following their respective appointments to the MAS Board on 1 January 2015.

The appointments are part of the key initiatives under the MRP, which calls for the strengthening of the airline’s leadership as it transitions to NewCo over the coming months. Meanwhile, Ahmad Jauhari Yahya continues to be the Managing Director and Chief Executive Officer of MAS.

5. Review of supply contracts

More than 4,000 contracts have been identified under a comprehensive review of MAS’ contracts. The process to novate contracts that meet the market-based requirements of NewCo commenced in end-February 2015, while discussions are underway on selected contracts that have been identified for renegotiation.

MAS is currently negotiating with BAC towards a New Catering Agreement (“NCA”), targeted to be signed on or before 31 March 2015. The NCA will be based on international standards, taking into consideration a home-based caterer serving a home-based national carrier, and will be driven by mutually-agreed key performance indicators.

Pending the outcome of the negotiations on a NCA, MAS and BAC have on 27 February 2015 entered into a Settlement Agreement (“SA”) for an interim period from 1 October 2014 to 31 March 2015. The SA provides for:

1. A 25% reduction on monthly bills to MAS during the interim period
2. A settlement over disputed amounts owed to BAC, whereby MAS agrees to release to BAC a sum of RM37.95 million, which is less than the total monies amounting to RM94.03 million withheld by MAS due to the dispute

The SA will remain in force subject to a NCA being signed on or before 31 March 2015. Should a NCA not be concluded within the timeframe, MAS will look at alternative catering suppliers to service NewCo.  MAS Management is currently evaluating several options to ensure that in the event a NCA is not signed, there is no disruption to its current operations and that there is a smooth transition to NewCo.

6. Reskilling and redeployment

The CDC, which was previously named the Corporate Reskilling Centre (“CRC”), is currently putting in place the necessary structures and platforms in collaboration with various partners and stakeholders for it to commence operations by 1 April 2015.

The CDC will provide avenues and opportunities for the outplacement and reskilling of MAS staff not transitioning to NewCo. Exiting employees will have access to a broad range of services, which will include talent profiling, career counseling, basic and detailed training, job-seeking skills, entrepreneurship, retirement planning and placement.

The leadership of the CDC is on board, with Tan Sri Bashir Ahmad Abdul Majid as Chairman, Shahryn Azmi as CEO, and Dato’ Boonler Somchit as Non-Executive Director and Advisor. They were appointed to their respective positions on 1 January 2015.

7. Strengthening industrial relations

The Employee Consultative Panel (“ECP”) has held two meetings on 8 December 2014 and 17 February 2015, respectively, which were attended by all unions, employee associations and representatives from non-unionised staff.

Attendees at the first ECP meeting were briefed on the ECP’s terms of reference, and updated on the MRP, leadership announcements and talent assessment approach. Feedback was received and where feasible, addressed accordingly. The second ECP meeting involved discussions on the CDC, talent review programme, separation scheme, NewCo employment, and transition management.

The unions and employee associations that attended the ECP meetings were:

• Malaysia Airlines Pilots’ Associations (MAPA)
• Malaysian Airline System Managerial Staff Association  (MASMA)
• Malaysia Airline System Executive Staff Association (MESA)
• Malaysian Airline System Employees’ Union Peninsular Malaysia (MASEU)
• Sabah Executive Staff Association of Malaysian Airline System (SEAMAS)
• Sarawak Executive Staff Committee (SESC)
• Airlines Workers Union Sarawak (AWUS)
• Air Transport Workers’ Union Sabah (ATWUS)

The ECP is intended to help boost alignment between employees, unions and management, and to provide a platform for a genuine exchange of views and ideas through dialogue and collaboration.

MAS management has also gone-on-the-ground (“turun padang”) to meet with employees, as part of efforts to garner employee feedback and update them on various restructuring initiatives. So far, 33 turun padang sessions have been held since 14 August 2014.

Concurrently, all MAS staff are being regularly engaged and updated on the ongoing restructuring via in-house channels such as MAS’ intranet, newsletters, letters from the CEO and Chief Restructuring Officer (“CRO”), social media and through other direct outreach initiatives.

8. Right-sizing the workforce

The talent assessment exercise at MAS was completed on 2 February 2015. The comprehensive process which covered approximately 20,000 employees, took into account the employees’ past performance, experience, qualifications, behavioral traits, disciplinary records, functional competencies and aspiration to join NewCo.

The exercise also included the most senior 500 executives at MAS undergoing a three-hour behavioural interview with an independent consultant, while the remaining employees completed a competency talent review questionnaire, designed specifically for each category of staff.

Post-talent assessment, the process of identifying the pool of staff that meets NewCo’s requirements is in progress.

A separation scheme is also being developed, guided by principles that include recognition of the cessation of business, fairness to all parties, compliance to legal requirements, and financial constraints. The separation scheme should be viewed in relation to the outplacement and training services provided by the CDC to ensure minimal disruption to the livelihood of exiting employees.

A key priority is to ensure that airline operations continue smoothly. It is expected that there will be an operational transition period and the reduction in workforce numbers will be in stages, in tandem with operational transformation initiatives and readiness.

9. New operating business model and operational transformation

Based on further refinement of the NewCo business plan, a rationalisation in aggregate capacity in 2015 by more than 10% can be expected as NewCo focuses on more profitable domestic and regional routes. This short-term network consolidation is expected to enable a strengthening of the airline’s financial position, putting it on the right path to subsequently grow its capacity by a compounded annual growth rate (“CAGR”) of more than 5% per annum over the 2015-2020 period.

Specifically, NewCo plans to grow its domestic and ASEAN route capacity by 6-8% per annum and Asia-Pacific by 5% to build its Kuala Lumpur hub connectivity, while reviewing its European and Middle Eastern routes to focus on network contribution and profitability. Existing routes are therefore being carefully evaluated and where routes are not in line with these objectives, cancellations shall be considered.

The NewCo business plan is also being designed to realign fleet to network requirements. The choice of aircrafts deployed on these routes is a key contributor to the airline’s performance, and a recalibration of aircraft suitability would ensure optimisation of profitability while minimising costs.

Further refinement of the NewCo business plan continue to surface numerous operational transformation opportunities in many areas of the business, including sales and marketing, product, aircraft ownership and ground operations. Addressing these issues will result in material improvements in the operational performance of the group.

Realisation of these improvements is also dependent on NewCo’s success in executing these initiatives, which are being commenced. The restructuring effort will continue to explore opportunities for greater efficiencies as NewCo implements its business plan.

There are also contingency plans, as part of the business continuity plan, ready to be activated if the need arises in the transition from MAS to NewCo.

10. Consolidation at KLIA

The migration of staff from Subang to the Support Facility Building at KLIA is on track to begin in May 2015. This will include the migration of at least 1,300 staff from Subang to KLIA in stages. The renovation work at the Support Facility Building to support the staff transferred to the facility is ongoing, with overall progress at approximately 40%.

11. Strengthening assurance, integrity and safety

A Governance and Ethics Committee (“GEC”) was formed in December 2014, primarily to conduct a thorough, independent corporate governance review.  The GEC will help facilitate the strengthening of key control and operational systems, related to assurance and integrity functions. It is a sub-committee of the MAS Board, with members comprising Independent Non-Executive Directors.

MAS has consistently adhered to the International Air Transport Association (“IATA”) Operational Safety Audit (“IOSA”) programme, as part of its compliance with IATA membership requirements. Further to its commitment to continually improve customer experience, MAS will voluntarily adopt the Enhanced IATA Operational Safety Audit in March 2015. This is aimed at enhancing operational safety and security practices at MAS.

12. External support and interest in the MAS restructuring

Khazanah continues to receive interest from various entities seeking to participate in or complement the MRP. In this regard, Khazanah has received 36 business proposals to-date.

Khazanah has met and will continue to meet relevant submitting parties to discuss their proposals in detail. Khazanah conducts a rigorous evaluation process and will only evaluate and assess credible proposals with proven capability and resources. Furthermore, all proposals should not involve any break up of MAS assets integral to its function as the national carrier.

Overall, the progress shown thus far is in line with the specific timeline for the return of MAS to sustained profitability under the MRP, which is as follows:

• By the end of 2014: Complete the delisting of MAS and announce the leadership of the NewCo
• By 1 July 2015: The formal transition to the NewCo
• By the end of 2017: Three years from the delisting, for the NewCo to achieve profitability
• Between 2018 and 2020: Between 3 to 5 years from delisting for the NewCo to be relisted

ENDS

For further information on Khazanah, please visit www.khazanah.com.my or contact Mohd Raslan Md Sharif at +603 2034 0000, or e-mail at [email protected].

About Khazanah Nasional Berhad
Khazanah Nasional Berhad (Khazanah) is the strategic investment fund of the Government of Malaysia entrusted to hold and manage the commercial assets of the Government and to undertake strategic investments. Khazanah is involved in various sectors such as power, telecommunications, financial institutions, healthcare, aviation, infrastructure, leisure & tourism, property, creative & media, education, and innovation & technology. Some of the key listed companies in Khazanah’s investment portfolio include Telekom Malaysia Bhd, Tenaga Nasional Bhd, CIMB Group, Axiata Group Bhd, IHH Healthcare Bhd, Malaysia Airports Holdings Bhd and UEM Sunrise Bhd. For further information, please visit www.khazanah.com.my