CASE STUDY 3:

CAPITAL STRUCTURE - THE SURVIVIAL OF MALAYSIAN AIR LINES

QUESTION 1
Discuss the facts of the case
The case study is all about the survival of Malaysian airlines toward their capital
structure. Capital structure is a mix of a companys long term debt, specific short term
debt, common equity and preferred equity. It is about on how a firm finances its overall
operations and growth by using different sources of funds.
Malayan airways limited (MAL) was incorporated pass 12 October 1937, in the golden
age of commercial air travel when a joint initiative of the ocean steamship company of
Liverpool, the Straits Steamship of Singapore and Imperial Airways led to a proposal to
the Colonial Straits Settlement government to run an air service between Penang and
Singapore. The airline had changed its name to Malaysian airlines limited after the
formation of Malaysia in 1963. The groups business comprises of two business
segments, traffic and others. Traffic services comprises of passenger, mail and cargo
transportation while other revenue is generated through the lease of aircraft and
engines, airport handling and engineering services, catering and cleaning services and
charter services.
Malaysia airlines earned a record breaking with amount RM319 million profits in
financial year for year 1996/1997. However, due to poor management and fuel price
increases, MAS descended into a period of continual losses of as much as RM260
million in 1997. But the company still continued operating in losses from 1998 to 2004.
In accordance, there is one company that founded to restructure the airline under a
financial restructuring programme called Widespread Asset Unbunding (WAU). As a
result, on that year, Khazanah Nasional, the Malaysia governments investment arm
became Malaysia airlines parent company. Furthermore, Malaysia airlines unveiled its
business turnaround plan (BTP) in February 2006, which identified low yield, an

inefficient network and low employee productivity. A part from that, Malaysia airlines also
rescheduled all of its flight timing and changed its operations model from point-to- point
services to hub- and- spoke-services.
Currently, Malaysia Airlines System Bhd. Facing a big issues as their two plane disaster
in 2014. This accident give high impact to the company as they need to cover
everything loss. These tragedies become a big issue and the management had decided
to restructure back their capital. A lot of expenses have been use in order to cover the
maintenance in that accident. In Malaysian Airliness statement, private ownership will
give the parent company room to introduce an appropriate capital structure to meet the
airlines substantial funding requirements in the next few years and to sustain
operations amid a high level of debt.

QUESTION 2
What is your comment on the performance of MAS and what are the main factors
leading to their losses
Regarding to the statement in this case, its shows that MAS try to act far as they know
their capabilities in manage the airbus company. Although the company reveal to some
financial problem, they still able try to wake up and doing some positive action in order
to solve their problem. Besides that, MAS are surviving to take any risk although they
know at that time them already loss too much. Furthermore, MAS should be more
compliments to new economy environment in the world especially in Malaysia and do
more research and development to achieve a greatest service satisfaction by each of
their passenger.
There are some factors leading to their losses:
1. The price for fuel is a major cost component for airlines need to faces. It is not only
continued to stay stubbornly high but showed an upward trend as the year progressed.
For example, for the fuel rose from USD99 per barrel in the fourth quarter of 2010 to
USD134 per barrel in the fourth quarter of 2011. The fuel expenditure of the Group rose
33%, equivalent to RM1.46 billion compared to the previous year. Thus, this show that it
totally increases and the airlines need to spend more cost to this matter.
2. Next is, the impact of a weak global economy, particularly in Europe, resulted in fewer
people travelling by air. This also plays an important role in increases the use of airlines
as the passenger will travel using the airlines. According to International Air Transport
Association (IATA) reported that Asia-Pacific airlines revenue was expected to a fall
between 5-10% in 2011 due to the economic uncertainty and rise in fuel prices. In 2011,
Malaysia Airlines revenue increased by a marginal of 2% to RM13.90 billion, however,
still below the 17.1% increased recorded in 2010, reflecting the IATAs doubt. The higher
fuel costs and lower demand in North Asia in 2011 as resulted from the Japan tsunami

and low demand on flights operating from the Kota Kinabalu hub meant that revenue
was not able to reflect the higher costs of flying passengers
3. Moreover, natural disaster in neighboring is one of the causes that make passengers
think twice to travel to that place. They afraid if something bad happen so they only
choose not to travel using the airlines. Besides, MAS also had planned for the
expansion in 2010, but it was failure, thus this effect a little bit to the company.
4. Furthermore, MAS also was exposed to the risk of defaulting on its financial
obligations by having 90.9% debts. So this is very high in debt for this company as they
could not manage well the financial obligation. In 2011, MAS liquidity ratio is only at 0.39
which showed that MAS has less ability to turn short-term assets into cash to cover its
debts.

QUESTION 3
Explain elements of capital structure and how does it solve MAS problems.
Discuss
Capital structure refers to a companys outstanding debt and equity. It allows a firm to
understand what kind of funding the company uses to finance its overall activities and
growth. In other words, it shows the proportions of senior debt, subordinated debt and
equity (common or preferred) in the funding. The purpose of capital structure is to
provide an overview of the level of the companys risk. As a rule of thumb, the higher the
proportion of debt financing a company has, the higher its exposure to risk will be.
The element of capital structure involved of:
1) Capital mix firms have to separate about the mix of debt and equity capital. Debt

capital can be mobilized from a variety of sources.

2) Maturity and priority, the maturity of securities used in the capital mix may

differ. Equity is the most permanent capital. Within debt, commercial paper has
the shortest maturity and public debt longest. Capitalized debt like lease or hire
purchase finance is quite safe from the lender point of view and the values of
assets backing the debt provides the protection to the lender.
3) Terms and conditions firms have choices with regard to the basis of interest

payments. They may obtain loans either at fixed or floating rates of interest in
case of equity, the firm may like to return income either in the form of large
dividends or large capital gains.
4) Currency firms in a number of countries have the choice of raising funds from

the overseas markets.

5) Financial innovations firms may raise capital either through the issues of simple

securities or through the issues innovative securities. Financial innovations are

intended to make the security issue attractive to investors and reduce cost of
capital.
6) Financial market segments there are several segments of financial markets

from where the firm can tap capital. For example, a firm can tap the private or the
public debt market for raising long-term debt. The firm can raise short term debt

either from banks or by issuing commercial papers of certificate deposits in the

money market.
All these elements of capital structure had help the MAS in solve their problem, for
example, first, Malaysia Airlines (MAS) proposes to launch a Sukuk programme (bond)
of up to RM2.5 billion to shore up its capital base, and the proposed programme is
currently pending regulatory approvals. MAS also have received abridging loan of RM1
billion from a local commercial bank on 30th March 2012 to ensure their working capital
cash balances remain adequate until the expected drawdown of the first tranche of the
proposed Sukuk. Next is, MAS could lease new aircraft from an external entity that give
full trustfully to them. Besides, MAS obtain commercial funding of aircraft capital
expenditure (capex) from commercial sources, such as operating leases, finance leases
and commercial debt.
In other word, MAS has been through several restructures since it was returned from an
unsuccessful sale to entrepreneur Tajudin Ramli in 2001. The Malaysian state
investment agency Khazanah is now facing another restructure of the struggling carrier.
The airline is a repeated loss maker and needs a major fleet overhaul to replace the
aging Boeing 777-200 aircraft. The choice of Khazanah as one of their sources is highly
stark. ASEANs open skies opens new market possibilities in the coming years, but
MAS has little prospect of bridging the cost gap with its low cost regional competitors to
capture that opportunity. Without some radical trimming of its cost base and an
aggressive repositioning of the MAS brand, it seems unlikely that a further capital
injection could be justified on any basis other than the desire to retain MAS as a flag
carrier.