Malaysia Weighs AirAsia Contingency as Rival Carriers Sound Out Route Absorption

Malaysia's government has approached Malaysia Airlines and Batik Air to gauge whether they could take on AirAsia's domestic market share, according to people familiar with the discussions, in what they described as contingency planning while authorities track the financial condition of Southeast Asia's largest low-cost carrier.

The conversations, which have picked up in recent weeks, involve the finance ministry and state-linked airport operator Malaysia Airports Holdings Berhad (MAHB). They form part of a wider set of options being weighed as pressure builds on AirAsia, the people said.

Among the alternatives discussed is some form of government endorsement to strengthen AirAsia's push to raise capital from outside investors, though the precise shape of any support remains undefined.

According to one of the people, both Malaysia Airlines and Batik Air have indicated they would only take over AirAsia's operations on a large scale if they could also assume its aircraft leases, since absorbing routes and passenger volumes without the planes would be considerably harder. Both carriers have told the government they would prefer to expand organically to pick up AirAsia's routes and passengers rather than buy the business outright.

AirAsia has said it accounts for roughly 40% of Malaysia's overall aviation market and 60% of domestic flying, making its difficulties a matter of significant concern for the government.

Farouk Kamal, deputy group CEO of AirAsia Group, said the airline does not comment on operational or financial speculation or unannounced corporate arrangements. He said material updates on business and fleet strategy are disclosed through official exchange filings and corporate announcements at the appropriate time.

"We also wish to reiterate that AirAsia remains focused on maintaining business continuity and stable operations across all its markets and we continue to see strong underlying demand across our network," he said, adding that the airline is working closely with stakeholders to manage its financial and operational requirements.

MAHB said it engages regularly with all airline partners as part of normal network and route development, including on potential capacity and route opportunities where market gaps or unmet demand exist. It declined to comment on AirAsia's financial outlook. Malaysia's finance ministry, Batik Air and Malaysia Airlines declined to comment.

AirAsia had current liabilities of 18.4 billion ringgit ($4.51 billion) as of June 30 and owes MAHB at least 500 million ringgit for services including landing and parking fees, according to the people and two others. The airport operator has already granted the carrier repayment extensions, two of them said. All declined to be identified because the discussions are private.

MAHB said it does not discuss commercial arrangements with airline partners as a matter of practice. AirAsia did not address questions about whether it owed money to MAHB but said it has a strong and constructive relationship with key partners, including MAHB Chief Airports Officer Bryan Thompson and his team.

AirAsia said this month it was advancing talks with financial institutions, targeting up to $1 billion from international debt markets plus 700 million ringgit in local credit facilities, primarily to restructure its debt. Two people familiar with the matter estimated the airline needs at least $3 billion in fresh capital to address its financial position. AirAsia said its financing targets are sufficient to meet its requirements. It held cash and bank balances of 954 million ringgit as of June 30.

The carrier reported a net loss of 831 million ringgit for the second quarter ended June 30, hurt by rising jet fuel costs and foreign-exchange losses of 331 million ringgit. Jet fuel prices averaged $183 a barrel in the second quarter, up 66% from the previous quarter, amid the U.S.-Israeli war on Iran.

AirAsia has been restructuring aggressively, cutting underperforming routes, returning 25 older aircraft to lessors and renegotiating vendor contracts to lower costs. The finance ministry has hired Alton Aviation Consultancy to assess AirAsia's funding needs as it considers whether to extend support, given the airline's role as a major employer and provider of affordable air connectivity in the region. The ministry declined to comment, while Alton did not respond to a request for comment.