Malaysia Weighs Rival Airlines as AirAsia's Finances Come Under Strain

Malaysia's government has held discussions with Malaysia Airlines and Batik Air about whether they could take over AirAsia's domestic market share, according to people familiar with the matter, as authorities keep a close watch on the financial health of Southeast Asia's largest low-cost carrier.

The talks, described as scenario planning, have picked up in recent weeks amid mounting concern over the financial pressures facing AirAsia. The finance ministry and state-linked airport operator Malaysia Airports Holdings Berhad (MAHB) are involved, the people said.

Among the options discussed is some form of government endorsement to support AirAsia's efforts to raise fresh capital from outside investors, though the precise nature of any support remains unclear.

Malaysia Airlines and Batik Air have told the government they would only take over AirAsia's operations on a large scale if they could also assume its aircraft leases, one person said. Absorbing routes and passenger volumes without the planes would be far more difficult. Both carriers have indicated a preference for expanding organically to pick up AirAsia's routes and passengers rather than acquiring the whole business.

AirAsia has said it accounts for roughly 40% of Malaysia's overall aviation market and 60% of domestic flying, making its troubles a 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, adding that material updates are disclosed through official exchange filings. He said AirAsia remains focused on maintaining business continuity and stable operations across its markets and continues to see strong underlying demand, while working closely with stakeholders to manage its financial and operational requirements.

Shares in AirAsia and affiliated company Capital A both fell 5.5% in early trade on Thursday, after Malaysian financial markets were closed on Wednesday for a public holiday.

MAHB said it regularly engages with all airline partners as part of normal network and route development, including on potential capacity and route opportunities where there are gaps or unmet demand. It declined to comment on AirAsia's financial outlook.

Batik Air Malaysia CEO Chandran Rama Muthy said in a statement that his airline was able to bring in aircraft quickly to absorb or help with domestic market share if required. The airline declined further comment. Malaysia's finance ministry and Malaysia Airlines declined to comment.

AirAsia, which had current liabilities of 18.4 billion ringgit ($4.51 billion) as of June 30, 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. MAHB declined to comment on specific queries, saying it does not discuss commercial arrangements with airline partners as a matter of practice. AirAsia did not address queries on whether it owed money to MAHB but said it had 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 discussions 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 with knowledge of the matter estimated the airline required at least $3 billion of fresh capital to address its financial position. AirAsia said its financing targets were sufficient to meet its requirements. The airline had cash and bank balances of 954 million ringgit as of June 30.

AirAsia reported a net loss of 831 million ringgit for the second quarter ended June 30, hit by rising jet fuel costs and heavy foreign-exchange losses of 331 million ringgit. Jet fuel prices surged 66% in the second quarter from the prior quarter to an average of $183 a barrel, driven by the U.S.-Israeli war on Iran.

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