Malaysia's government has agreed to a more than 6 billion ringgit ($1.6 billion) rescue of troubled national carrier Malaysia Airlines (MAS) to slash its huge debt burden.

The carrier, which was re-nationalised a year ago in a controversial buy-back, says that under the proposed deal the finance ministry will buy eight of its wide-body aircraft, in addition to property assets, through a special-purpose company. The items will then be leased back from the government.

The deal involves three existing Boeing 747-400s, three new 747-400s and two new 777-200ERs. The aircraft will be purchased by the government and leased back for 12 years in a transaction that will raise 3.9 billion ringgit for cash-strapped MAS.

Funds will be used to repay Japanese yen-denominated loans, for working capital purposes and to part-finance the purchases of the new aircraft.

The second part of the agreement involves 2.2 billion ringgit of property assets. As part of this transaction, the government intends, through another special-purpose company, to purchase the airline's headquarters building in Kuala Lumpur and other properties including buildings at Kuala Lumpur's old airport at Subang and new airport at Sepang. The properties will then be leased back.

MAS, which is struggling under a huge debt in excess of $2 billion, and which has posted losses for each of its past four financial years, says the aircraft disposals "would enable MAS to address its cashflow position and subsequently improve its net current asset position." It adds that the deals, which should be completed in the first half, "will raise funds for MAS Group to repay part of its bank borrowings and improve its balance sheet".

The losses at MAS have mounted alarmingly in recent years, and it is expected to post a net loss of around1.5 billion ringgit for the year ending March. At the same time, MAS says it is negotiating with a consortium including two local companies, as well as LSG Sky Chefs, to sell "at least 70% equity interest" in MAS Catering (MCSB).

Until now, Asian carriers have generally preferred to keep their catering operations in-house. But financial troubles appear to have prompted a change of heart at MAS. It says the consortium made an offer in December for 70% of the loss-making unit, but it hopes to sell all of it to the group. LSG Sky Chefs has a 40% stake in the consortium, with the balance held by the two local groups.

MCSB suffered losses in the 2001 financial year of nearly 80 million ringgit. It lost 41.5 million ringgit in 2000, and 26 million ringgit in 1999, but posted profits in 1997 and 1998. In addition to the government sale/leaseback deals, the finance ministry recently agreed to extend the airline's tax-exemption status for five years up to 2005.

MAS has been undergoing a wide-ranging restructuring since last year and hopes to return to profitability by the end of its 2003/4 financial year. This will be helped if six international routes it had suspended, but is now gradually reinstating, begin to perform.

Source: Airline Business