‘Prepare for lending’

THE Covid-19 pandemic is a problem that refuses to go away, at least for AirAsia Group Bhd.

The airline is now seeking Putrajaya’s help in the form of a government guarantee for a proposed cash-raising exercise to refinance costly pandemic-era obligations.

The low-cost carrier (LCC) plans to seek up to US$1bil from the international debt market and RM700mil in local credit facilities. This is on top of the RM1bil it raised in March via a private placement exercise.

The guarantee sought would only be for part of the whole sum, sources tell StarBiz 7.

To be clear, AirAsia is not seeking cash funds from the government, it will raise it by itself from investors and/or creditors.

Nevertheless, the government guarantee is a financial commitment where a public agency promises to cover a borrower’s debt or obligation if a default occurs.

The Finance Ministry (MoF) is reported to have appointed Alton Aviation Consultancy to look at the request. Assuming Putrajaya agrees to the request, the guarantee would act as a sweetener and give investors and lenders more confidence that they would get their money back even if the carrier’s fortunes turn for the worse.

At the same time, it could help AirAsia get an improved interest rate on the money raised.

After all, Putrajaya’s financial appeal among international investors has improved in recent times. A recent US$1.5bil bond issue (consisting of two tranches) by the federal government in July attracted strong international investor demand. It was oversubscribed by 4.5 times and upsized and priced at 15 to 25 basis points above US Treasuries.

This proposed corporate exercise has again raised the issue of a “too big to fail” enterprise, much like its full service industry peer Malaysia Airlines more than a decade ago when it ran into financial difficulties.

History of support

The rescue of Malaysia Airlines over the decades have cost Khazanah Nasional Bhd billions.

Thankfully, the national flag carrier has become operationally profitable with a relisting on Bursa Malaysia being planned.

But Malaysia Airlines is not the only other case. Government rescues of entities in corporate Malaysia every few years have become a common occurrence and caused taxpayer fatigue and suspicion.

Unsurprisingly, there will be some public pushback on the carrier’s request despite AirAsia’s role in the aviation ecosystem and wider economy.

“In considering the fiscal pressures on the government’s balance sheet, AirAsia must exhaust other options first, including assistance from shareholders, before approaching the government for the guarantee,” says Lee Heng Guie, Socio-Economic Research Centre executive director and economist.

“As AirAsia holds about 60% of Malaysia’s domestic aviation market, its survival is a critical question of preserving economic connectivity and ensuring national economic stability.

“Its collapse would undermine the domestic air travel ecosystem, including the supply chains and related airline services such as downstream hospitality, retail and logistics.

“The carrier acts as a primary funnel for both domestic in-bound travellers and regional and international visitors, which is indispensable for campaigns like Cuti-Cuti Malaysia and Visit Malaysia.

“Hence, its exit could see KLIA Terminal 1 and KLIA Terminal 2 lose their position as a major regional and international aviation hub,” he added.

Malaysia, rightly or wrongly, has been the one country where the authorities (including influential voices in powerful places) picked volume of air passengers from lowered prices over value of air travel from market prices. AirAsia was a key enabler in achieving that goal.

There is a real economic case for AirAsia, given its infrastructure and connectivity argument where it flies into secondary cities in Sabah and Sarawak that other carriers underserve.

It employs a large workforce directly and through its maintenance and engineering ecosystem. AirAsia is, therefore, a legitimate economic externality argument, akin to the reasoning used elsewhere in the world for backstopping national or quasi-national carriers.

Rivals like Air Borneo, Malaysia Airlines and Batik Air could take some of the market share of the group, but it will take time to fill the air space AirAsia has taken up in the past two decades or so.

That said, a government guarantee, however, is not inherently gentler than the cash injection made to save Tabung Haji and Sapura Energy Bhd in recent times.

“While there is no upfront fiscal outlay, it understates the tail risk, particularly given this would be AirAsia’s second attempt at a government-guaranteed facility. The earlier attempt reportedly failed when the carrier’s founders were asked for personal guarantees.

“It is understandable that the government has adopted a cautious approach,” says Professor Yeah Kim Leng, director of Economics Studies at the Jeffrey Cheah Institute on South-East Asia.

Another perspective is to ascertain whether a market-led alternative such as debt-to-equity conversion by creditors, a rights issue, or a strategic investor is genuinely unavailable before assuming government backing as the only route.

The government also has to consider the risk of competitive distortion versus Batik Air and Malaysia Airlines if one carrier gets state-backed cheap capital and others don’t.

Other considerations include the fiscal-space and sovereign-rating impact of stacking contingent liabilities arising from multiple bail-outs of “too big to fail” entities.

A text book case

Governments stepping in to provide support for companies in trouble is quite normal. This is more so when the business or businesses are considered strategic to national interests or critical for economic stability.

This practice is often referred to as industrial policy. Intel Corp was effectively “rescued” by the White House in August last year by converting Chips Act subsidies and Secure Enclave programme funding into an US$8.9bil equity investment, giving the US government a 9.9% stake in the semiconductor manufacturer.

It also pumped in US$400mil into rare-earth miner MP Materials as part of an effort to loosen China’s grip on magnet supply chains.

Even now, Putrajaya is providing loan guarantees to cash-strapped companies, especially small and medium enterprises (SMEs), to ease access to financing when banks are reluctant due to high risks, especially during the ongoing Middle East conflict.

Syarikat Jaminan Pembiayaan Perniagaan Bhd (SJPP), a government-owned company under the Ministry of Finance Inc, provides schemes like Government Guarantee Scheme Madani (GGSM) and Working Capital Guarantee Scheme (WCGS).

Yeah said SJPP’s GGSM and WCGS schemes are rules-based, apply broadly across SMEs, subject to pricing in the form of guarantee fees, administered at arm’s length from politics, and are closer to a standing infrastructure for credit markets than a rescue.

They are already systemic and have been running for years without triggering a wave of moral hazard because eligibility and pricing are standardised.

Risk concerns are stronger for large and politically visible companies as it reinforces the expectation among other large, connected or “too visible to fail” firms that distress can be renegotiated with the government rather than resolved through creditors, equity dilution, or insolvency.

The way to keep it from becoming a habit is to make each intervention publicly costly to existing shareholders and management, rather than a soft landing.

The government appears to have learnt some lessons from the past. Last year, Putrajaya pumped RM1.1bil into Sapura Energy (now Vantrix Energy Bhd) but the funds were structured as a repayable loan.

The money was earmarked to settle debts owed to about 2,000 local oil and gas vendors.

A few years earlier, the government used tens of billions of ringgit to rescue Tabung Haji and Federal Land Development Authority or Felda from financial problems and mismanagement.

The list is long.

National oil company Petroliam Nasional Bhd has been called upon to rescue companies like Bank Bumiputra, Perwaja Steel, national car maker Proton and Konsortium Perkapalan Bhd, as well as underwrite projects like the KLCC Twin Towers and development of Putrajaya.

Such interventions have had mixed outcomes.

Perwaja failed despite government efforts while Proton appears to have turned around with help from China’s Geely. While both involved state support, the difference is what came with the money.

Perwaja was repeatedly recapitalised without a change in governance, technology, or market discipline, Yeah explains. The state kept refilling the tank without fixing the engine.

Proton’s recovery came after Geely took a sizeable 49.9% stake, brought platforms and technology that Proton didn’t have, and DRB-Hicom Bhd retained enough skin in the game that both partners had something to lose.

Sales went from a 15-year low of about 64,700 units in 2018 to roughly 158,000 in 2025 on the strength of actual new car models built on Geely platforms, which is a genuine operational turnaround, not just a balance-sheet patch up.

“With AirAsia, the government support needs to be paired with a party who has real capital and real authority at risk, not just government money layered on top of an unchanged capital structure.

“AirAsia’s low-cost short-haul model was profitable and expanding before Covid-19. It looks less like Perwaja’s structural non-viability and more like a leverage and liquidity crisis.

“That’s arguably more fixable, but only if the rescue forces an actual capital-structure fix with new equity, real creditor haircuts and disciplined governance, rather than just extending the runway on the same debt load,” says Yeah.

Internationally, governments have backed distressed airlines in many ways. Singapore backed Singapore Airways (SIA) through its sovereign wealth fund Temasek Holdings as an equity holder and not an arm’s-length guarantee,

Thai Airways and Garuda Indonesia went through court-supervised restructuring rather than guarantees, while the United Kingdom and France used guarantee/loan schemes for airlines during the pandemic with strings attached.

The Malaysian government doesn’t hold equity in Capital A Bhd or AirAsia the way Temasek does in SIA, which arguably makes a plain guarantee a reasonable middle path.

However, it also means the state has less leverage to enforce discipline than an owner would, which is why the conditions attached matter more.

The support for AirAsia will be a case of “how” rather than “whether”, Yeah explains.

Both economists agree that if Putrajaya proceeds to support AirAsia, the conditions could include a capped, ring-fenced guarantee such as a specific instrument, a specific ceiling and seniority terms that don’t leave the government picking up losses ahead of other creditors.

The guarantee fee should be market-based and not a subsidised one and “real skin in the game” from existing shareholders such as fresh equity or personal guarantees as public money is involved.

Given AirAsia’s higher leverage, a binding deleveraging and restructuring plan with milestones, independent monitoring, and consequences if missed, could be included in the negotiation list.

In addition, a moratorium on dividends, buybacks, and executive bonuses until the guarantee is retired or leverage targets are hit could be added.

Yeah would also like to see possibly warrants or an equity kicker so taxpayers share in upside if the restructuring works, rather than bearing the downside risk for free.

StarBiz had reported that the government is seeking two board seats as conditions for the backing. If agreed to by the LCC, Lee says the board seats must be filled by professionals and experts in the aviation industry to give the government greater oversight over its strategic direction.

“The government must treat this strictly as an isolated, exceptional case based on the airline’s national economic connectivity’s irreplaceable contribution, to prevent setting a precedent and moral hazard,” Lee adds.

The scale of AirAsia

AirAsia currently has a fleet of 239 planes and moved over 14 million passengers across its operations in the region in the recent second quarter of financial year 2026 (2Q26).

AirAsia reported an operating net loss of RM831mil for 2Q26 mainly due to high fuel costs and foreign exchange losses. Revenue per available seat-km (ASK) was 21.28 sen while cost per ASK was 22.72 sen based on its exchange filings.

Total equity is negative at RM606mil, but this is an improvement from RM2.6bil negative equity at the end of 2025. Cash and bank balances increased to RM954mil from RM635mil at the start of the year, indicating improved liquidity but net current liabilities of RM14.5bil pose a significant risk factor.

The negative equity makes the carrier quite unattractive to banks for financing, which is probably why it requested a government guarantee.

Its 2Q26 revenue hit RM5.09bil while staff payroll expense amounted to RM563mil, with the company estimated to support over 300,000 direct and indirect jobs. Hence, a collapse or operational paralysis would have an impact across the nation.

The resulting route disruptions, soaring air fares and immediate loss of international visitor spending would severely impair Malaysia’s hospitality and logistics sectors. This systemic weight explains why any intervention must consider the airline’s financial resilience.

The operating loss for the period was primarily driven by external cost shocks, currency pressures and heavy structural fixed overheads.

To its credit, despite a 20% reduction in capacity quarter-on-quarter, revenue only declined by 15% in 2Q26 but fixed costs remained high.

Financial year 2026 will likely see AirAsia post losses.

Jet fuel prices look set to remain on the high side. BMI, a Fitch Solution company, recently revised its global average jet fuel forecast upward to US$139.70 a barrel for 2026, citing prolonged Middle Eastern conflicts, regional refinery outages and elevated jet-Brent crack spreads.

There may be some relief in prices once the holiday season is over in the northern hemisphere towards the end of the 3Q26.

Although spot benchmarks in Singapore are projected to ease toward US$96/bbl into 2027, residual risk premiums and refining supply constraints ensure that fuel will remain well above historical averages over the next 12 to 18 months.

Its currency losses for the quarter topped RM330mil and will likely remain a pain point as the US dollar continues to strengthen against regional units since its cost base is in the greenback.

Despite the noise the news of the government guarantee has raised, AirAsia is not on the verge of immediate collapse.

But its turnaround depends on normalising jet fuel crack spreads and successfully executing its capital-raising initiatives.

For an aviation analyst, the US$1bil and another RM700mil proposed money could be short of what the carrier may actually require.

“Revenue is unlikely to be higher when airplanes are being returned, sold or similar. Current liabilities (due in 12 months or less) are already four times bigger than the talked about amount sought.

“So, yes, probably the founders of AirAsia will be asked to invest another few hundred million at least,” he said.

Co-founders Tan Sri Tony Fernandes and Datuk Kamarudin Meranun control AirAsia indirectly via Capital A, Tune Live and Tune Air with a total deemed interest of about 31%. Despite a world renown brand name, the company still lacks substantial institutional shareholders.

The airline has not replied to queries at press time.