<![CDATA[Does the Singapore Airlines and Malaysia Airlines partnership clear the runway for a future merger?]>

Malaysia Airlines (MAS), the Southeast Asian nation's struggling flagship carrier, has unexpectedly agreed to explore a wide-ranging partnership on flights, cargo and aircraft maintenance with one of its fiercest rivals " Singapore Airlines (SIA) " in a move analysts say could herald a potential merger.

The announcement on Thursday harked back to their past " they were once one company, Malaysia-Singapore Airlines, but split in 1972 after Singapore separated from Malaysia seven years earlier.

But it also comes as MAS struggles to stay afloat while Singapore Airlines remains highly profitable, revealing how starkly their fortunes have diverged.

The Singapore Airlines Group " which includes flagship carrier SIA, regional unit SilkAir and low-cost carrier Scoot " has more than 210 aircraft, carried 35.5 million passengers last year and generated close to US$12 billion in revenue.

SIA has won numerous airline accolades and is best known for its luxury service, which includes the world's longest non-stop flight " a 19-hour trip from Singapore to Newark, New Jersey.

In contrast, MAS was bleeding cash for years and was nationalised with an injection of 6 billion ringgit (US$1.45 billion) in 2014 by Khazanah Nasional, Malaysia's sovereign wealth fund. Today, it is under pressure from budget carriers and its reputation is still stained by the twin tragedies that took place over five months in 2014, when flight MH370 disappeared and flight MH17 was shot down over Ukrainian airspace.

MAS " along with its smaller subsidiaries MASWings and Firefly " carried 16.1 million passengers in 2018. The company currently has 113 planes in service, made up mostly of single-aisle Boeing 737s and turboprop jets to serve domestic and regional routes.

A Malaysia-Singapore Airlines aircraft before the carrier split in 1972. Photo: Handout alt=A Malaysia-Singapore Airlines aircraft before the carrier split in 1972. Photo: Handout

The Malaysian government has been weighing whether to shut down the MAS group, and earlier this week Prime Minister Mahathir Mohamad said a sale was likely as long as the carrier's national identity was retained.

In their joint announcement, the airlines said their new partnership could see "wide-ranging cooperation", with their existing code-share agreement for flights between Singapore and Kuala Lumpur " where each airline sells tickets for either carriers' service " expanding to other countries. They would also offer rewards to each other's frequent fliers.

MAS and SIA said the plan was for a formal agreement to be finalised soon subject to regulatory approvals, and it would include their subsidiaries.

Aviation consultant Shukor Yusof of Endau Analytics said in a report that the deal could be seen as politically significant if Mahathir had given the green light, for it would "mark a major shift" in the premier's feelings and attitude towards Singapore.

Mahathir, who also served as prime minister from 1981 to 2003, is widely regarded as harbouring hawkish attitudes towards Malaysia's southern neighbour, which was part of the same country before being expelled in 1963. Soon after he returned to power in 2018, the two countries became involved in disputes over airspace and overlapping port boundaries, although these have largely been resolved.

Politics aside, the deal meant the airline was at less risk of being sold, Shukor said.

"No right-thinking government will want to jeopardise the prospect, no matter how remote, of [MAS] being rejuvenated," he wrote. "Moreover, the [partnership] has the potential to deliver wonderful things to the signatories, more specifically to SIA, with its solid resources (cash, fleet and brand name), and the wherewithal to fully exploit the booming Southeast Asian market."

Shukor said by working together, SIA and MAS would be "well-positioned" to fend off the growing dominance of Malaysia-based low-cost carrier AirAsia by offering a wider range of more competitive fares.

The deal comes as MAS submits its turnaround plan to its financial backers. Speaking to This Week in Asia earlier this month, chief executive Izham Ismail said the carrier would remain a full-service airline while trying to claw back market share from its low-cost carrier rivals.

He said it made sense to work more closely with partners who were offering the same products: "Why compete when we can collaborate [while] at the same time benefiting consumers and respecting antitrust rules?"

MAS already has a deal with Japan Airlines to jointly operate flights between Kuala Lumpur and Japanese cities, with plans to collaborate on cargo, airport ground handling and staff training.

Brendan Sobie, CAPA Centre for Aviation's Singapore-based chief analyst, said MAS was taking the right strategic steps to shore up its business with new partners to better compete.

"It is not clear how deep these will go, [but] the new partnerships will generally enable MAS to compete more effectively in an extremely challenging environment " both in its home market and regionally within the Asia-Pacific," Sobie said.

The forging of close bonds would "naturally start speculation" SIA could be the investor MAS was looking for and the Malaysian government was seeking, but the analyst poured cold water on it.

"There would be so many challenges that would need to be overcome to make that a serious option," he said.

While Thursday's announcement has caused ripples among aviation sector analysts and boosted speculation of a potential merger, one analyst shocked his peers by publicly saying as much last month.

Working together, Singapore Airlines and Malaysia Airlines would be "well-positioned" to fend off the growing dominance of Malaysia-based low-cost carrier AirAsia, according to an analyst. Photo: AFP alt=Working together, Singapore Airlines and Malaysia Airlines would be "well-positioned" to fend off the growing dominance of Malaysia-based low-cost carrier AirAsia, according to an analyst. Photo: AFP

Maybank Kim Eng Securities associate director Mohshin Aziz had said MAS should put national identity aside and merge with SIA to survive and thrive. His comments were panned by netizens on social media, who described it as "wishful thinking". Some attacked the character of the analyst for making a bold prediction, while others said it would never happen due to the heavy losses, powerful union, national pride and political uncertainty.

Mohshin declined to comment on the latest developments. An analyst who shared the same views, but who declined to be named, said a merger was a sensitive topic because it meant the blurring of national identity "in the name of business".

This has been true in Europe where Air France and KLM became part of a larger Franco-Dutch airline group in 2004 and British Airways and Iberia became the last of the continent's big airlines to join forces in 2010. The rocky start for the latter " thanks to Spanish national pride " has since been overcome.

"[But] in the name of business, in the name of pragmatism, you have to put all your nationalistic feelings aside because it's a global business at the end of the day," the analyst said, adding that the agreement for both airlines to explore closer cooperation was good news.

"Here we have MAS and SIA, from the fiercest competitor countries you can imagine. [With this agreement] you can say that finally we've matured, and are thinking pragmatically. It's a good day for the industry."

Additional reporting by Tashny Sukumaran

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This article originally appeared on the South China Morning Post (SCMP).

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