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Canceled hookup between Malaysia Airlines and AirAsia

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By DUNCAN MAVIN – THE WALL STREET JOURNAL

With the canceled hookup between Malaysia Airlines and AirAsia, employee unions at the national carrier are shooting themselves in the foot. For the low-cost airline, though, the abandoned deal is a dodged bullet.

The share swap announced last August was worth upwards of $360 million and saw Malaysia Air’s major shareholder—the state investment firm Khazanah Nasional Bhd.—take a 10% stake in AirAsia. In return, AirAsia’s top shareholder, Tune Air Sdn. Bhd., took a 20.5% share of the flag carrier.

But Malaysia Air’s main union leaned on the country’s politicians to squash the share swap because of concerns about cost cuts. Those fears were well-founded. Malaysia Air has been bleeding losses because of rising competition and soaring fuel prices. The tie-up was meant to reduce overlap between the two Malaysia-based carriers on some routes, cut expenses and help shore up Malaysia Air’s balance sheet.

Now the share swap is history, however, Malaysia Air’s employees could find they face even deeper cuts. The deal was a key to reviving “a very sick patient,” said the airline’s chairman, Tan Nor Yusof, in March. Without AirAsia on board, uncompetitive routes will still have to go and other cost-cutting measures will have to be found.

For AirAsia, though, the breakdown of the share-swap arrangement looks like a let-off. AirAsia now has no exposure to its rival’s weak results, yet it could still see some synergistic benefits as the two parties continue collaborating on certain operations, such as aircraft maintenance.

Also, Asia’s largest budget carrier—with a $3 billion market capitalization—should pick up more passengers as Malaysia Air cuts capacity. Already in the first quarter of 2012, AirAsia’s passenger traffic from Malaysia was up 12% compared with last year. Revenue was up sharply, and while net profit was down, that was mostly because the year-earlier figure was boosted by one-time foreign-exchange gain.

AirAsia’s shares have lost about a quarter of their value since the swap was announced last year. There is room to rise. On a forward-price-to-earnings basis, the shares trade at a valuation about 20% lower than the average for AirAsia’s global peers, according to OSK Research analyst Ahmad Maghfur. Without the drag from a failing government-owned national carrier, that discount looks wide of the mark.