How will MH370 compensation payouts affect MAS liquidity and costs?

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MH370 Compensation Payouts and Their Impact on MAS Liquidity and Costs

Compensation payouts to the families of those lost on Flight MH370 are expected to strain Malaysia Airlines' (MAS) financial liquidity and potentially increase its operational costs. While the exact figures for these payouts are yet to be determined and the aircraft was insured, the airline is anticipated to bear the initial financial burden, particularly for public relations reasons. This situation arises amidst an already challenging financial environment for MAS, characterized by several years of negative operating cash flow and a high cost base.
Payouts Likely to Impact Liquidity and Increase Cost of Funds

While specific payout amounts are not yet established, and insurers like Allianz have begun processing claims, MAS is expected to absorb the initial financial impact. This will likely affect the airline's liquidity, potentially necessitating an injection of more funds for capital expenditure programs and even day-to-day operations. Furthermore, the incident is projected to considerably increase the cost of borrowing for MAS, even with its sovereign guarantee, as perceived risk rises.
Existing Financial Pressures on MAS

Prior to the MH370 incident, MAS was already facing significant financial headwinds. The airline had a negative operating cash flow for three consecutive years and a negative free cash flow for six years. Its cash and short-term investments at the end of December were less than its average operating costs for the preceding two quarters, signaling a potential need for fresh funding or bank loans.
Expected Decline in Bookings and Further Financial Strain

Bankers and analysts anticipate that the loss of Flight MH370 will negatively impact bookings for MAS. This decline, coupled with existing high cost structures, is likely to lead to further financial losses, potentially exceeding those recorded in 2013. Credit Suisse forecasts an additional three years of losses for MAS, underscoring the severity of the anticipated financial strain.
Restructuring Needs and Potential Obstacles

The MH370 accident is expected to accelerate the downward trend observed at MAS for years, highlighting the urgent need for restructuring. However, potential obstacles to significant restructuring, particularly concerning employee costs, are likely to emerge. Labour unions, which have previously rejected share swap deals, could pose a primary stumbling block to implementing necessary cost-cutting measures.

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How will MH370 compensation payouts affect MAS liquidity and costs?

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