Discussions between the government and Malaysia Airlines and Batik Air have increased in recent weeks, the people said, amid growing concerns over financial pressures faced by AirAsia.

The airline has been hit by soaring jet fuel costs stemming from the US-Israeli war on Iran that surged 66 percent in the second quarter from the prior quarter to an average of US$183 a barrel.

The talks, which involve the finance ministry and state-linked airport operator Malaysia Airports Holdings Berhad (MAHB), are part of broader scenario planning around AirAsia's financial strains, the people said.

Other options that have been discussed include the government providing some form of endorsement to bolster the airline's plan to raise fresh capital from external investors, though the exact nature of any potential support remains unclear, Reuters reported this month.

Reuters was unable to independently establish details about AirAsia's financial picture.

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Malaysia Airlines and Batik Air told the government they would only take over AirAsia's operations on a large scale if they could also assume its aircraft leases, one of the people said, as absorbing its routes and passenger volumes without the aircraft would be far more difficult.

Malaysia Airlines and Batik Air have both expressed to the government their willingness to expand organically to absorb AirAsia's routes and passengers rather than acquire its whole business, the people said.

AirAsia has said it commands about 40 percent of Malaysia's overall aviation market and 60 percent of domestic flying, making its financial challenges a significant concern for the government, the people interviewed by Reuters said.

Farouk Kamal, deputy group CEO of AirAsia Group, said in a statement that the airline does not comment on operational or financial speculation or unannounced corporate arrangements.

"All material updates regarding our business and fleet strategy are disclosed transparently through official exchange filings and corporate announcements at the appropriate time," he told Reuters.

"We also wish to reiterate that AirAsia remains focused on maintaining business continuity and stable operations across all its markets and we continue to see strong underlying demand across our network. We are also working closely with our stakeholders to manage our financial and operational requirements."

MAHB said it regularly engaged with all airline partners as part of normal network and route development, including on "potential capacity and route opportunities where there are gaps in the market or unmet demand." MAHB declined to comment on AirAsia's financial outlook.

Malaysia's finance ministry, Batik Air and Malaysia Airlines declined to comment.

AirAsia seeks fresh capital

AirAsia, which had current liabilities of 18.4 billion ringgit ($4.51 billion) as of June 30, owes MAHB at least 500 million ringgit, the people and two others said, for services including landing and parking fees.

The airport operator has already granted the carrier repayment extensions, two of them said. They all declined to be identified because the discussions were private.

MAHB declined to comment on specific queries from Reuters, saying it did not discuss commercial arrangements with airline partners as a matter of practice. AirAsia did not address queries on whether it owed money to MAHB but said it had a strong and constructive relationship with key partners, including MAHB Chief Airports Officer Bryan Thompson and his team.

AirAsia said this month it was advancing discussions with financial institutions, targeting up to $1 billion from international debt markets plus 700 million ringgit in local credit facilities, primarily to restructure its debt.

Two of the people with knowledge of the matter estimated the airline required at least $3 billion of fresh capital to address its financial position.

In response, AirAsia said its financing targets were sufficient to meet its requirements. The airline had cash and bank balances of 954 million ringgit as of June 30.

AirAsia reported a net loss of 831 million ringgit for the second quarter ended June 30, hit by rising jet fuel costs and heavy foreign-exchange losses of 331 million ringgit.

The carrier has been restructuring aggressively, cutting underperforming routes, returning 25 older ‌aircraft to ⁠lessors and renegotiating contracts with vendors to reduce costs.

Reuters reported this month that the finance ministry had hired ‌Alton Aviation Consultancy to assess AirAsia's funding needs as it weighs whether to provide support given the airline's role as a major employer ​and provider of affordable air connectivity across the region.

The finance ministry declined to comment, while Alton did not respond to a request for comment.

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