DJ UPDATE: Malaysian Airline, AirAsia Shareholders To Cancel Share-Swap Pact - Source

--Malaysian Airline, AirAsia to cancel share-swap agreement signed last year, a person familiar with the situation says

--Agreement cancelled amid reports of protests by Malaysian Airline employee unions

--Agreement was aimed at helping to turn loss-making Malaysian Airline around

(Recasts leads, adds background in the 3rd, 5th and 6th paragraphs, analyst comment in paragraph 7.)

By Ankur Relia

Of DOW JONES NEWSWIRES

KUALA LUMPUR (Dow Jones)--Shareholders of Malaysian Airline System Bhd. (3786.KU) and low-cost airline AirAsia Bhd. (5099.KU) have decided to cancel a share-swap agreement signed last year amid resistance from employee unions at the state-owned airline, a person familiar with the situation said Wednesday, a move that will likely hurt the national carrier's turnaround plans.

The agreement, signed in August last year, was aimed at turning around the state-owned flag carrier Malaysian Airline and entailed cooperation in aircraft purchasing, engineering, ground support services, cargo services, catering and training in a bid to cut costs and lower competition. Malaysian Airline reported its fourth straight quarterly loss in February as higher fuel costs continued to bite, and warned that 2012 would be a difficult year for the airline industry.

The cancellation comes after Chairman Md Nor Yusof said in March the collaboration agreement that involved the share-swap with AirAsia shareholders was "a key foundation stone" towards containing losses and strengthening the company.

"Malaysia Airlines is a very sick patient, and its condition is quite critical," he said at the time.

Under the agreement signed in August, Malaysian Airline shareholder Khazanah Nasional Bhd planned to get a 10% stake in AirAsia, while AirAsia's major shareholder, Tune Air Sdn. Bhd., was to receive a 20.5% stake in Malaysian Airine.

Media reports said Malaysian Airline employee unions were putting up strong resistance against the deal, which they said would lead to aggressive cost cuts. Union officials couldn't be reached for comment.

RHB research analyst Joshua CY Ng said Malaysian Airline has structural and operational problems that will require the company to undergo a restructuring program in order to sustain itself and cut costs.

The deal is being called off at a time when Prime Minister Najib Razak is trying to bolster electoral support ahead of an upcoming national election expected within months. The Malaysian Airline employees union have reportedly met with the Prime Minister to discuss the deal, which they fear will result in job losses at the airline.

Shares of both AirAsia and Malaysian Airline have been suspended from trading Wednesday pending an announcement, the two airlines said in separate exchange filings.