Malaysia Airlines (MAS) and budget carrier AirAsia have called off a proposed USD$364 million share swap, according to a statement filed to Bursa Malaysia on Wednesday.
Prime Minister Najib Razak, who could face national elections as early as June and was widely seen as the main driver of the plan, has come under pressure from MAS's 20,000-strong union to drop it.
Placating workers, who said the tie-up resembled a takeover by AirAsia founder Tony Fernandes, may help Najib win back Selangor state where the national carrier is based.
Under the deal, Tune Air, controlled by Fernandes and his deputy Karmazin Merman, would have taken a 20.5 percent stake in MAS and two board seats and the Malaysian government's investment arm Khazanah Nasional would have had 10 percent of AirAsia.
The government holds a majority stake in MAS through Khazanah.
The two airlines said they would move ahead with a collaboration agreement covering areas such as aircraft maintenance and support and repair services.
The share swap was aimed at helping the carriers compete against rivals such as Tiger Airways and Singapore Airlines once the Southeast Asian open-sky policy comes into effect in 2015.
Shares of MAS have tumbled 28 percent over the last three months while AirAsia shares have slid 11.7 percent so far this year. Shares of both companies were suspended earlier.