High-flying AirAsia rocked by research report


  • Business
  • Saturday, 20 Jun 2015

Tony Fernandes, group CEO of AirAsia.

FOR the longest time, budget carrier AirAsia Bhd seemed to be immune to the upheavals of the industry. That may not be the case anymore.

Sitting in Paris and then in Jakarta, Tan Sri Tony Fernandes (pic) and his partner, Datuk Kamarudin Meranun in Kuala Lumpur, are furiously trying to address worries that all is not well with the financials of the airline. Fernandes is group CEO of AirAsia, the airline which he co-founded with Kamarudin, while Kamarudin is executive chairman.

They have been issuing daily memos to investors and conducting conference calls with analysts and fund managers in a bid to halt the fall in the company’s share price.

The selling was triggered by a report by GMT Research on June 10 questioning the airline’s reliance on affiliates’ profits that the parent can’t collect. In the report, GMT values AirAsia’s share price at RM1.23 a share.

The report came out last Thursday and sent the stock price into a frenzy.

“Despite the effort, the stock price continued to plummet post-conference call with analysts and fund managers on Wednesday afternoon, reaching a bottom of RM1.45 per share. The last time the stock was this low was back in 2009. People are in a state of panic and nobody is looking at fundamentals,” says Mohshin Aziz, senior analyst with Maybank Investment Bank Bhd.

Some analysts claim to know the existence of the issues raised by GMT, but the question is, why did they not raise them earlier then?

“It’s nothing new,” claims Mohshin.

Kamarudin contends that “they (GMT) were only looking at the negative side... if we were not transparent, how could they have gotten all the details? Even if we had hidden anything, would they ever be able to find it if we were not transparent?”

Shukor Yusof, founder of independent research firm Endau Analytics and former aviation analyst with Standard & Poor’s (S&P), says “all things being equal, and although I have not read the report, from what I have seen over the past 10 to 12 years since the airline was listed and even during my time in S&P, there is nothing to indicate red flags. Yes, there may be doubts over the Philippines and Indonesian operations, and some other subsidiaries, but does it justify the selling to erase the market capitalisation by RM1bil?,” Shukor asks. He adds, however, that “the fact that they put something out there tells us that they know something many of us do not”.

Shukor believes that the market dynamics have changed and the reaction by the “investment community sent a very direct message to him that they want AirAsia to do what it is good at, ie, provide low fares to people, expand networks and give value for money to investors”.

“You only need to look at the traffic flying in Asean to know the business is for real. But I must admit that he (Fernandes) has taken his eye off the ball and is distracted by other businesses (since he has diverse businesses). He should be re-focusing his energy on the airline business,” Shukor adds.

Is the selling done?

Since last Friday, AirAsia has been defending itself, partly by addressing concerns raised by GMT.

The measures it will take include leasing out planes, raising cash via bonds, and listing the Indonesian and Philippines units.

Just like it engages with fund managers and analysts, had AirAsia engaged with the GMT people to explain its side? Fernandes says “no, we haven’t engaged with them. We see no need to”.

Tulloch’s touch

Is GMT founder Gillem Tulloch convinced by the messages from AirAsia since he wrote his report?

“Plans to re-capitalise AirAsia’s associates are a step in the right direction, although we have concerns over the ability to execute,” Tulloch told StarBizWeek in an email this week.

“However, AirAsia presently generates little to no cash flow from operations. As such, a re-capitalisation to bring debt down to more manageable levels would be in the best interest of the company. We remain concerned about the appropriateness of generating profits through inter-company transactions and our inability to identify their exact contribution to AirAsia’s bottom line,” he says.

Tulloch is the founder of GMT Research, and according to its website, he is a veteran in financial analysis and research across Asia.

Despite the GMT report, Bloomberg’s analyst consensus shows 19 houses out of 25 still having a “buy” call on the stock.

Amid the mayhem in the share price, AirAsia was still named Asia’s and the World’s “Best Low-Cost Airline” for the seventh consecutive year at the annual Skytrax World Airline Awards on Tuesday.

“It remains a viable business,” adds Shukor.

Both Fernandes and Kamarudin bought over AirAsia for RM1 with two planes and an RM11mil debt about 14 years ago.

They introduced a new way of flying in Malaysia and expanded the low-cost business model into the region. Today, there are over 60 low-cost carriers (LCCs) in the region.

AirAsia has ventures in Thailand, Indonesia, the Philippines and India.

For a long time, the Malaysian operations funnelled growth in other markets and this gave rise to new LCCs being set up.

“Inevitably, it is a double-edged sword. He has created the LCCs and also opened up markets for his rivals. It is such a huge market where his competitors are able to also fly at cheaper fares, so AirAsia has to counter that,” Shukor adds.

Indonesia remains one of the world’s fastest-growing aviation markets and competition is intense. AirAsia is up against Lion Air and Garuda in that country and those airlines are entrenched in the market place.

The flight QZ8501 incident in December hurt AirAsia’s operations in Indonesia, and for the first three months of 2015, there was a 19% capacity cut and loads stood at 70%. Its market share there is barely 10%.

In the Philippines, Cebu Pacific and Philippines Airlines are its main rivals and the market is said to be price-sensitive.

For the first three months of 2015, there was a 19% capacity reduction and loads stood at 77%, up 11% year-on-year.

In Indonesia, it has 29 planes, while it uses 15 aircraft in the Philippines.

Group-wise, AirAsia’s loads were down 1% to 77% in the first quarter of 2015, although it carried 3% more passengers to 11.9 million on the back of a 5% capacity increase. As at end-March, group-wide, it had 171 aircraft, an additional 14 aircraft year-on-year.

Loads in the second quarter of 2015 are looking “very good”, says Fernandes.

Though loads may be looking good, and fuel prices are still favourable with crude oil at about US$60 per barrel, the challenge is the weakening US dollar against the ringgit, since about 60% of the airline’s cost is in US dollars, says an analyst.

AirAsia has also ordered the most number of aircraft in the region, though it wants to lease out some. After the share price plunge, Shukor called up bankers to find out if they were pulling back credit lines for AirAsia. Net debts stood at RM11.4bil as at end-2014, and net gearing is at 2.50 times, up from 2.07 times in September 2014.

Matured market

“The creditors have not shown any signs of backing off when I spoke to them,” he says.

But he did say this episode highlights that the market has matured and it is not going to be as easy as before.

“Making profits is tougher and margins are getting thinner, although it is still a viable airline. It also has a leasing company to lease aircraft which it has ordered. The Airbus neo aircraft will come in handy when there is a shortage of aircraft in the region, since they have so many slots,” adds Shukor.

Reports are saying flight bookings are beginning to drop in some markets due to an outbreak of a deadly respiratory disease – the Middle East Respiratory Syndrome or MERS – in South Korea and hope that it is contained soon before it spreads into the region, dampening the air travel sector.

Malaysia Airlines (MAS) CEO Christoph Mueller is also trying to get MAS on a better footing and if he manages do to that, then the players in the region will have to worry about MAS once again and that will put pressure on the margins of many airlines.

Related story:

Financials in turbulence

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