AirAsia shares down on concerns over fate of unit IAA

PETALING JAYA: Concerns that PT Indonesia AirAsia (IAA) may be shut down by the end of this month has caused AirAsia Bhd’s shares to fall as much as 23 sen, wiping out a whopping RM640mil from its market capitalisation.

IAA, however, said the suggestion that its operational licence would be called into question was not accurate.

“We wish to emphasise that IAA’s operation remains as per normal and suggestions that our operational licence will be called into question is not accurate. The level of our equity has never been an issue, as the company has been fully funded through a variety of sources.

“This has never compromised our absolute commitment to the global standards of safety and best practices of our operations,” IAA president director Sunu Widyatmoko said in a statement.

AirAsia shares recovered slightly to close 19 sen lower at RM1.30, its lowest in about five years, with 144.6 million shares being traded, making it the most actively traded counter yesterday. Year-to-date, AirAsia’s shares have lost more than 50% of their value.

AirAsia’s 49%-affiliate IAA has received a letter from Indonesia’s Transport Ministry laying out terms for it to ensure a positive equity position by July 31.

Indonesia’s Transport Ministry has ordered 13 airlines to raise funds to reach positive equity positions out of concerns that a negative equity would affect safety oversight.

IAA will require an injection of over 3,535 billion rupiah to reverse its negative equity position, for which AirAsia will have to fork out over RM400mil for its 49% stake.

IAA said it would be in active discussions with Indonesia’s Ministry of Transport to ensure that the regulatory directives are met.

“Our underlying business has been robust and cashflow positive as of the first quarter of 2015. Separately, AirAsia, our shareholder, had previously announced plans to raise the share capital of IAA, as well as to conduct an initial public offering in an effort to further pursue our growth plans in Indonesia,” the carrier said.

“We would like to assure that AirAsia Indonesia shall at all times continue to operate within the ambit of the Indonesian law,” it added.

When contacted, Maybank Investment Bank Bhd analyst Mohshin Aziz described the latest ruling from the Indonesian Government as a “black swan event”. He said no Government in the world had ever come out with such a directive.

“It does not make sense for the Indonesian government to force 13 airlines to cease business and terminate thousands of jobs. We think common sense will prevail, possibly higher powers will intervene and find an amicable solution.

“No government in the world would want to put thousands of people out of a job, especially during a festive season,” he said, adding that there was “no correlation” between positive equity and safety concerns.

Mohshin said as a regulator, Indonesia should monitor the airlines, inspecting, validating and having effective enforcement to make sure they complied with safety regulations.

He doubts any of the airlines would be able to comply with Indonesia’s latest ruling within the given deadline, considering that this is the festive month with Muslims going on holiday next week.

“AirAsia has RM1.6bil cash in its balance sheet. They have the capital, however, they don’t have the regulatory approval to do so in just three weeks.

“The new capital requirement for IAA is substantial and they would need the shareholders’ mandate. It has to be done via an EGM and organising an EGM takes two months the soonest,” Mohshin said, adding that the budget carrier was also surprised by this development and would be meeting up with Indonesia’s regulator to ask for concessions.

CIMB Research analyst Raymond Yap believes AirAsia is actively lobbying the Indonesian government not to enforce the ruling, which will result in a loss of 2,000 jobs and entrench Lion Air’s market dominance.

“At the very least, IAA may be given more time to comply with the ruling. A possible Cabinet reshuffle before end-July may yet give hope that the ruling will be abandoned,” he said in a report.

Should the ruling be enforced, Yap said it would be hugely negative to AirAsia, as IAA may have to suspend or permanently shut down its operations, while AirAsia would have no hope of recovering its debt from IAA and would be left with 29 planes to find a home for.

PublicInvest Research said AirAsia’s management was in final discussions with its local partners to raise new capital of about US$100mil and at least another US$100mil from new investors through a subscription of convertible bonds issued.

However, the research house feels the deadline of end-July is too short for IAA to inject new equity or raise new debt to improve its shareholders’ equity.

“Therefore, we believe AirAsia, which had a cash position of RM1.6bil as at March 2015, may inject cash into IAA to improve its equity position. However, this would raise AirAsia’s net debt position from 2.5 times to 2.7 times,” it added.