AirAsia’s burden adds on with asset-light strategy


  • Aviation
  • Saturday, 04 Apr 2020

The low cost carrier knows it is not in a comfortable position in its course of navigating out of the economic maelstrom in the aviation industry caused by the coronavirus disease (Covid-19) pandemic.

AIRASIA Group Bhd has quite a bit going for it. It has cash, RM2.59bil of it, a strong business model and a brand-name that naturally is a crowd-puller in any markets it ventures.

However, the low cost carrier knows it is not in a comfortable position in its course of navigating out of the economic maelstrom in the aviation industry caused by the coronavirus disease (Covid-19) pandemic.

Firstly, the airline has high commitments to begin with by moving to an asset-light business model.

It may be a good way of doing away with the residual risk of owning aircraft but in times of downturns, it is the airlines that will incur additional cost for leases.

And this is proven with AirAsia’s fourth quarter results for the financial year ended December 2019, where it dipped further into the red by 35.9% to record a net operating loss of RM373.95mil.

Based on the 2019 unaudited results, leasing charges comes up to RM505.87mil while staff cost is another RM1.78bil.

Coupled with other fixed over-heads such as rentals and finance cost, the burn rate a month can come up to RM200mil, even with none of AirAsia’s flights in operation.

The group has temporarily suspended all its international and domestic flights in its Malaysia operations for about a month and also in the region, including the Philippines, Thailand and India.

In Indonesia, it is significantly reducing the frequency of its international and domestic flights.Assuming that everything is back on track with flights operating at their usual frequencies, AirAsia would be incurring additional expenses such as fuel cost, maintenance and overhaul and user charges.

Based on the 2019 accounts, this would easily add RM300mil more per month to its cost.

However, the low cost carrier would generate some amount of cashflow to mitigate its cost.

“The drawback is the operating cash inflow would not pick up quickly unless a vaccine is found for Covid-19, ” says an analyst.

And the RM2.59bil, or whatever that is left now after the first quarter, is the only buffer the airline has when it resumes business operations.

The group knows it cannot be taking any chances and it needs to raise as much cash as it can, which is why it is seeking out a loan from the government.

This is also why group chief executive officer Tan Sri Tony Fernandes told Bloomberg Markets that it is going to be an uphill slog, even with his team having a lot of ideas to get going again.

“No bailout. You don’t need a bailout. Obviously many airlines are looking at loans and we think the cash will last us for the most part of this year.

“And when the sales return, then we’re okay. It’ll be great to get a loan as well and we’re working on that with our government, ” he told Bloomberg.

The budget airline knows there is no way it is going to get easy money or cheap loans so the best bet is still the government and Fernandes is confident something will transpire out of the airline’s recent meeting with it.

After all, AirAsia has a high bargaining power with it ferrying the bulk of passengers into Malaysia and domestic flights, which allows it to boast of accounting for 1.8% of the tourism industry’s contribution to the gross domestic product (GDP).

The question now is, how much cash does it need and at what price would it come?

Or will it be easier for shareholders to fork out money for a rights issue considering they have been amply-rewarded in the past two years?

Shareholders of AirAsia have made a pile of cash over the last 18 months from dividends that the group has been giving out, largely from its strategy to go asset light.

The airline declared a record special dividend of 90 sen a share in May last year after it sold its 25 aircraft to US-based private investment firm Castlelake LP for US$768mil (RM3.22bil).

Back in March 2018, it entered into a sales and leaseback arrangement with BBAM Ltd Partnership involving 79 aircraft and 14 aircraft engines, of which AirAsia received US$1.19bil (RM4.62bil).

There was another special dividend of 40 sen declared for the third quarter of 2018, on top of the interim dividends of 12 sen each for the first and fourth quarters.

Just from the two years, shareholders have pocketed RM5.15bil in dividends.

The sales and leasebacks of the aircraft may have made the group asset-light but the commitments of the lease itself has become a huge burden to the airline.

On the rumours of a merger between AirAsia and Malaysia Airlines, sources say it is unlikely to happen.

“Malaysia Airlines’ burn rate is not likely to be as high as AirAsia. AirAsia employs 29,000 people while MAS has far fewer workes.

“Moreover, AirAsia has commitments to take up new planes while MAS does not. So there really is no push for a merger, ” says an executive familiar with the airline industry.

Instead, Khazanah Nasional Bhd, which owns 100% of Malaysia Airlines, might want to take a stake in AirAsia if the offer is cheap.

“But there won’t be any merger. It is during a crisis like this that shows that you truly need a national airline on a standalone basis.

“With AirAsia temporarily hibernating its planes, Malaysia Airlines is the only one prepared to fly, ” the source says.

Year-to-date, AirAsia’s share price has declined 50.89% from RM1.69 to 83 sen as of yesterday’s close.

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