THE runway for AirAsia X Bhd (AAX) is far from clear, filled with liquidity potholes that is now an enormous task to patch.
It is burning more cash than it can sustain and the group is now at a critical juncture where it has to pull all stops to raise funds, or its current cash pile, even if it is utilised conservatively, will only see it survive until the end of 2020, according to an analyst.
As of March 31, the long haul sister airline of AirAsia Group Bhd saw its total liabilities balloon to RM10.35bil, exceeding its total assets by RM864.11mil.
AAX posted its results for the first quarter of the year (1Q20) on Thursday, which saw it slip to RM549.7mil in the red, the worst it has ever seen.
The net loss from the quarter itself is 12.3% higher than the net loss for the financial year 2019 (FY19) of RM489.48mil.
AAX also triggered the prescribed criteria of Practice Note 17 as its shareholders’ equity on a consolidated basis is 25% or less of its share capital and also, because its auditors Ernst & Young issued an unmodified audit opinion with emphasis of matter on material uncertainty relating to going concern, in view of the current economic condition and coronavirus (Covid-19) pandemic, in respect of AAX’s audited financial statements for the financial year ended Dec 31,2019.
It is nothing new that the aviation sector is badly hit due to the pandemic but as domestic air travel starts to improve as Malaysia moves from the movement control order (MCO) to a more lax recovery MCO, AAX enjoys zero of that, being a long haul, low-cost carrier.
In fact, almost its entire aircraft fleet remains grounded since mid-April besides some cargo and charter flights.
The airline said in its quarterly results filing with Bursa Malaysia that it will not be able to restart scheduled operations until there is an easing of travel restrictions and a gradual reopening of international borders.
As Malaysia’s recovery MCO will last until the end of August, this effectively prohibits outbound and inbound international travel, coupled with the fact that Australian borders remain closed and there are limitations still in place in China, Japan, India and South Korea.
AAX has sought payment deferrals and concessions from its suppliers, lessors and lenders and reduced capital expenditure wherever possible in order to maintain liquidity.
It also implemented salary reductions across all levels of the company besides the most junior staff and cut its headcount by 10% with further reductions planned, particularly in flight operations related functions.
CGS-CIMB Research pointed out that AAX burned through RM140mil in cash in 1Q20 and only has RM219mil left as at March 31.
“Assuming 1Q20 salary costs of RM105mil are reduced to RM70mil per quarter for the rest of the year, AAX only has enough cash to pay salaries until the end of 2020, not even considering its obligations to its suppliers.
“AAX is not in a desperate attempt to grasp at all the straws it can find. We believe AAX has not been repaying its lessors, maintenance providers and suppliers since 4Q19.
“Lessors are unable to do anything about this effective default of the operating lease contracts as repossessing the planes may leave them looking in vain for replacement customers, ” it said in a note yesterday.
The research house gave AAX a brutal target price of zero sen, saying that even with the substantial support of the airline’s suppliers, it is unlikely to survive unless it gets a cash injection.
It is of the view that it will be unlikely for any bank to agree to provide liquidity unless there is shareholder support.
“But we have no evidence of either the individual shareholders of AAX or AirAsia willing to top up equity and the Malaysian government has so far not offered state backing, ” it said.
AAX is planning to make an application for a government loan of up to RM500mil under the Danajamin Prihatin Guarantee Scheme.
Another analyst, speaking to StarBizWeek on the condition of anonymity, questions if the government would even extend its assistance to AAX.
“Will AAX survive? The bankruptcy of AAX will benefit Malaysia Airlines, which has been in a bad shape for years, ” he says.
Meanwhile, CGS-CIMB also forecasts that AAX’s available seat kilometre capacity in FY20 will only be 22% of its FY19 baseline, with FY21 at 40% and FY22 at 50%.
It adds that even if borders reopen, the carrier may have to be a lot more selective on the routes it flies.
AAX admits it continues to face severe liquidity constraints and says its management and directors will continue to seek additional liquidity and work towards a material reduction of the company’s cost base to enable the airline to continue as a going concern in the post Covid-19 environment.
Time is seriously running out for AAX to raise funds.
As much as it is imperative for companies to have a solid game plan to pick up post-Covid-19, AAX’s bigger headache will be to ensure it manages to survive 2020.
AAX closed at seven sen on Thursday, not that much of a rebound from the counter’s all-time low of four sen during the stock market crash of March 19.
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