AirAsia Group plans to spin off aircraft leasing unit, Asia Aviation Capital Ltd (AAC), via an initial public listing (IPO), upon completing a massive expansion plan that will see it growing into one of Asia’s largest lessors of aircraft.
The low-cost carrier aims to increase AAC’s fleet from 55 aircraft to 200 by then, and to help fund those growth plans, (they may) secure a large equity investor by the end of this year, an industry source told The Malaysian Reserve.
“The IPO is a long-term strategy (for AirAsia). In the meantime, they want to get a long-term investor to buy a substantial stake.
“They need someone to properly run it first, that way they can expand the business,” the person said.
The unit is currently valued at US$1 billion, top AirAsia executives told analysts at a recent briefing.
Rumoured parties interested in the stake include the HNA Group, a Hainan, China-based megacarrier that owns more than a thousand planes and flies to 800 destinations.
HNA’s acquisition of Ireland’s Avalon Holdings this year has made it the world’s third-largest aircraft leasing service provider based on fleet size, and recent deals such as its US$450 million purchase of a majority stake in Brazil’s Azul SA signal a rapid push to expand, also something AirAsia wants to achieve with AAC.
The investor may pay up to US$557 million (RM2.26 billion) for a 56% stake in AAC, with AirAsia retaining a 44% stake in the unit, analysts at Nomura Securities Co Ltd said in a note to investors.
The exercise will deleverage Air- Asia’s balance sheet by as much as US$750 million of borrowings, reducing the airline’s net gearing to 77% from 120.6%, the Japanese investment bank noted.
The broker has a ‘Buy’ call on the stock, and a target price of RM3.88, 30% higher than consensus’ estimate.
Last month’s deal to purchase 100 Airbus A321neo jets at the Farnborough Air Show will assist the expansion of AAC, as around 30% of that order will go the unit.
“AAC’s business model will be similar to that of BOC Aviation Ltd,” said an analyst, referring to Bank of China’s aircraft leasing business, listed this year in Asia’s second biggest share sale.
BOC Aviation purchases aircraft from manufacturers and then leases them to carriers around the world.
After a certain period, the client returns the aircraft, which can then be leased to another airline.
AirAsia is “carrying out a strategic review of AAC, including the potential divestment of all or a substantial portion of its equity interest in AAC or its business or assets,” the company said in a filing to Bursa Malaysia last Friday.
“The strategic review is part of its continual review of its businesses and operations to enhance shareholders value and there is no certainty that it will result in a transaction,” the airline added.
AirAsia founder and group CEO Tan Sri Dr Tony Fernandes said in a May interview that AirAsia had received a US$1 billion offer for the leasing unit, and at the time, the airline had not gone to the market for a sale.
Tony’s comments sent AirAsia’s share price to its highest in more than a year, but not everyone is as excited as he is about getting knee-deep into the leasing business.
“AirAsia should stick to what it does best,” said Shukor Yusof, founder of Endau Analytics Sdn Bhd, an aviation consultancy based in Johor.
“It is a lucrative business but not for the faint hearted. One needs to understand the business well, it’s different from running an airline,” said Shukor.
“Recent IPOs might have put aircraft leasing back on investors’ radars but it’s a highly commoditised business for which it is difficult to justify paying above book value,” Mark Webb of Hong Kong-based GMT Research said in June.
“True profit levels are uncertain in the short term and dependent on subjective accounting estimates.
“Risks are rising due to the threat of global aircraft oversupply,” said Webb.
Aided by declining fuel costs, which have fallen more than 20% year-on-year, as well as a projected 10% year-on-year improvement in load factors, AirAsia is expected to announce strong quarterly results when it reports its financials today.