AirAsia seeks funds as auditor sounds alarm


AIRASIA Group Bhd needs to raise fresh funds and resume operations or it faces the risk of financial ruin due to its weak financial position, made worse by travel restrictions instituted to contain the Covid-19 pandemic.

Nervous investors sold down the budget carrier’s shares yesterday on fears a potential rights issue or new share placement will dilute their holdings after its external auditor voiced concerns over its business prospects on Tuesday.

While government officials have rejected calls to provide direct financial support and advised the country’s carrier to seek other financial avenues, aviation analysts said some government assistance, similar to the support other governments have given to their aviation companies, may be necessary.

“RM500 million will be very helpful, RM1 billion is even better. The value proposition for AirAsia is the best compared to Malaysia Airlines Bhd and Malindo Airways Sdn Bhd, due to its vast network, efficient operations and lowest ticket prices,” independent aviation analyst Mohsin Aziz told The Malaysian Reserve (TMR).

The International Air Transport Association on June 16 warned that the airline industry is facing a hard winter and called on governments around the world to continue providing relief measures as the Covid-19 crisis prolongs.

Mohsin said the UK government, for example, is paying 80% of the salaries of aviation sector employees until the end of October 2020.

Bloomberg yesterday reported AirAsia is considering raising RM1 billion through a rights issue, according to sources. The group is also weighing raising additional funds via sale of stakes in its digital and cargo units.

Mohsin said in order to shore up its balance sheet, AirAsia needs to raise capital either via equity or debt with the government as a guarantor or via a bridging loan facility.

“We have yet to see such a structure in Malaysia. Raising equity, either via rights issue or private placement, is the second option, but it is not ideal as the share price is depressed and will greatly dilute existing shareholders, but it could be the difference between survival or extinction.”

In May 2019, the company declared a special dividend of 90 sen per share, the highest-ever dividend for the low-cost carrier, which saw some RM3 billion in total payout.

AirAsia shares slipped 15 sen or 17.5% on heavy volumes to close at 70.5 sen yesterday’s afternoon session after the counter was suspended in the morning.

The budget carrier’s weak financials triggered the Practice Note 17 (PN17) criteria, but Bursa Malaysia’s Covid-19 relief measures announced in April will not see AirAsia classified as PN17 till July next year.

AirAsia on Monday posted a net loss of RM803.85 million or loss per share of 24.1 sen for its first quarter ended March 31, 2020, due to weak air travel, losses on derivative contracts, depreciation charges and lease liabilities.

CEO Tan Sri Dr Tony Fernandes said the group has applied for bank loans in its operating countries to shore up its liquidity.

Nomura Global Markets Research transport analyst Ahmad Maghfur Usman believes imminent fundraising is needed in the near term, not only to outlive the impact of the Covid-19 pandemic, but also for AirAsia to settle outstanding dues from oil hedges.

Currently, AirAsia’s hedge stands at an average price of US$61.40 (RM262.34) per barrel, while the Brent crude contract is around the US$40 level.

During the global financial crisis of 2008, AirAsia suffered a RM1 billion loss on fuel hedges, he said. An equity fundraising is highly likely to settle the cash deferral payment backlog.

“As for rights issue, it’s going to be hard to get investors to commit cash for AirAsia unlike Singapore Airlines, which is backed by Temasek Holdings Pte Ltd,” he told TMR.

AmBank Research in a report yesterday had a ‘Sell’ call on the low-cost carrier with a fair value of 41 sen, adding that AirAsia is not in a favourable position when it comes to negotiation with potential new investors.

“Given the depressed share price, a rights issue or private placement could be highly dilutive to existing shareholders,” it said.

As at March 31, 2020, AirAsia had a net cash of RM1 billion and shareholders’ fund of RM1.1 billion versus total lease liabilities of RM12.2 billion.

TA Securities Research analyst Tan Kam Meng, in a research note on Tuesday, stated the government itself is financially constrained at present.

“A government financial lifeline may not come anytime soon taking into account Malaysia’s national debts to GDP has risen to 55%,” Tan noted.

For the moment, AirAsia will strive to reduce financial year 2020 (FY20) cash expenses to 50% of FY19 levels, targeting staff costs (15% of FY19 expense) by implementation of salary reduction, headcount rationalisation, deferment of increment, promotion and bonus.

It will lower fuel cost (36% in FY19) by reducing flight frequency, followed by maintenance (11%) with the use of new airplanes.

“This also includes operating lease (19%) by deferring new aircraft deliveries, retiring two third-party leases and deferral of lease expenses,” Tan added.

AirAsia in March 2018 sold its aircraft leasing operator unit, Asia Aviation Capital Ltd, for RM4.63 billion to commercial aircraft investments manager BBAM Ltd Partnership.

It has been a tough year for the carrier. In early February, Fernandez and Datuk Kamarudin Meranun relinquished their executive positions in AirAsia due to allegations linking them to the Airbus SE graft scandal.

They denied any wrongdoing, but stepped aside while the matter was investigated. On March 20, Fernandez returned to his post after being cleared in an independent probe.