AAX reset provides brighter outlook

The long-haul budget airline has initiated a turnaround plan to attain a sustainable debt structure and pave way for fresh capital to restart its operations


AIRASIA X Bhd (AAX) significant progress on its turnaround plan, lower cost structure as well as higher contribution from air cargo business has led Public Investment Bank Bhd (PublicInvest) to revise its forecast on the cash strapped carrier.

Its analyst Danny Oh stated that AAX had been significantly impacted by the Covid-19 pandemic as travel and border restrictions were imposed around the world, leading to a significant fall in demand for international air travel.

As a result, AAX has grounded most of its fleet since March 2020 which is facing severe liquidity constraints to meet debt and other financial commitments and has been faced with possible liquidation.

To transform and reset its business, AAX initiated a turnaround plan which consists of a proposed debt restructuring, proposed corporate restructuring and proposed fundraising, to attain a sustainable debt structure and pave way for fresh capital to restart its operations when international borders reopen.

Oh noted that AAX’s debt restructuring exercise had been approved last week by the scheme creditors as the requisite majority of 75% of each Class A, B and C creditors was obtained at their respective court convened meetings.

The provisional scheme amounts have been estimated at RM33.65 billion and Airbus SE has agreed to reduce AAX’s order to 15 A330neos and 20 A321XRL jets from 78 and 30, respectively, previously, as part of the deal.

“Pursuant to this, AAX received support from creditors across the three groups at a scheme creditors meeting on Nov 12, 2021, who voted in favour of the proposed debt restructuring to restructure RM33.65 billion of liabilities which creditors has agreed to the restructuring that will see it receive 0.5% of debt owned and existing contracts cancelled.

“In addition, the Class A and Class B creditors will be entitled to an annual profit-sharing mechanism which will be based on 20% of the excess over RM300 million of Ebitda and lease rentals for four years from 2023 to 2026,” the analyst wrote.

In October, AAX proposed to pay 0.5% of debt owed to each of its creditors and to terminate all existing contracts so that it can restructure RM33.65 billion of liabilities.

The 0.5% of debt owed to each creditor will be paid from operating cashflow one year after the debt restructuring goes into effect.

Oh further stated that the group plans to focus on cargo-driven routes to mitigate uncertainties caused by the current pandemic. He said cargo revenue has helped narrow losses of airlines.

With the pandemic under better control, Oh expects AAX’s financials to improve.

AAX’s proposed fundraising will raise fresh funds to restart the group’s flights and rebound as a low-cost medium haul airline with leaner and more sustainable cost base with focus on business sustainability and yield-building, instead of market share.

He expects the air cargo business to reach a record US$175 billion (RM731.5 billion) in 2021 and stay near that level at US$169 billion in 2022 driven by economic recovery, diversion from overcrowded ocean shipping and e-commerce.

The International Air Transport Association (IATA) estimated air cargo volume for airlines will grow at 7.9% in 2021 with demand heating up to 13.2% above pre-pandemic levels in 2022.

“The cargo volume roared back in the second half of 2022 as production and sales resumed. Since then, the air cargo market has kept growing, driven by economic recovery, diversion from overcrowded ocean shipping and e-commerce,” IATA said.

PublicInvest has upgraded its call on AAX to ‘Outperform’ from ‘Neutral’ with target price of 13 sen based on four times enterprise value to Ebitda of financial year 2023.

He noted that AAX shareholders will likely have to go through the entire corporate exercise (rights issue) to see the full benefits of the turnaround plan as the debt restructuring will cut the group’s gearing levels to zero and enable it to restart on a clean slate.