No further risk to IAA’s licence but bigger re-rating depends on ability to become sustainably profitable
IT has been a topsy-turvy time for AirAsia Group Bhd’s share price.
After investor sentiment was rocked by a damaging report by GMT Research report on June 10 that questioned the financials of the low-cost airline, AirAsia’s share price came under pressure when Indonesia threatened to pull back its licence in its 49% owned unit, Indonesia AirAsia (IAA), if its finances and that of 12 other airlines are not improved by July 31.
Indonesia’s Transport Ministry wants the 13 airlines to shore up their shareholders’ equity to 500 billion rupiah if they operated 70 seater planes by July 31 or face being stripped of their licence.
That punitive measures were later softened with the ministry changing its mind.
On Thursday, the ministry issued a statement saying it would “assist and support” the 13 airlines with negative shareholders’ equity to improve their equity positions if they were unable to meet the July 31 deadline.
“The wording suggests that the ministry has performed a gentle face-saving U-turn and the airlines’ licences will not be at risk after all. With no further risk to IAA’s licence, the recent share price sell-off may partially reverse, although a bigger re-rating depends on IAA’s ability to become sustainably profitable,’’ says CIMB Research senior analyst Raymond Yap.
AirAsia share price has thus far rebounded and closed on Friday at RM1.34, marginally up from Wednesday’s close of RM1.30, which was the recent low.
From the beginning of this year, it has lost RM4.11bil in market capitalisation and both the GMT report and the Indonesian directive were much of the culprits for the drop.
Maybank Investment Bank senior analyst Mohshin Aziz described the ruling as “unexpected surprise.’’
“About half of the airlines globally have negative equity and anyone in the airline industry knows that safety is not about negative equity. It is about discipline, cashflow and enforcement,’’ he adds.
An airline executive felt that the ruling was not enforceable, adding that “do you honestly think Indonesia will close an airline which hires 2,000 people and brings in most tourists?’’
According to World Bank data, international tourism receipts totalled US$10bil for Indonesia for the 2010-2014 period.
But Shukor Yusof, the founder of Endau Analytics, felt that the Indonesian Transport Minister is making a concerted effort to overhaul and clean up the domestic aviation.
“A good number of Indonesian carriers can barely stay solvent, with the exception of the major ones like Lion Air group and Garuda. But it is unlikely they will shut them (the 13 players) down though.’’
Apart from IAA and Rusdi Kirana’s Batik Air (a unit of Lion Air Group), the others affected by the new ruling are Cardig Air, Trans Wisata Prima Aviation, Istindo Services, Survei Udara Penas, Air Pasifik Utama, John Lin Air Transport, Asialink Cargo Airline, Ersa Eastern Aviation, Tri MG Intra, Nusantara Buana and Manunggal Air.
Indonesia is the world’s fourth most populous nation with demand for air travel growing every quarter. From 2010 to 2014, about 95 million passengers took to the skies. There are 65 domestic airlines in the country.
AirAsia has a 49% stake in IAA and its share of the Indonesian market is below 10%, though IAA has the largest market share in international air travel segment in Indonesia. The market is controlled by Garuda and Rusdi Kirana’s Lion Air group.
Despite the threat of suspension, AirAsia boss Tan Sri Tony Fernandes says the airline is not pulling out of Indonesia.
This can be explained as the market potential is huge and an initial public offering (IPO) is being planned for IAA, which operates with 29 planes in Indonesia.
According the International Air Transport Association (IATA), by 2034, Indonesia is expected to be the sixth largest market for air travel. By then, some 270 million passengers are expected to fly to, from and within the country. That’s three times the size of today’s market.
Short-term reprieve
Though IAA got a reprieve, affected airlines in Indonesia will still have to improve their balance sheet if they want new routes. New routes are important for low-cost carriers as growth in traffic comes with more destinations.
All the 13 players also need to submit their business plan by month end.
Fernandes was reported to have said that “We were going to comply anyway. We have already set that process in motion.”
As at end March this year, IAA had a negative equity position of 3 trillion rupiah (RM860mil) and paid-up capital of 180 billion rupiah. Hong Leong Research estimates that IAA needs at least RM1bil injection and this includes the additional paid-up capital of 320 billion rupiah or RM90mil.
Yap of CIMB points out that the fundamental issue of IAA’s long-term future will still weigh heavily on investors minds.
“At the moment, IAA is still some distance away from securing the subscribers for its proposed US$100mil-US$150mil convertible bonds.”
Even if those are secured, most likely with a guarantee issued by AirAsia, it would only buy AirAsia two years of time. IAA will need to be reasonably and sustainably profitable before AirAsia’s share price can recover convincingly.
But Fernandes told that “we have resolved and have no worries about our licences and we are confident of a profitable airline in Indonesia.’’
