Thursday 28 Mar 2024
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KUALA LUMPUR:AirAsia X Bhd (AAX) began operations in 2007, and the question remains whether the low-cost, long-haul model is a viable one for the carrier.

Historically, others have tried and failed, so what will turn the tide for AirAsia Bhd’s sister airline?

In the past year, the question about the model’s viability has risen once again after AAX fell into the red in the fourth quarter ended Dec 31, 2013 (4QFY13). It has not recovered since.

For AAX shareholders, it has so far been a bumpy ride with its share price now trading at 58 sen, more than half of its initial public offering price of RM1.25 per share. Its market capitalisation stood at RM1.37 billion.

While the low-cost model has worked for AirAsia Bhd’s short-haul flights, investors might be spooked by AAX’s (fundamental: 0; valuation: 0) inability to return to profitability thus far.

For its latest financial year ended Dec 31, 2014 (FY14), net loss more than quintupled to RM519.35 million from RM88.27 million in losses the year before. This was on the back of a 27% increase in revenue to RM2.94 billion from RM2.31 billion in FY13.

“Revenue per available seat-kilometre (RASK) reduced 0.3% from 12.06 sen to 12.02 sen in FY14 due mainly to the lower average passenger fares as the group introduced more promotional fares on newly launched routes during the year, and load factor was flat at 82% versus 82.1% in FY13,” AAX explained in its financial statements.

From a quarterly perspective the story is the same, with losses rising 27% to RM168.43 million in 4QFY14 compared with RM132.6 million in 4QFY13. This was despite revenue growing 20% to RM819.27 million from RM680.45 million a year ago.

“The fall in jet fuel prices will unequivocally be good for AAX’s bottom line, but we don’t think it will be sufficient to return the carrier to the black [this year] due to the competitive operating environment. AAX is likely to pass on a significant portion of the fuel cost savings to consumers,” Alliance Research analyst Tan Kee Hoong said in a Feb 25 note. 

Global crude oil prices have fallen off its peak of US$115 per barrel in June 2014 by almost 60% to below US$50 per barrel now, which inherently reduces the cost of jet fuel.

“If crude oil trades lower than US$70 per barrel, AAX will be able to survive. But the question is what happens when prices are back to normal at US$100 and above per barrel. Will it be able to survive? The jury is still out on that one,” Maybank Investment Bank Bhd aviation analyst Mohshin Aziz told The Edge Financial Daily.

Mohshin cautioned that when times are tough, AAX might not have what it takes to weather the storm as seen in its financials for FY13 and FY14.

“When times are tough it would be predictable that [all] in the market would lower their fares. When that happens, AAX will lose its [competitive] edge completely because there is not much of a price gap left,” he added.

Another analyst pointed out that when it comes to such price competition, many consumers do not mind paying a small premium for the comforts of a full-service carrier when flying long distance.

Another challenge for AAX so far has been its loss-making routes. So far this year, the airline has discontinued its flights to Adelaide and Nagoya that were incurring losses to the group. It also slashed the frequency of flights to Sydney, Perth and Melbourne late last year.

“AAX needs to tweak its business model and growth plan to be more relevant to its core market. They will have to experiment a little with its routes and frequency, and maybe permanently remove certain routes that simply do not have enough volume to be viable,” said Mohshin.

“In this low price environment, AAX’s short-term strategy is to survive, recapitalise and conserve capital. It is fire-fighting at the moment in order to build strength, beyond which it can focus on growth,” he added.

Nevertheless, analysts have noted that AAX’s balance sheet is not looking as good as it used to be.

Its cash and bank balances almost halved to RM125 million as at end-December 2014, from RM263 million at end-FY13. Meanwhile, its trade payables soared 63% to RM656.5 million from RM346.8 million in the same period.

Still, AAX has managed to scale back total borrowings to RM1.58 billion compared with RM2 billion as at end-FY13. Of this, RM1.07 billion or 67.5% consists of long-term borrowings, while the remaining RM513.2 million is short-term.

It is worth noting, however, a whopping 95% of the total borrowings comprised US dollar-denominated debt, with the rest in ringgit.

AAX also proposed a cash call on Jan 30 for a renounceable rights issue with free attached warrants. This could raise RM395 million that the carrier intends to use for working capital and to service its loans.

But maybe recent events at the airline could lend investors some confidence, as AirAsia executive chairman and co-founder Datuk Kamarudin Meranun steps in as group chief executive officer (CEO) of AAX, taking over from Azran Osman-Rani, while Benyamin Ismail is acting CEO.

Kamarudin will spearhead the development of AAX group and, alongside Benyamin, will “lead the reorganisation and turnaround exercise to strengthen the airline’s balance sheet and to maximise profitability to ensure a stronger financial footing for the airline”.


The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

 

This article first appeared in The Edge Financial Daily, on March 2, 2015.

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