KUALA LUMPUR: Low-cost carrier AirAsia Bhd may not have enough time to turn its 49%-owned associate Indonesia AirAsia's (IAA) negative equity positive by the end of this month under Indonesian law, said analysts.

This is to avoid having its operating permit suspended by the Indonesian Transportation Ministry.

“The time is too short for them (AirAsia), and it is hard for them to do a cash call at a time like this,” TA Securities analyst Tan Kam Meng told The Edge Financial Daily yesterday.

On June 10, a report by Hong Kong-based GMT Research questioning AirAsia's accounting practices resulted in the airline’s share price falling to a five-year low.

Tan also finds it odd that the Indonesian authorities put such focus on AirAsia’s equity.

“If they (Indonesian authorities) want to foster a healthy aviation industry, they should focus more on operational issues rather than accounting matters,” he said.

Tan also pointed out that the strength of enforcement of the said policy by the Indonesian authorities remains uncertain as well.

“We still have to wait and see how strong they will enforce the law, and how will AirAsia react to this,” he said.

PublicInvest Research analyst Nur Farah Syifaa’ Mohamad Fu’ad is also of the view that it would be difficult for AirAsia to comply with Indonesia's aviation regulation in less than a month.

“Even if they (AirAsia) are to speed up their recapitalisation plan, it is hardly conceivable that they can do it within a month,” she said.

An analyst, who declined to be named, questioned the Indonesian policy as positive equity may not directly relate to safety standards adherence.

“An equity-negative airline can still spend money on aircraft maintenance.It does not mean that it has to stop safety measures once shareholders’ fund is [in] deficit,” the analyst said.

AirAsia on June 17 announced that it is recapitalising both its Indonesian and Philippine operations, which include raising share capital to around US$100 million for IAA from US$13.81 million, raising a minimum of US$100 million from new investors who will subscribe to convertible bonds issued by IAA, and floating 20% of IAA shares.

Last Friday, The Jakarta Post reported that 13 airlines, including IAA, had been given until July 31 to move their balance sheets into positive figures.

Failing to do so, according to Indonesia's Law No 1/2009 on aviation, will result in their operating permits suspended by the Transportation Ministry.

The other 12 airlines are Batik Air, 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.

When contacted by The Edge Financial Daily yesterday, AirAsia group chief executive officer Tan Sri Tony Fernandes declined to comment.

However, IAA corporate secretary Audrey Progastama Petriny was reported as telling The Jakarta Post that the carrier will comply with the ministry’s regulation and is in the process of restructuring its financial situation.

In a report yesterday, Credit Suisse Securities Research said the suspension, if triggered, should be positive to AirAsia’s shareholders in the long run.

That's because a failed turnaround and continued life support for loss-making IAA would be negative to AirAsia's stock, even though this is already priced in, it added.

“We are not certain if the [Indonesian Transportation] ministry's warning can be taken at face value, but if local capital is not forthcoming and IAA’s operating permit is suspended, this may be the catalyst that forces the management to wind down IAA,” it said.

“There would be a period of transition keeping sentiment negative (up to RM0.75 per share of amount due from IAA could be written off, reported profits would decline as lease income from IAA disappears), but in reality such an outcome should be very positive for shareholders in the longer run,” Credit Suisse added.

Negative equity occurs when total asset value in balance sheet is less than total liabilities. As at March 31, IAA’s total asset stood at 4.77 trillion rupiah (RM1.4 billion), while total liabilities were 7.81 trillion rupiah, resulting in a negative total equity of 3.03 trillion rupiah.

Under the regulation, scheduled airlines operating planes with a capacity of 70 seats or more are required to have a paid-up capital of 500 billion rupiah. Those with aircraft of 30 seats or less must have a paid-up capital of 300 billion rupiah and those operating cargo planes must have 100 billion rupiah.

AirAsia shares closed three sen or 1.97% lower at RM1.49 yesterday, with a market capitalisation of RM4.23 billion.

This article first appeared in The Edge Financial Daily, on July 7, 2015.