This article first appeared in The Edge Malaysia Weekly on November 30, 2020 - December 6, 2020

AIRASIA Group Bhd, Asia’s largest low-cost carrier (LCC), is revisiting its plan to set up new local airlines in Indochina and has earmarked funds from its proposed capital-raising exercise to support these efforts.

Last Tuesday, when announcing its financial results for the third quarter ended Sept 30, 2020 (3QFY2020), AirAsia president (airlines) Bo Lingam said the carrier is actively exploring opportunities for a local airline presence in Indochina.

Two years ago, AirAsia had announced plans to start LCCs in Vietnam and Myanmar. It was also reported to be on the lookout for a partner in Cambodia, but nothing materialised.

With many aircraft available at much-reduced prices owing to the Covid-19 pandemic, analysts believe that this could be a good time for AirAsia to start looking at new markets.

Nomura Global Markets Research analysts Ahmad Maghfur Usman and Divya Thomas say AirAsia aims to establish two to three new airlines in Asean in the next six to eight months to utilise its spare aircraft in various regions, redeploying them to markets that are relatively less affected by the pandemic.

“AirAsia will proceed with plans to raise between RM2 billion and RM2.5 billion in funding for its airline businesses through a combination of debt and equity. Around RM1 billion of this was already reported as soft loans from the government,” they write in a report dated last Wednesday.

“Fundraising will begin in mid-December and continue through January 2021, up to Chinese New Year. Since up to RM1.5 billion of this funding could be drawn down as equity, we think this presents a significant dilution risk,” they add.

MIDF Research notes that while there are talks on capital raising on the equity market, so far, nothing is concrete yet except that there is urgency to the exercise as AirAsia management wanted to complete the bulk of fundraising by the end of January next year.

“Based on management disclosure, the allocation of funds from its capital-raising exercise is earmarked for setting up new airlines in Southeast Asia for future growth, as well as settlement of creditors such as fuel hedges, lessors, trade creditors and refund for passengers. What remains will be part of the group dry powder as the carrier rebuilds itself post-pandemic,” says the research firm in a Nov 25 report.

According to Shukor Yusof, head of aviation consultancy Endau Analytics, now is an “opportune time to create a post-Covid-19 carrier, provided one has a fool-proof business model”.

“Planes are plenty and cheap, too. And Indochina, particularly Vietnam, has continued to grow despite the pandemic,” he tells The Edge. The Vietnamese economy grew 2.62% in the July-September quarter, up sharply from the 0.39% year-on-year increase in the previous quarter.

An analyst with a foreign research house concurs. “If AirAsia has (extra) cash, there is a lot of bargain planes out there to buy.”

Expanding into new markets would also provide a growth story for the proposed cash call, other than using the cash to pay creditors and surviving through the pandemic, the analyst adds.

“If you take a long-term view, it makes business sense to start exploring new markets because the potential of the tourism sector in Indochina is tremendous. And there is no perfect time to start,” another analyst, who declined to be named, tells The Edge.

AirAsia announced last week a partnership with Turkish Airlines through the cross promotion of destinations in anticipation of the upcoming revival of international travel.

Still, opponents of the move believe that AirAsia should prioritise boosting its coffers over spending on new markets given that passenger volumes are not expected to return to 2019 levels until 2024 at the earliest, according to International Air Transport Association estimates.

“Some may question the timing of this plan when the carrier itself requires substantial cash injection to recapitalise its balance sheets on the massive losses it has suffered during the pandemic. Depending on the cost of launching a new low-cost start-up, does it make sense to stretch its capital thin during the period?” the analyst points out.

AirAsia currently has local units in Malaysia, Thailand, Indonesia, the Philippines and India. It announced the cessation of its 33%-owned associate AirAsia Japan Co Ltd in October — the first coronavirus-related casualty in the group.

Nomura Global Markets Research says AirAsia management has indicated that AirAsia Japan and AirAsia India were the largest cash burners and that an exit from India seems likely in the near future as AirAsia recommits to its Asean focus.

“Reports in the Indian media on Nov 24 indicated that AirAsia India would receive US$50 million in emergency funding from its Indian partner, the Tata group, which could potentially dilute AirAsia’s stake from the existing 49%,” it says.

CGS-CIMB Research transport analyst Raymond Yap notes that AirAsia’s cash balance fell from RM2.6 billion as at Dec 31, 2019, to RM618 million as at Sept 30, 2020, which he estimates can last the carrier less than three months at the actual burn rate of RM222 million per month during the nine months ended Sept 30, 2020 (9MFY2020).

He also points to the reimposition of the Conditional Movement Control Order in October that has curtailed domestic travel again, coinciding with the progressive resumption of the carrier’s lease instalments, making 4QFY2020 tougher than expected.

“AirAsia expects its RM2 billion to RM2.5 billion capital-raising exercise to be completed within the December 2020 to February 2021 timeframe. Based on our current assumptions for traffic recovery, the RM2.4 billion in capital raising should be just barely enough, but is cutting it very thin,” says Yap.

Despite how the odds are stacked against AirAsia, MIDF Research believes the LCC is poised to survive this pandemic with stringent cost control and continuous innovation of its business model.

“Operationally, we are expecting a decline across the board, below the FY2019 level. We are slashing our FY2020 core net losses estimates of RM2.7 billion to RM3.35 billion, 24% lower due to higher-than-expected losses for 3QFY2020,” says the research firm.

“However, with vaccine developments indicating encouraging results and AirAsia managing its cost base very successfully, we forecast a slight positive net profit for FY2021 at RM109.4 million, compared with the RM435 million loss from our previous forecast. This is premised on the strong return of air travel demand slated for the second half of 2021, due to vaccine availability, albeit limited accessibility. However, it is sufficient to act as catalyst for a rebound in air travel,” it adds.

AirAsia narrowed its net loss to RM851.78 million in 3QFY2020 compared with RM992.89 million in the previous quarter, as the carrier ramped up its operations following the easing of travel restrictions.

Last Tuesday, AirAsia group CEO Tan Sri Tony Fernandes said he foresees sufficient liquidity for the carrier in 2021. “We are ready to rely purely on the strength of our domestic markets next year.”

AirAsia has already raised RM300 million from Sabah Development Bank, although this amount has been earmarked for projects within Sabah.

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