This article first appeared in The Edge Malaysia Weekly on November 7, 2022 - November 13, 2022

LOW-COST carrier AirAsia Aviation Group Ltd (AirAsia), the aviation arm of Capital A Bhd, may merge with AirAsia X Bhd (AAX) as part of the restructuring of Capital A, sources say.

Both carriers were founded by Tan Sri Tony Fernandes and Datuk Kamarudin Meranun but are currently under two different listed companies — Capital A and AAX.

While AAX has cleaned up its balance sheet after a hard-fought debt restructuring exercise with creditors, AAX and Capital A have just announced the appointment of banks and legal firms to work on their restructuring.

Capital A, in its announcement to Bursa Malaysia last week, gave no further details on its restructuring. Sources tell The Edge that the sale of AirAsia to AAX is on the table.

“There will be no cash involved. It will be a straightforward sale by Capital A in exchange for AAX shares,” says one source.

Capital A and AAX are both Practice Note 17 (PN17) companies and have to regularise their financial condition.

The merger of AirAsia and AAX is to form a consolidated low-cost airline under the AirAsia brand, which will continue to be listed on Bursa under AAX.

After spinning off its airline business, Capital A will keep its non-aviation digital assets, such as the airasia Super App, logistics venture Teleport, BigPay fintech service and venture arm Redbeat Capital.

The consolidation of the two carriers will help address their PN17 status.

A merger between AirAsia and AAX might not come as a big surprise, given that its major shareholders had floated the idea before AAX’s RM33.65 billion debt restructuring deal — which was completed in March this year. However, it is understood that Capital A’s board of directors at the time was against the idea of merging AirAsia with AAX, which was loss-making and laden with debt.

A Nov 1 filing with Bursa Malaysia showed that Capital A has engaged RHB Investment Bank Bhd to assist in the formulation of possible proposals with the aim of developing a plan to regularise its PN17 condition. It has until January 2023 to submit the regularisation plan to the stock exchange regulator and six months from then to complete the regularisation.

It has also appointed Messrs Adnan Sundra & Low as the due diligence solicitors; Deloitte Corporate Advisory Services Sdn Bhd as the independent valuer; Messrs Ernst & Young PLT as the reporting accountants; and BDO Consulting Sdn Bhd as the internal control reviewer.

A day after Capital A’s filing, AAX said it has engaged AmInvestment Bank Bhd to assist in the formulation of possible proposals to develop its regularisation plan. It has six months until April 28, 2023, to submit the proposed plan.

It also appointed Messrs Mah-Kamariyah & Philip Koh as the due diligence solicitors; Deloitte Corporate Advisory Services Sdn Bhd as the joint independent valuer; Messrs Ernst & Young PLT as the reporting accountant; Smith Zander International Sdn Bhd as the independent market researcher; and BDO Governance Advisory Sdn Bhd as the internal control reviewer.

On Oct 26, AAX let lapse an extension of time granted by Bursa Securities for the carrier to complete the implementation of its corporate exercises announced in May last year, which entail the raising of up to RM116 million via a one-for-one rights offering, together with a special issue to raise RM50 million.

Then, on Oct 31, AAX announced the resignation of Fernandes as its acting group CEO, almost four months after he was appointed to the post.  The filing stated that “Fernandes is now going to focus on delivering significant value to shareholders of Capital A, including AirAsia, aviation services, logistics, travel, fintech and the e-commerce lifestyle platform”.

AAX triggered the criteria for PN17 classification in October 2021, after its external auditors, Messrs Ernst & Young PLT, expressed a disclaimer of opinion in the airline’s audited financial statements for the 18-month financial period ended June 30, 2021.

As at end-June, AAX’s cash balance stood at RM25.36 million, with an average monthly cash burn of RM30 million to RM35 million. It operates a fleet of five Airbus A330-300 aircraft.

Capital A, meanwhile, reported a widened net loss of RM931.22 million in the second quarter ended June 30, 2022 (2QFY2022) compared with RM580.06 million in 2QFY2021, weighed down by high jet fuel prices, foreign exchange losses and share of loss from associate AirAsia Thailand. Its cash balance stood at RM631.7 million at end-June, an improvement from RM364 million at end-March.

AirAsia reported positive earnings before interest, taxes, depreciation and amortisation of RM151.5 million for 2QFY2022, compared with a negative Ebitda of RM125.2 million a year earlier. This was contributed by the higher yield for international flights and the implementation of fuel surcharges.

Currently, four airlines are part of the AirAsia group: AirAsia Malaysia, AirAsia Indonesia, AirAsia Philippines and AirAsia Thailand.

Early this month, AirAsia sold its remaining 16.33% stake in AirAsia (India) Pte Ltd (AAI) to Air India Ltd, an affiliate of Tata Sons Pte Ltd, for INR1.56 billion (RM89.25 million). AAI was launched in 2014 as a 49:51 joint venture between AirAsia and Tata Group. In December 2020, AirAsia sold part of its stake, 32.67%, in AAI to Tata Group for US$37.66 million.

Capital A triggered the criteria for PN17 status in January this year, after its external auditor Ernst & Young PLT raised material concerns about the group’s ability to continue as a going concern in its audited financial statements for FY2019 and its shareholders’ equity fell below 50% of its share capital.

Capital A and AAX have common shareholders. Both Capital A co-founders Fernandes and Kamarudin owned 24.64% of Capital A shares through their private vehicles, Tune Live Sdn Bhd and Tune Air Sdn Bhd, as at March 31. Well-known Hong Kong poker player Stanley Choi Chiu Fai holds a 7.99% stake in Capital A through Positive Boom Ltd.

Kamarudin is the largest shareholder of AAX, with a direct stake of 8.94%, while Fernandes held a direct stake of 2.69% as at Oct 11, 2021. Both also owned a collective indirect stake of 31.59% through Tune Group Bhd and AirAsia Bhd.

Capital A shares closed at 60 sen per share last Friday, down 25.93% year to date, giving the company a market capitalisation of RM2.48 billion. AAX shares, on the other hand, settled at 38.5 sen apiece, down  40.77% YTD, valuing the firm at RM157.6 million.

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