This article first appeared in Forum, The Edge Malaysia Weekly on January 24, 2022 - January 30, 2022

There are a number of reasons why the government cannot allow AirAsia Bhd to fail. The company made air travel possible for the masses and was able to withstand competition during normal times. Tan Sri Tony Fernandes and his partner Datuk Kamarudin ­Meranun pioneered the art of operating a low-cost carrier (LCC) in the region and airlines in other countries followed suit.

Many LCCs dropped out of the race even before the pandemic because they could not compete with AirAsia.

In the context of making air travel cheaper, its contribution to the economy, particularly the tourism industry, is huge. The sheer number of passengers coming from overseas and travelling within the country has supported numerous ancillary businesses such as hotels, entertainment and transport.

Before AirAsia came into the picture, air travel to even Sabah and Sarawak was an expensive affair.

The ecosystem built around an airline such as AirAsia is so massive that the government cannot afford to see it fail. But having said that, opinions on why airlines such as AirAsia should not be given a blank cheque to survive the pandemic can easily be swayed.

First, it is a private venture whose shareholders benefited when times were good. AirAsia paid out RM3.4 billion in dividends in 2019 and RM401 million for the financial year ended December 2018. The shareholders benefited tremendously.

The dividends should have been enough to compensate those who took up placements in 2019 at RM1.84 per share. At that time, the valuation of the shares placed out was cheap because the airline business was booming in an environment of low oil prices.

But now, the business is so unpredictable that even banks shy away from extending credit to companies involved in it. The airline business will certainly recover when the pandemic enters the endemic phase but when that will happen is anybody’s guess.

Second, if AirAsia receives some form of government assistance, it would open the door for other industries affected by the pandemic to seek the same. For instance, operators of convention centres are still languishing.

However, given the wide implications to the economy should AirAsia fall, there is a case for targeted government intervention in private business.

But any government intervention should only be to save the company and not the shareholders. That has to be made very clear to taxpayers who would certainly want some form of assurance that they will be protected ahead of shareholders.

Also, government intervention should only be for the short term. The government already has Malaysia Airlines on its hands and does not need another airline to deal with in the longer term.

What AirAsia needs is some certainty of short-term funding to help tide it over during the pandemic. With the LCC having been flagged as a Practice Note 17 company, it will be difficult for it to raise additional funds to sustain its operations.

AirAsia is reported to have raised RM2.6 billion from a combination of a rights issue of convertible instruments, a share placement, disposal of assets and loans from banks. The rights issue was completed last December and raised some RM974 million.

Based on its latest results for the nine months to end-September 2021, AirAsia has cash of RM400.7 million. This should increase to more than RM1.35 billion with the fundraising exercise.

Analysts forecast that the cash raised should be enough for it to sustain its business for this year.

But the question is, what if borders continue to be closed and AirAsia cannot get out of PN17 status?

Like other airlines, the company is suffering from a cash burn that is depleting the cash needed to stay afloat. Its net operating cash outflow for the first nine months of last year was RM653 million while revenue for the period only came up to RM534 million, indicating a shortfall in cash to manage the business.

During good times, net cash from operations was in surplus of about 25% compared with revenue. For instance, in the first nine months of 2019 — before the pandemic — net cash from operations was RM2.2 billion compared with revenue of RM8.8 billion.

Nevertheless, AirAsia’s cash burn rate has slowed down. For the first nine months of last year, net cash outflows from operations were RM1.7 billion, indicating a burn rate of more than RM500 million every quarter. The latest quarterly results indicate that the cash burn rate has dropped by more than half.

In addition to its finances, AirAsia faces another obstacle in the form of competition from MYAirline Sdn Bhd, which has been given conditional approval to operate an ultra-low-cost carrier (ULCC). MYAirline’s business model is to offer just the basics for air travel, without any add-ons.

Giving the approval for another airline when the existing players are already suffering from overcapacity and cash burn does not make sense. Before the pandemic, for every one passenger travelling, there were 1.8 seats available based on the capacity of Malaysia Airlines, AirAsia and Malindo Air.

Malindo Air dropped out of the race at the onset of the pandemic while AirAsia and Malaysia Airlines have cut down capacity by more than half to survive. Both companies are still suffering from cash burn.

In normal times, it is fine to issue a licence for a ULCC as competition is good for consumers. But not when the industry is in a crisis owing to factors beyond the control of the incumbent companies themselves.

The regulation is that a company has to record two consecutive quarters of profits to come out of PN17 status. Going by this, AirAsia may take some time to fulfil the condition.

The LCC needs to make some hard decisions to rectify the negative position of its shareholders’ funds, which was the reason its auditors raised the red flag on its status as a going concern.

In the aftermath of the 1998 financial crisis, the government set up special resolution trust agencies such as Pengurusan Danaharta Nasional Bhd and Danamodal Nasional Bhd to help clear bad loans and recapitalise the banks.

Some banks borrowed from Danamodal and the lending came with strict conditions. The interest rate was high and restrictions were imposed on the shareholders. The terms were so restrictive that the banks quickly redeemed the loans.

Targeted assistance could be made available to companies such as AirAsia that are critical to the wider economy. But it should be for the short term, come with restrictions and be used to save the businesses and not the shareholders.

M Shanmugam is a contributing editor at The Edge

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