Cash balance grows but liquidity still an issue at AirAsia X

This article first appeared in The Edge Financial Daily, on November 18, 2019.
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KUALA LUMPUR: The latest quarterly report from AirAsia X Bhd (AAX) raised concerns among the investing fraternity that the long-haul low-cost airline may have difficulties in making ends meet, due to a potential liquidity shortage.

This is despite the group’s improved cash balance, which jumped to RM401 million by the close of the third quarter ended Sept 30 (3QFY19) from RM298 million at end-2018.

This is because the increase, according to CGS-CIMB Research analyst Raymond Yap, was due to the sale of aircraft and not operating activities. The group raised RM909 million from the sale and leaseback of five A330s — three in 2QFY19 and two in 3QFY19.

On the back of this is AAX’s current liabilities, which stood at RM2.3 billion, exceeding its current assets of RM798 million by RM1.5 billion, Yap pointed out.

Even after stripping out sales in advance of carriage of RM702 million — representing monies received by AAX from advance passenger bookings — current liabilities still exceed current assets by RM809.8 million, Yap said.

Given that, he is of the view that AAX will require an equity fundraising to remain solvent.

“We have assumed a five billion share issue at eight sen to raise RM400 million in mid-FY20. Alternatively, major shareholders, such as Tune Group Sdn Bhd (17.83% stake), AirAsia Bhd (13.76%), Tan Sri Tony Fernandes (2.69%), and/or Datuk Kamarudin Meranun (8.94%) may have to extend shareholder loans,” he said.


Cash from operating activities lower than funds needed for financing activities

A look at AAX’s 3QFY19 cash flow statement shows that the group’s net cash generated from operating activities was only RM352.91 million, but it needs RM1.14 billion to fund its financing activities.

If not for the RM887 million generated from AAX’s investing activities in the nine months up to end-September — largely due to aircraft sales, which is in line with the group’s move into an asset-light business model — the group’s nine months of FY19 would have recorded a net decrease in cash.

In fact, over the past five years, AAX only managed to generate higher net cash from its operating activities than net cash used in financing activities in two years, which are FY16 and FY17 — as shown in the group’s Annual Report 2018.

When contacted, independent aviation consulting and analysis firm Sobie Aviation founder, Brendan Sobie, said AAX has been using the sale-and-leaseback strategy to boost its cash flow in the last few years.

“It’s not unusual for airlines, particularly low-cost airlines in Asia, to pursue sale and leaseback. It’s a bit more unusual in the wide-body space and it’s not something the AirAsia Group has done historically. But in recent years, AAX has been doing it in a big way,” he said in an email response to The Edge Financial Daily.

Now, after five sale and leaseback this year, AAX is left with two aircraft that are not on operating leases, noted Sobie, formerly an analyst with the CAPA — Centre for Aviation.

“AAX could pursue a sale and leaseback of these last two aircraft, but it may not be prudent to rely 100% on operating leases,” he said, adding AAX has already committed to the sale and leaseback of its 2020 aircraft deliveries (A330neo).


A bailout takeover by AirAsia another option

Apart from equity raising, Sobie suggested that a takeover by AirAsia Group Bhd would help AAX address its liquidity situation.

“AirAsia needs AAX from a network perspective, while some AirAsia shareholders have resisted [the possibility of a takeover] until now. Taking over AAX could be a reality if there are no other viable options for raising cash,” he said.

“AAX needs to be sustained as it is important to the broader AirAsia strategy. Despite AAX’s weak financial position, there is not much of a concern [that] it will cease operations, as the AirAsia bailout option is always there,” he added.

Endau Analytics aviation analyst Shukor Yusof concurred that a bailout takeover by AirAsia is an option for AAX, while noting that the low-cost long-haul model has always been tricky and tough to turn a profit.

“AAX has experienced heavy losses before. Its management has to decide what is best [for the airline]. Perhaps delist it and bring it under AirAsia Group? It depends on how long the company is able to withstand persistent losses. The balance sheet looks like it can withstand near term, [but] cash call is an option,” he said.

Another local brokerage analyst, who declined to be named, agreed with CGS-CIMB’s Yap that equity raising is likely for AAX.

“Visibility [of AAX prospects] is poor due to competition, weak consumer sentiment, and unfavourable ringgit movement.

“From CIMB’s report, cash flow seems to be a big issue. Thus, CIMB is assuming equity raising, which I think may happen as AAX may not have much funding options now. Sale and leaseback would definitely give [AAX] some buffer, though it may not be sufficient,” he said.

This is not the first time that concerns about AAX cash flow was raised, as the group reported a sharp fall in cash balance to RM266 million in 3QFY18 from RM433 million as at end-FY17.

While AAX has not made any equity fundraising so far, but earlier this month, AirAsia announced it is transferring two of its existing slots on the Kuala Lumpur-Singapore route, involving 14 flights, to AAX, which allows the latter to take part in 50% of the route’s net operating profit.


Operating challenges ‘aplenty’

Meanwhile, CGS-CIMB’s Yap said operating challenges for AAX are “aplenty” going forward, including overcapacity in certain routes and departure levy.

“3QFY19 results reflected only one month’s impact from the departure levy; we worry how MAAX’s (Malaysia AirAsia X — AAX’s Malaysian operations) numbers will look in 4QFY19, with a full quarter’s impact.

“MAAX is also due to take delivery of two A330neo from Airbus in FY20F (forecast FY20), [at a time] when overcapacity in Seoul and Taipei, and weakness in Chinese demand have reduced its daily aircraft utilisation from 16 hours to 13 hours,” he said.

“TAAX (Thailand AirAsia X) increased its fleet size to 12 planes after taking new leases for two planes in 3QFY19, with another two leased planes to enter its fleet in 4Q19F, and two more to be delivered from Airbus in FY20F. Due to its aggressive capacity expansion, TAAX’s losses may continue for some time yet. Meanwhile, IAAX (Indonesia AirAsia X) may return to losses in 4Q19F, if it does not manage to lease out its two planes on good rates. Both TAAX and IAAX are 49% owned by AAX.