This article first appeared in The Edge Malaysia Weekly on August 3, 2020 - August 9, 2020

THE liquidity crisis of AirAsia X Bhd (AAX), the troubled low-cost, long-haul affiliate of AirAsia Group Bhd (AAGB), has become more urgent than ever after its latest quarterly results show that the airline is now technically insolvent.

On Thursday, the airline announced its first-quarter 2020 financial results after a two-month delay, which saw its liabilities exceeding its assets by RM864.1 million. It also triggered the Practice Note 17 (PN17) criteria, as its shareholders’ equity on a consolidated basis has fallen to less than 25% of its share capital.

AAX saw its net loss widen more than five times to RM549.7 million in the three months ended March 31, 2020 (1QFY2020) compared with the previous quarter. The quarterly loss also exceeded the airline’s RM489.5 million net loss for all of 2019. The latest quarterly loss brings AAX’s accumulated losses to RM2.04 billion as at March 31, 2020. It had reported a net profit of RM43.3 million in the year-ago quarter.

AAX has long been loss-making because its huge financial costs and depreciations ate into its meagre earnings. The Covid-19 pandemic exacerbated the situation, as the airline has grounded most of its planes since April amid global travel restrictions. AAX started reducing its capacity to China in February, followed by Australia, Japan, South Korea and India in March.

With the civil aviation industry having ground to a halt in March, it is expected that the airline’s losses will only worsen in 2QFY2020.

Depending on whether a vaccine is found and approved to fight Covid-19, the short-term outlook for AAX continues to be bleak.

To sustain its operations as a going concern, AAX will doubtless have to raise funds to keep it afloat.

“The airline will definitely need to raise equity now that its shareholders’ equity is in the negative,” an analyst who covers AAX’s stock tells The Edge.

“Either that or they can merge with AAGB, as the latter has a stronger balance sheet. It is really going to be tough for AAX.”

AAGB is the second-largest shareholder of AAX with a 13.8% stake, after Tune Group Sdn Bhd at 17.8%.

AAX, founded in 2007, started as FlyAsianXpress Sdn Bhd, serving the rural areas of Sarawak and Sabah through turboprop aircraft. It later evolved into a long-haul, low-cost airline, becoming the first in Asia to test the business model.

The business model proved, however, to be very hard to crack. The economics of long-haul, low-cost air transport has been difficult to balance, especially during a period of high oil prices. Passengers expect fares to remain affordable, when the operating costs of the airline continues to grow as oil prices increase.

Since it was listed in 2013, AAX has been able to record full-year net profits only in FY2016 and FY2017. The situation has become more dire, as AAX resumed recording losses in FY2018 and bigger losses in FY2019.

The Covid-19 pandemic and the Movement Control Order (MCO) implemented by the Malaysian government on March 18 meant AAX had had to ground its entire fleet at its main hub in klia2 since March 28.

In the slide accompanying its 1QFY2020 results, AAX says its focus this year will be on managing cash flows and cost-saving initiatives, including the potential outright sale of two Airbus A330s to raise estimated gross proceeds of US$100 million (RM424 million) at market value.

The group will also be seeking the early return of aircraft to focus on a fleet of 16. It states that, so far, it has managed to return one aircraft early at no termination costs. Currently, AAX has a fleet of 32.

AAX will also be rescheduling and restructuring payments with all business partners and vendors and renegotiate lease rates across its entire fleet and lease maintenance reserves. The focus of the renegotiation will be on power by the hour and pay per use arrangement until travel demand normalises, it says.

The group will also seek to renegotiate airport charges across all stations and other contract terms with all business partners and vendors.

Passenger load factor slips in 1Q

In 1QFY2020, AAX saw its passenger load factor drop to 74% from 83% a year ago, with the number of passengers carried declining 25% year on year (y-o-y) to 1.14 million passengers.

AAX’s seat capacity declined 15% y-o-y to 1.54 million available seats in 1QFY2020. Available seat kilometre (ASK) capacity declined 21% y-o-y to 6,874 million passenger-km, owing to capacity management, following increased travel restrictions and international border closures across the region.

Its revenue per ASK stays flat at 13.44 sen per seat-km during the quarter vis-à-vis 13.43 sen per seat-km in 1QFY2019. Cost per ASK rose 16% to 14.94 sen per seat-km, however, owing to reduced ASK capacity and ongoing fixed maintenance costs.

Hard for AAX to raise funds through rights issues

If AAX wants to raise funds, it can do so through either private placement or rights issues. Private placement will depend on whether the group can secure new shareholders, whereas rights issues will depend on the appetite for its existing shareholders to subscribe.

A shareholder of AAX says she will have to look at what the plan would be before deciding whether to participate in a rights issue.

“The top management must get their act together. They have leveraged AAX too high. I’m hoping for a merger between AAX and AAGB. Just save the company!” she says.

Another analyst says a rights issue will be tough to conclude for the company. This is because the long-haul sector and leisure market will be the last to recover, even if countries start to reopen their borders and allow international travel.

“It will be quite unlikely for AAX shareholders to inject more money into the group. It will be mostly coming from Tune Group. I don’t think any other institutional shareholders would be keen for a rights issue,” he says.

Tune Group is the investment vehicle owned by Tan Sri Tony Fernandes and Datuk Kamaruddin Meranun, co-founders of AAGB.

AAX could also issue new shares to AirAsia and do an intercompany loan, says another analyst whom The Edge spoke to. He thinks, however, that bankruptcy could be the only way out for everyone because of the bleak outlook for the group in the short term.

AAX’s total borrowings stood at RM6.4 billion as at end-March 2020, with RM917.34 million due in less than a year and RM3.67 billion due after one year but not later than five years. It also has RM137.74 billion in aircraft purchase commitments.

If AAX declares bankruptcy, however, it would mean the end of the group. There is no rehabilitation, and everyone would end up worse off, says a corporate finance practitioner.

“To ensure it is a going concern, AAX should look at re-profiling its debts, which include terming out its loans, enter into an arrangement and [come to a] compromise with its existing trade creditors,” he says.

He believes that, rather than allowing AAX to go bankrupt, the management can request for the group to be rehabilitated through judicial management or a scheme of arrangement under Section 366 of the Companies Act.

These schemes will allow the group’s business to be rehabilitated while keeping its creditors at bay, instead of having the businesses wound up by receivers and managers.

Over the past year, AAX has lost 68.9% of its market value, as at last Thursday’s closing price of seven sen. The counter fell to its lowest on March 19, when it closed at four sen. Since its IPO in July 2013 at RM1.25 a share, AAX has never returned to that level.

Bloomberg data shows that, of the seven analysts covering the stock, six are calling for a “sell”, with an average target price of four sen. The stock is expected to be one to watch out for on Monday, as investors will be able to make their positions known then.

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