Flying in turbulence

After big losses, particularly at AirAsia X, the company’s share price has plunged by more than 20 per cent. Stock took a particular dive in June after a report by GMT Research questioned the airline’s reliance on affiliates’ profits which it suggested the parent simply can’t collect.

Other analysts have been raising questions about AirAsia’s accounting, cash flow and leverage at a time when investors are concerned that all Asian airlines are expanding their fleets at too rapid a pace. It is known that Fernandes, now group chief executive of AirAsia, and Kamarudin, who is executive chairman, have been busily talking to analysts and fund managers to reassure them all is well and many of the reports about financial woes are overblown. But the GMT report alleged the carrier used transactions with its affiliate companies to boost earnings. And another researcher, HSBC, suggested AirAsia’s balance sheet was exposed to “concentration risk” from having all of its loss-making affiliates as customers of the parent group, which is listed in Kuala Lumpur.

The analysts said AirAsia’s loans to affiliates doubled in 2014 even as their performance “significantly weakened…our analysis shows that even if the lossmaking ventures replicate their best year (2010) consistently over the next eight years, their cash flow generation wouldn’t be enough to repay those loans. ” AAX is a particular concern. Its share price has shrunk by a massive 60 per cent. Little wonder. Last year its net loss widened almost six times to $182 million compared to a loss of $31 million a year earlier, despite an increase of 27. 3 per cent in revenue. Worse, the market isn’t seeing any signs of improvement. In fact one local financial researcher, CIMB Research, is forecasting AAX will make net losses of $130. 5 million and $38. 2 million for its financial years ending December 31 2015 and 2016 respectively. And the prospects for subsidiaries in India, Thailand, the Philippines and Indonesia appear just as gloomy. As with anything in the highly complex business of aviation, there are no simple explanations for the clouds that have gathered over Fernandes’ empire. Economic conditions have been volatile. AirAsia may have been a first mover in the region’s budget market but it has since sparked the emergence of more than 60 other LCCs across Asia, bringing increasing levels of competition, lowering yields. The no frills sector has also placed unprecedented orders for new narrowbodies – AirAsia is among the biggest culprits although it has deferred some deliveries and leased out some aircraft – bringing in more and more capacity and again damaging returns.

The bizarre disappearance of Malaysia Airlines flight MH370 on its way to Beijing also severely impacted the crucial Chinese market, not only for MAS but also for AirAsia. Then, in December last year, an Indonesia AirAsia A320 crashed, killing all 162 people on board. Now, there are reports bookings are dropping in some markets due to the outbreak of a deadly respiratory disease, the Middle East Respiratory Syndrome or MERS, in South Korea.

Together, all of these factors have contributed to the group’s decline and there is another potential challenge emerging. Troubled Malaysia Airlines now has a new chief, German Christoph Meuller, who has set about repairing that embattled carrier’s operations and has a pretty good record of success. If he does succeed, AirAsia will face even more competition in its home markets.

There’s another factor that has been raised as a potential contributor to AirAsia’s problems: does Fernandes have fingers in too many pies? Quite apart from the airlines, he is involved in hotels, insurance, aircraft leasing, numerous other businesses, has had involvement in a Formula 1 motor racing team, and is chairman of English football league side Queens Park Rangers which has just suffered the indignity of being relegated for the second time in a few years. Some industry insiders say Fernandes – and no-one is questioning his enormous business talent – needs to re-focus on AirAsia, give it much more attention and get it back on track by clearing up its financial problems.

Is AirAsia facing collapse? Unlikely, given the enormous traffic growth in the region, although some of its affiliates may be in peril if they don’t turn around soon.