LIQUIDATING OR DOWNSIZING?
The disposal of significant amounts of the operating assets of any company is quite often viewed as a paring down of the company’s operations, a partial liquidation of the company (much like the paying of large dividends) or an attempt by the company to raise money in a market which may not be too friendly to them.
Air Asia is in trouble. Air Asia’s troubles began not after the crash of QZ 8501 but long before when their ‘round the clock’ strategy of grabbing market share at any costs began to eat into their budgets. The consequence of the strategy to grab market share in a highly competitive market in Asia meant having to cut corners. The crash of QZ 8501 merely accelerated the inevitable in terms of the discovery of a lose management structure involving so many different jurisdictions many like Indonesia and the Philippines who eschew international airline regulations where labour exploitation and aircraft maintenance and safety standards are well below international expectations and established standards.
If not all of the suggested reasons for sale of the Aircraft by Air Asia, then at least a number of them appear to apply to Air Asia’s recent announcement of its intention to sale (and lease back) a number of its operating assets, its aircraft.
What is not part of the announcement by Air Asia’s board (who we assume authorised the statement as it should be the case) about its decision to sell 11 aircraft, is the reason why Air Asia sees it to be a wise decision to sell its operating assets in order to achieve what it could otherwise achieve in a more competitive way on the open market.
Another question which needs to be answered is this: Have the shareholders of Air Asia been properly informed of the move with all its attendant reasons and is court approval required for the company to take such a significant step to possibly reduce or alter its capital structure and through such a move its asset base without prior shareholder approval.
WHY AN ASSET SALE IS A RED FLAG
In early 1980 Qantas then still a government owned and a very well-funded airline sold 3 of its new Boeing 747’s to Eastern Airlines in the US in almost similar circumstances. A carefully concealed note in its accounts reported the source of a jump in its earnings and the resultant profit from sale of the 3 Jumbos.
The problem with such exercises and trades is this. Qantas then like Air Asia is today is in the core business of aviation and that means transportation by air. If it reports a profit arising from in-flight food and beverages sale as a key component to its profits, then an analyst would see a red flag in such a report, discount the sales from inflight food and beverages to reveal the real bottom line and performance of the airline from its core activities before making any recommendations to the market.
In 1976 American brewing giant Anhauser Busch reported a large profit for that year in its accounts when the market for its products were reported to be flat. On closer examination it was discovered that Anhauser Busch’s profits for that year in question arose from the profitability of its transportation arm and not from beer sales. In short if the penny still hasn’t dropped, Anhauser Busch beers were not selling. That is the core business of Anhauser Busch.
In order to try to raise more capital for expansion and perhaps acquisitions it considered offers for its transportation arm from a number of suitors in the road haulage and transport sector. It however did not sell its transportation arm as was widely expected in the market. Anhauser dipped into its reserves tightened its belt and held the fort till the turnaround came.
AIR ASIA FOLLOWING CRASH OF QZ 8501
The point is this. Following the disastrous crash of QZ 8501 Air Asia’s soft underbelly was exposed by a series of public relations gaffes, badly managed poorly structured press releases and a series of near mishaps involving the airline.
Air Asia now the subject of heavy scrutiny in most of its destinations outside Asia could have but appears not to have corrected its rapidly declining perceptions in the markets it wishes to tap into.
Asian airline operators (excepting Singapore) have a history of poor maintenance standards and records of their aircraft and low standards of airline safety and training of its staff and crew. Yet they operate with relative impunity in Asia where such lower standards are tolerated as if it is permissible as long as there is money to be made in the sector.
The recent record (over a period of a decade) of Asian airlines (Philippines and Indonesia in particular) being banned from operating flights into European and American sectors bears testimony to this point.
What is the reason for Air Asia, once the darling of the skies, selling off 11 of its aircraft? What will its balance sheet look like after the event and can the impact of the sell-off be explained away in a note to its annual report?
Why has Air Asia not been able to raise the money it needs in the market on competitive terms or simply favourable terms if it is indeed not bleeding or being held in circumspection by its lenders, the market and the general public?
BLESSING IN A WEAK CURRENCY MARKET WHAT BLESSING?
The bit about the sale of Air Asia’s aircraft being ‘a blessing in a weak currency market’ (meaning weaker Malaysian Ringgit )against which currency in particular is not answered by this statement.
What about the need to meet debt obligations denominated in foreign currencies, does that of itself not provide an answer to the sale down of assets? Is there a hedge against any currency fluctuations for the lease back? Or is there a suggestion that the aircraft is being sold to a Malaysian entity where no currency hedging is required in the sale lease back transaction? If this is the case who then is this entity purchasing the aircraft? If it is local I suspect it would be a local bank run leasing company, where regulation and prudential standards of lending is often trampled on where big players are concerned. And if it is indeed a local entity will there not be foreign currency implications for them when paying US$271 million for 11 aircraft? There are too many unanswered questions for a transaction of the sort being touted by Air Asia.
DOWN BUT NOT OUT?
In a period of record low fuel prices why is an airline like Air Asia selling down its assets instead of approaching the market the conventional way to raise money because this is precisely what the exercise appears to be about in the absence of a fuller picture to explain the sell down of assets.
It would not be the case of a sell off or partial liquidation of the airline as such sell off’s are sometimes referred to as in accounting circles, unless of course there is tacit admission by Air Asia that passenger numbers have dived so drastically since the crash of QZ 8501that these aircraft have become a burden on the Airline without the capacity to earn their keep post- crash in the foreseeable future.
In mid-2014 there was talk of Air Asia merging or taking over MAS (Malaysian Airlines). It was not all talk or speculation though because there were at least 2 banks involved in a first stage due diligence of at least one of the two airlines. That exercise ended up costing a significant amount of money to carry out. Shareholder money.
How was that expenditure deferred and the costs associated with it accounted for in Air Asia’s annual report? MAS and its largest shareholder Khazanah denied any such merger was even in their contemplation. Not so according to two accountants who were part of that dialogue and preparation.
Our take on the sale of 11 Air Asia aircraft is that Air Asia whilst being hyped to the sky (no pun intended) and the flamboyance of its CEO and high exposure public relations which did work for a while is now as productive an investment as Queens Park Rangers the soccer team owned by Tony Fernandez CEO of Air Asia is.