Thursday, June 23, 2011

How Is AirAsia Going To Finance This New Airbus Order?

On 25th May 2011, I wrote the following: http://whereiszemoola.blogspot.com/2011/05/update-on-airasia-earnings.html

Back in early Aug 2010, I gave AirAsia credit. Yeah I did. LOL!

In the posting Positive Move That AirAsia Defers Their AirBus Order, I said the following...

  • However, let me say this, I have to give AirAsia some credit for eating the humble pie and for successfully persuading AirBus to allow them to defer the delivery of the air crafts and more so, this move really gives them a fighting chance to survive and to overcome their insanity of building a company which was clearly over burdened by the immense corporate debts they took upon to finance the building of their business.Yeah.. AirAsia should be ok for the next one year or so... yeah.. this is a POSITIVE CORPORATE exercise... it's certainly extremely crucial that AirAsia made this postponement of delivery.... but... deferring is only a postponement.... and in regardless, these air crafts order still needs to be delivered!
And AirAsia the stock had done fairly well since then. (LOL! That would be some major understatement for some)



(ps: you are welcome! :D )

And I continued to make reference on it.

On 4 Dec 2010: A Look At AirAsia Stellar Earnings. The positive moves from the deferment of the aircrafts was visible on the balance sheet. I made the following remarks.

  • The cash/debt level, has it improved?
    The c.c or capital commitment column 'improved'. Would I pay attention to the value? Or should I pay attention to the number of aircraft to be delivered?

On 24 Feb 2011: What Do You Thnk Of AirAsia's Earnings?

From that posting ::

Cash actually improved a lot compared to the previous quarter.

And debt increased slightly.
But the capital commitment... there was a huge improvement, yes?
And as mentioned before in August 2010, I thought it was a Positive Move That AirAsia Defers Their AirBus Order.

Seriously... it's giving AirAsia a fighting chance to survive!!!

And I still hold those remarks from that posting.
  • However, let me say this, I have to give AirAsia some credit for eating the humble pie and for successfully persuading AirBus to allow them to defer the delivery of the air crafts and more so, this move really gives them a fighting chance to survive and to overcome their insanity of building a company which was clearly over burdened by the immense corporate debts they took upon to finance the building of their business.

    Yeah.. AirAsia should be ok for the next one year or so... yeah.. this is a POSITIVE CORPORATE exercise... it's certainly extremely crucial that AirAsia made this postponement of delivery.... but... deferring is only a postponement.... and in regardless, these air crafts order still needs to be delivered!
  • Anyway... a postponement is a postponement is a postponement. Come 2014 (last August AirAsia deferred 8 AirBus to 2014) and 2015, these air crafts still needs to be delivered. Which means, from now till then, AirAsia still needs to ensure that it builds up its cash flow to ensure it can accept delivery of these air crafts that they had ordered. Unless of course, AirAsia can pull off another miracle by asking AirBus to allow them to defer yet once more. :P
    ps: yeah, AirAsia X listing would indeed help AirAsia financials. It too is required. And it is the ONLY OTHER logical and sensible option for AirAsia to rescue its dire balance sheet.

Back in early 2009, I certainly thought AirAsia was doomed. I really thought there was a 90% chance it go into deep trouble but now I have changed my opinion. It's doing all the right things to survive.

They got their placement of shares. They deferred their aricraft order and their current plans to list AirAsia Thailand would help a lot!

But then the main issue or risk is... 2014 and 2015.

That's when AirAsia would have to take deliveries of all the aircrafts orders they have postponed. Will they survive? Or will they not?

ps: I have no idea what the stock would do. :/

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Last night AirAsia reported its earnings.

I believe the following updated table would speak for itself in regards to the much improvement in AirAsia balance sheet.



ps: And as usual I have no idea and have no interest to know how the stock will do.


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I repasted the entire posting because  today, AirAsia confirmed its new order of aircrafts:  AirAsia places firm order for 200 A320 Airbus aircraft

200 aircrafts!

Holy cow!
  • KUALA LUMPUR: AIRASIA BHD [] placed a firm order with Airbus for 200 A320neo aircraft, which is the largest order for the aircraft manufacturer.

    Altogether, AirAsia has now placed firm orders for 375 A320 Family aircraft, with 89 already in service on the carrier's fast-growing pan-Asian network. In addition, the carrier's long haul affiliate AirAsia X is also an all-Airbus customer having placed orders for 38 widebody aircraft.

    The order for the 200 aircraft makes AirAsia the biggest airline customer for the Airbus single aisle product line worldwide. Its A320neo aircraft will be powered by CFM International’s new LEAP-X engines.

    AirAsia group chief executive officer Tan Sri Tony Fernandes said on Thursday, June 23 with this historic deal, AirAsia had secured its future with the ability to meet the huge growth potential offered by the Asian market.

    “Our decision to be one of the launch customers for the A320neo will ensure that we remain at the forefront of our business, with one of the world's youngest and most modern fleets," he said at the Paris Air Show.

    The A320neo, which incorporated new engines and large wing tip devices called sharklets, will ensure fuel savings of 15% and additional range capability of 500 nautical miles (950 km), or the ability to carry two tonnes more payload at a given range.

    The fuel savings translate into some 3,600 tonnes less tonnes carbon dioxide per aircraft per year. In addition, the A320neo will provide a double-digit reduction in NOx emissions and reduced engine noise. The A320neo will have over 95% airframe commonality with the existing models, enabling it to fit seamlessly into existing A320 Family fleets.

    Over 7,000 A320 Family aircraft have already been ordered and almost 5,000 delivered to more than 330 customers and operators worldwide.
No price mentioned???

So I searched Bursa website: Purchase of Airbus A320 Neo.pdf
  • AirAsia Berhad (“AirAsia” or “the Company”) is pleased to announce that it has signed a Purchase Agreement with Airbus S.A.S (“Airbus”) to purchase two hundred (200) Airbus A320 NEO aircraft (“A320 NEO Aircraft”).

    With the purchase of the A320 NEO Aircraft, the aggregate total of AirAsia’s aircraft order for the AirAsia Group including the current A320 aircraft will be three hundred and seventy five (375) aircraft orders comprising one hundred and seventy five (175) firm orders of the current A320 aircraft and two hundred (200) firm orders of the A320 NEO Aircraft.
Let's refer to the table from May's posting again.



Yes, cash is improving but the most worrying thing for me is the C.C or Capital commitment. As per the most recent earnings report, fy 11 A1, AirAsia said its total capital commitment for new aircrafts totals some 19.635 billion ringgit.

Today's order:?
  • The value of the A320 NEO Aircraft Purchase based on list price is approximately US$18.2 billion for 200 aircraft.
US$18.2 billion!??

WOW!

Using a lower and simple exchange rate of 3.00 to the USD, this would work to about an aircraft order worth 54.6 Billion ringgit!

Which means AirAsia capital commitment would now be 74.235 billion ringgit!!!!

WOW!

This is massive. As mentioned before and highlighted again in the top of this posting, I was worried about AirAsia financial position back in 2009. However, because AirAsia had deferred its new aircrafts deliveries, AirAsia financials turned for the much better. Cash flow improved. And with the possible listing of its subsidiaries, AirAsia looked ok. But today's announcement is scary. It's a massive worry. How on  earth is AirAsia going to be able to finance this?

Ok, the new the aircraft delivery schedule is to commence from 2016 through 2026, and when we add in the current existing order with this new order, from now till 2026, AirAsia will be taking in delivery of 285 new aircrafts!

How?

AirAsia still can ah?

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From AirAsia announcement today, the delivery schedule.

( first line would read, aircrafts no.90 to 96 or 7 new aircrafts will be delivered this year. This is part of the current A230 Airbus order.)

Aircraft N° 90 - 96 7 2011 Current A320


Aircraft N° 97 – 110 14 2012 Current A320

Aircraft N° 111 – 123 13 2013 Current A320

Aircraft N° 124 – 141 18 2014 Current A320

Aircraft N° 142 – 160 19 2015 Current A320

Aircraft N° 161 - 175 15 2016 Current A320

Aircraft N° 176 – 179 4 2016 A320 NEO Aircraft


Aircraft N° 180 – 193 14 2017 A320 NEO Aircraft

Aircraft N° 194 – 211 18 2018 A320 NEO Aircraft

Aircraft N° 212 – 230 19 2019 A320 NEO Aircraft

Aircraft N° 231 – 250 20 2020 A320 NEO Aircraft

Aircraft N° 251 – 271 21 2021 A320 NEO Aircraft

Aircraft N° 272 – 294 23 2022 A320 NEO Aircraft

Aircraft N° 295 – 318 24 2023 A320 NEO Aircraft

Aircraft N° 319 – 342 24 2024 A320 NEO Aircraft

Aircraft N° 343 – 366 24 2025 A320 NEO Aircraft

Aircraft N° 367 – 375 9 2026 A320 NEO Aircraft

9 comments:

Richard Cranium said...

Mr Moola
Actually, I think it is OK for them to order the planes. It won't affect the cash flow, so long as the planes are put on productive routes.

And since not all the planes will be delivered in one go, the hit won't be all at once. The US$18b payment will only become due over the years.

I think Fernandez is betting that his creditors won't foreclose on him for the debt.

There is a saying "if you want to borrow, borrow BIG so that the banks cannot really touch you without also losing a lot".

This large order is just a marketing stunt. Because Airbus cannot possibly deliver so many planes.

Moolah said...

Ah Richard: You may be right.. but I will be on the cautious side la.

Not saying cannot order new planes... but... comeon... the old order of planes still have remaining some 86 planes (hope i am right here or is it 87) to be delivered...and here AirAsia... wants to buy another 200?

Is like... you order one pizza and one plate of kway teow. You are eating the kway teow... pizza not yet come... and then.... you go ahead and order some.. fish head curry.

Isn't it better ... to digest more of the old order first before making this new order?

Richard Cranium said...

I agree with you, better to swallow the old ones first.

But, because we are not privy to the details of the order, we cannot also day the older ones are now replaced by the newer ones.

Orders are not the same as revenues, nor are they the same as expenditure.

Even in my business, sometimes the order is not worth the paper it is printed on.

Moolah said...

Ah Richard: I do understand your thinking. Like the current existing order. Airbus was 'kind' enough to allow AA to defer delivery of planes....

Anyway....

see this is what I am thinking now... ok.. the options to list AA Thai, AA Indonesia can and will help AA financials... but... looking at this order commitment...

It's 74 Billion ringgit... and as per the current order, the delivery is expected to be completed by 2026.

So from now till 2026... I ask myself two things...

1. How much can AA group make within this period?
2. Will it be enough to cover the total money (+ interests) spend to finance the purchase of all these planes?

Then I look at 76 billion ringgit again...

Then I think about it again...

from now till 2026... that's a 15 year time span...

hmmm.... 76 divide by 15 ... that's anout roughly .... 5 Billion ringgit....

hmm.... can AA make 5 billion a year?

Can ah?

Then I think about the size or the order commitment again...

hmmm.....

how?

peng01 said...

what if they IPO airasia X, airasia indon and airasia thai, airasia vietnam etc for funding ?

Moolah said...

peng01: If you follow my postings on AAsia last year, I acknowledged the fact that these listings would help. It would give AirAsia a fighting chance against its excessive borrowings.

But this ... this.... this is just something else.... and I just think AA is severely handicapping itself by making such an excessive order.

brotherlone said...

er, air asia needs to spend, so they can recognise deferred tax income from ITAs and CAs.

build up their reserves (a huge chunk of it are not cash but mere accounting profits), and use it to finance more aircraft purchases... rinse and repeat...

AirAsia's branding campaign is also targetted towards investors and bankers/creditors alike.

Debt levels and debt burden could be much higher, as those aircrafts are on finance lease. i.e purchase price includes financing costs.

dont think you should put too much weight on its balance sheet, you probably want to look more into its cashflow generation ability, and the expiry of those ITAs and CAs

Moolah said...

brotherlone: I am indeed more than aware of the cashflow and because of it and the decision that AAsia took to defer its aircrafts since last year, its cash flows turned EXTREMELY healthy.

However, with AAsia committing to this extravagent order, whatever cash derived from its operations and whatever cash 'hidden' by the depreciations of planes... I am afraid these cash would only end up financing the planes.

Of course I could be wrong by being too cautious...

peng01 said...

airasia + MAS share swap, hope to hear something from u soon :)