Tuesday, July 14, 2009

AirAsia Deferrs Aircraft Deliveries!

On today's Star Business: AirAsia: Plane delivery to be partly deferred

  • Tuesday July 14, 2009
    AirAsia: Plane delivery to be partly deferred
    By B.K. SIDHU

    AirAsia to hold back on eight aircraft each in 2010 and 2011

    KUALA LUMPUR: AirAsia Bhd plans to defer taking delivery of eight Airbus A320 aircraft for 2010 and may opt to do the same for another eight aircraft the following year, said its group chief executive officer Datuk Seri Tony Fernandes.

    “We are negotiating with Airbus SAS to push the orders to the back end. Our focus next year is to consolidate our aircraft type to all A320s and return the 13 B737 that we have leased from GE Commercial Aviation Services (GECAS),” he told StarBiz in an interview.

    AirAsia became the largest customer of the Airbus A320-200 in December 2007 after it placed a firm order for a total of 175 aircraft, with an option for 50 more. Deliveries are expected to run until 2014. For 2010 and 2011, the airline is slated to take delivery of 24 aircraft each year.

225 airplances. Isn't this a simple issue of ordering too many aircrafts? Overbought?

  • As at end-June, the budget airline had 61 aircraft of which 48 are for its Malaysian operations, and the rest for Thai AirAsia and Indonesia AirAsia.

    Besides that, it also has a fleet of 16 B737, of which three are its own and 13 leased from GECAS.

    With the deferment, AirAsia is expected to push most of it new aircraft to its associates in Indonesia and Thailand, leaving very few new aircraft for its Malaysian operations, thus limiting its growth potential going forward although the two units will be able to expand more aggressively.

    “Deferring the delivery of these aircraft is an opportunity lost to AirAsia as it would mean forgoing an attractive 12-year aircraft financing package which is close to LIBOR (rates) negotiated just prior to the economic crisis. (But issues arising from) the uncertainty of the new LCCT to be completed by July 2011 far outweighs the opportunity lost in this attractive financing (package),’’ said Datuk Kamarudin Meranun, the deputy CEO of AirAsia.

    Fernandes denied that the plan to defer aircraft deliveries had to do with raising funds for the purchase of the aircraft, saying “the funding for this and next year is in order.’’

Hmmm..... the DENIAL that the deferral in aircraft deliveries had to do with raising funds.

Well, can he blame the sceptics when the investing public hears about AirAsia Stock Sale? And what about its sale and leaseback on some aircrafts? And what about its stretched balance sheet issue?

  • In February this year, AirAsia mandated Barclays Capital, the investment banking division of Barclays PLC, to finance 15 of its new Airbus A320.

    “We are in negotiations with the supplier for all aircraft to have minimal or zero cash outlay and that will not put a strain on our cash.

    “We are not delaying the deliveries because of cashflow, we need the planes for our operations but there is an infrastructure risk out there that we cannot afford to take,’’
    Fernandes said.

    All airlines had been hurt by the economic crisis, Fernandes pointed out,
    but “our cashflow is very healthy. In fact, we are working towards having RM1bil cashflow by the first quarter of 2011.’’

    AirAsia had RM224mil cash and RM6.93bil debts in its books at the end of March 31, most of it for aircraft financing.

That's his exact words for now but look at its cash versus debt as stated above!

  • But for this year, Fernandes said “there will be no delays in taking the aircraft deliveries.’’

    AirAsia has taken delivery of five of 14 aircraft scheduled for this year.

    AirAsia has been expanding routes and frequencies when many airlines globally are cutting back, with the budget carrier aiming to expand to places like India, Middle East and North America.

    “Expansion is necessary but we will never stretch ourselves. Imagine this, if we were to slow down we could have been crushed by our competitors from Singapore. We believe in growing but in a sensible manner,’’ Fernandes said.


So sorry but I just do not understand... how does he really view the fact that as at March 31st 2009, AirAsia had cash balances of only 224 mil (the previous quarter AirAsia had 593 mil and the quarter before that AirAsia had cash balances of 774 million. See posting on Feb 2009: AirAsia Reported Massive Losses Again!!. Is this not a clear sign that cash balances are declining?) and total debts of 6.9 billion. And with all the new aircrafts ordered, capital commitment stands at a whopping 27.2 billion. So expansion is necessary, I would agree, but with such a balance sheet, where cash is only 224 million versus total debts of US 6.9 billion and a capital commitment of 27.2 BILLION, how can one consider AirAsia to be not stretching itself?

Perhaps I am flawed for not able to understand.

  • AirAsia was only one of a handful of airlines to post a profit in the first quarter.

    AirAsia’s earnings in its March quarter rose 26% to RM203.2mil from a year earlier due to higher passenger numbers from additional routes.

Anyway, besides the money issue, it was just back a couple of weeks ago, 24th June 2009, AirAsia made some rather bullish comments on the press here. Some of the points worth noting then were....

  • "I continue to remain bullish. Any product that can reduce cost will make more profit," he said."
  • I have been in the business for the last seven years. There has been perpetual headwinds such as the outbreak of SARS (Severe Acute Respiratory Syndrome in Asia in 2003) and tsunami. We will continue to grow," he added.
  • Fernandes said AirAsia won't defer arrivals of its Airbus A320 aircraft while its route expansion plans remained on track despite the bleak outlook of the sector.
  • "We are not affected by the swine flu outbreak. We have not deferred our plane orders. We are doing very well. We are growing our capacity," he said as the carrier planned to add Colombo to its route in August.


Me? I am simply confused.

ps... and when the bulk of AirAsia's debt are in USD, a weakening ringgit is not helping AirAsia at all, yes?