Less Gearing For AirAsia??

On Star Business: Reduced gearing for AirAsia

• Wednesday July 15, 2009
  Reduced gearing for AirAsia
  By LEONG HUNG YEE
  
  Move to part-defer taking delivery of aircraft in 2010 should lower debt obligations

Ermm... I am puzzled with this header.

The move by AirAsia in part-defer taking delivery of aircraft next year is only a move to shift its taking delivery of the aircraft towards the back end. End of the day, aircrafts delivery will still have to be accepted by AirAsia - unless of course, AirAsia defaults or negotiate a way to reduce its aircraft purchase contract.

What matters is the the capital commitment made by AirAsia when it placed out order for all these aircrafts. And less we forget the capital commitment is a whopping 27.2 Billion.

Now that's the problem isn't it?

Now the debt obligation will only lower when AirAsia finds a way to generate more cash or reduce its capital commitment.

In AirAsia Deferrs Aircraft Deliveries!, 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! Again questions has to be asked if AirAsia was simply too reckless when it placed all that massive order in 2007 for new aircrafts! Crudely put, why commit to such a massive order when it clearly did not have the financial ability to take delivery of all these planes.

Strains are now starting to show. First, the sale and leaseback of aircraft were done. Then we here that AirAsia wants to do a stock sale. And now part-defer of aircraft delivery.

Aren't these the clear strains on AirAsia?

So why did it made that huge order in 2007?

Was it reckless?

Capital funding comes at a huge price. And we all know that in business, acts of reckless capital commitments can easily bring down any given company.

And how can one repay the debts when the debts is actually increasing at an alarming rate all the time?

I do not know and since I am not a pro, I could always be wrong but these are just my plain simple understanding of things.

Anyway, here are the pro views mentioned in Star Business article today.

• PETALING JAYA: AirAsia Bhd’s decision to defer taking delivery of eight Airbus A320 aircraft next year is expected to bring its gearing level down, say analysts.
  
  AmResearch views the development positively, saying AirAsia would manage to avoid building up significant capital and finance costs in its books over a soft phase in passenger demand cycle.
  
  The research house said the move would also lift the market’s previous concerns on AirAsia’s aggressive expansion plan amid a weak demand environment, which could have resulted in a mismatch between slowing earnings growth and escalating costs.
  
  “Assuming the deferral were to materialise, we will lower our net gearing forecast to 2.7 times from 3.1 times in 2010 and 2.8 times from 3.6 times in 2011 – extending out the gearing up cycle over AirAsia’s growth phase.
  “Due to earlier assumptions of poor load factors, the elimination of depreciation and finance charges actually raise our net profit forecast by 9% to 16% to RM537mil in financial year ending Dec 31, 2010,” AmResearch said.
  
  On Monday, AirAsia said it was planning to defer taking delivery of eight A320s for 2010 and may defer taking delivery of another eight aircraft in 2011.
  
  The low-cost carrier was originally scheduled to take delivery of 24 aircraft next year and another 24 in 2011.
  
  OSK Research analyst Ng Sem Guan said the deferment could help the airline lower its “relatively high” gearing level.
  
  “Although AirAsia announced a proposed private placement recently, its gearing remains a concern,” he said, adding that the deferment reflected the less-than-exciting outlook for the carrier.
  
  “We think the deferment suggests that the outlook for the carrier is tougher than expected. The rebound in crude oil price and the fact that the company has unwound all its fuel hedge positions may pressure operating costs. This prompts us to revise downwards our FY10 earnings by 15.5%,” he said. ( ahem.. What Hope For Malaysian Investing Public When Research House Makes Such Calls? )
  
  However, Ng said AirAsia’s on-going fund raising exercise might provide some excitement for its share price performance.
  
  ECM Libra Investment Research said although the deferment of delivery of the eight aircraft next year might cap earnings for 2010, it would help lighten the the group’s debt obligations.
  
  “AirAsia’s gearing level is expected to be five times in FY10. However, the deferment of the aircraft delivery will reduce it a little to a gearing level of about 4.3 times. We also expect its cash balances to improve in FY10 as a result,” it said. (Gearing of 4.3 times acceptable? )
  
  The research house said it was less concerned about the earnings opportunity cost and was more positive about the effects the deferment would have on AirAsia’s balance sheet.

Strange that this news article did not seek comments from the pros who have negative views on AirAsia.

Now wouldn't it be helpful to the investing public gets to read all the contrasting view points on AirAsia?

Knowing both side of the coins is good, yes?

Here are the comments from RHB Research, a research house who had been negative on AirAsia. (added some comments in green bold)

• ♦ Cutting new delivery by a third next two years. Group CEO Datuk Seri Tony Fernandes was quoted by the press as saying that AirAsia plans to defer taking delivery of eight A320 aircraft for 2010 and may opt to do the same for another eight aircraft in 2011. AirAsia was supposed to take delivery of 24 A320 aircraft each in 2010 and 2011 based on the initial plans. The reason given was uncertainty with regards to the timeliness of the completion of the new LCCT, and not funding and cashflow issues. ( LOL! Not a cash flow problem? Comeon.... who is he kidding? )
  ♦ Forecasts. We are downgrading FY12/10-11 net profit forecasts by 12% and 28%, having cut our capacity growth in terms of available seat km (ASK) to 14% from 20% previously to reflect the lower aircraft delivery.
  ♦ Risks. The risks include: (1) Prolonged downturn in the global economy, and hence the regional air travel market; (2) A resurgence in prices of crude oil, hence jet fuel; and (3) Outbreaks of pandemic diseases.
  ♦ Investment case. Demand for air travel will remain weak on the back of the global economic slowdown and the current Influenza A (H1N1) outbreak. Not helping either, is the massive new capacity coming onstream from both full-service and budget airlines in the region over the short term that will intensify competition and depress yields. While cost pressure has eased tremendously with the sharp fall in crude oil prices, crude oil prices could resume its uptrend again. AirAsia is unhedged on its fuel requirements. We believe it is premature to turn positive on airlines, including AirAsia.
  ♦ Maintain Underperform. Indicative fair value is cut by 11% from RM0.70 to RM0.62 based on 9x revised FY12/10 EPS, at a 60% discount to benchmark 23x (the average historical 1-year forward PER for Ryanair during its growth stage) to reflect our concerns on AirAsia’s way over-stretched balance sheet. As at 31 Mar 09, AirAsia’s net debt and gearing stood at RM6.71bn and 3.71x that are not considered prudent under the current highly uncertain economic condition.