Review Of AirAsia Earnings

Blogged earlier this month, Positive Move That AirAsia Defers Their AirBus Order, and yes I did give AirAsia a positive set of comments!

• 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!

So I was extremely interested to see AirAsia numbers.

And I would use my last earnings review posting on AirAsia as a guide. On June 2010, I posted How Good Is AirAsia's Latest Earnings?

• This was on the Edge: Update AirAsia 1Q net profit up 10% to RM224m.
  So we have rm 224 million of profit.

AirAsia said it earned 198.9 million.

Last nights earnings was much less than what was reported in June 2010, yes?

LOL! The Star version is AirAsia Q2 net profit 43% up on higher passenger load

LOL! As the random stock master sifu would say, 'Best fit financial news'.

Typical. I guess the local media learned it too well from the US media.

Now don't get me wrong, the Star headline wasn't technically wrong because when compared to the same period last year, AirAsia did improve a lot. However, when compared to the previous quarter, AirAsia's numbers are a concern. Ok, some might argue that quarter to quarter comparison is not too accurate but surely, that decline is worth at least a mention, yes?

And for AirAsia, any sensible review should be on the debts.

Yeah, that's how pathetic it is. All these years, it wasn't about how much AirAsia earned but on how much is AirAsia borrowings.

Why?

AirAsia did it to themselves. Using debt to grow a business is acceptable at times but there must be a prudent control to make sure that the debt does not spiral out of control. Make no doubt about it - too much debts kills!

In June 2010, AirAsia managed to 'trim' its debts slightly lower (for the first time too!) to 7.186 billion.

Simple reasoning: AirAsia said it made 224 million. I will handicap all the 'extra' gains from forex, hedging etc and take that number as it is, as a whole. At 224 million, that would be some 896 million per year. Debts is at 7.186 billion. Capital commitment to new planes is 24 billion. For simplicity sake, assuming all the 24 billion is financed by borrowings as usual. This would see debts balloon to 31 billion. (it's an assumption but dare anyone say it's not possible at all?). Now a simple perspective, at the rate of 896 million, it would take AirAsia some 34.5 years to generate 31 billion of profits! (yeah, I am aware of the number of assumptions I have made here. :P ) ( And I probably should use the 'contracted' capital commitment of 15 billion)

How? Doesn't it sound out of whack? Capital commitment on new air crafts was simply out of order! ( And because AirAsia deferred the deliveries of air crafts, that gave AirAsia the breathing room. It was absolutely crucial! )

Let me say that I am impressed with the 'quality' of the earnings report. It's clear and there's tons of information in it and I wish all other listed companies use AirAsia reporting style as a benchmark! Kudos to AirAsia for this.

Total debts increased to 7.586 Billion!

( Duh! They wrote.. net gearing ratio of 2.27 times, only 1% higher then the preceding quarter!)

And this is the area of concern - the capital commitment.

To put this capital commitment into better perspective, on June 2010, from the posting How Good Is AirAsia's Latest Earnings?

• So far, AirAsia has received 70 of its A320 aircraft on order, with another 105 aircraft to be delivered through to 2015. ( Read more: AirAsia seeks to slow down A320 deliveries )

This is where the problem is.

Another 105 aircraft still needs to be delivered to AirAsia!

That's a lot of money! And as mentioned in the June posting.

• 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

And my view remains.

The cash balances for AirAsia now stands at 858 million. ( I would like to see AirAsia collect all the money due from its associates! It's no small change. )

One of my last remarks in the posting on 5th August 2010, was..

• ps: I am well aware that AirAsia's cash flows had certainly improved tremendously.

Now the critics would be real quick to say point out that I need to qualify that statement further!

Last fiscal year AirAsia had a huge placement of shares. It found investors willing to fork out money to invest in its share placement. AirAsia raised some 509 million and if one discount the money raised from that share placement, AirAsia is really, really in a poor financial state.

I agree. :P

Here's AirAsia cash flows.

From 2 quarters of operations, AirAsia generated some 483 million cash. ( That's impressive. Really! It's like a cash cow! :P)

But....

look at how AirAsia is using (burning? :P ) their cash...


That big fat arrow on top, that's where the concern is. Some 727 million was spend on 'property, plant and equipment' and I would assume that this is the acceptance of new air craft deliveries.

So despite the ability to generate that impressive 483 million cash, some 727 million was spend buying aircrafts!

Hey, basic math... money out more than money in!

And that's a not sustainable equation!

Which is why AirAsia cash flow showed a net increase of 338.384 million in borrowings! ( 619.183 - 280.789 )

How?

Cash flow is certainly AirAsia biggest problem. That aircraft order was simply too huge previously. Deferment is only a temporary solution. It does not solve anything. Currently as stated, AirAsia is contracted to accept some 14.9 billion worth of aircraft. Another 8.4 billion is authorised but not contracted. Add in the current borrowings of 7.586 billion. This is where the headache and the concern is.

And as mentioned before, I do believe that the listing of AirAsia X could help. And also maybe the listing of AirAsia Indonesia and AirAsia Thailand. This is the viable option left for AirAsia to tackle it's main problem.