E&Y casts serious doubt over the airline’s ability to continue as a going concern- Will Air Asia be able to rough it out?

• E&Y expresses concern over Air Asia’s financial health
• Air Asia hustles to seek loans & share capital

Air Asia Group Bhd. is another airline that is battling at the forefront with slumping demand and whose future has been questioned over the recent few days. The carrier’s shares took a hit following a trading suspension as E&Y, the airlines’ auditor, expressed serious doubt on the carrier’s ability of continuing as a going concern. As per E&Y’s statement to the Kuala Lumpur stock exchange, the airlines’ current liabilities already exceed its current assets by MYR 1.84 bn (US$ 430 mn) at the end of 2019, in addition to a reported net loss of MYR 304 mn (US$ 71 mn). This was last year, even prior to the effects of Covid-19 that literally brought the global airline industry to its knees amidst the worldwide travel ban imposed by several countries. Given the little revenue that trickled in for the carriers worldwide this year, the airline quite apparently reported another net loss of MYR 803 mn (US$ 188 mn) for Q1 2020 in conjunction to its current liabilities exceeding its current assets by MYR 3.6 bn (US$ 840 mn). Air Asia revealed in its stock filing last Wednesday (July, 08^th), that criteria had been triggered for it to be classified as a financially distressed company, further entailing it to provide a business improvement plan. The airline, however, is as of now avoiding that designation by availing of the 14-month relief period provided to companies severely impacted due to Coronavirus by the Malaysian bourse.

                       Source: EQUiBase

However, the auditor has also noted that they are witnessing a positive trend in the airline’s business as travel restrictions are being eased the world over, with flight frequencies, seat booking and load factors beginning to show an uptick, signalling signs of improvement. For instance, Air Asia is said to have sold ~41,000 seats in the last week of June, indicating a step towards recovery, with the expectation that it would gradually return to its normal operational level by early 2021. In spite of this, the road ahead is expected to continue remaining tough for the company with several countries still battling the spread of the virus. The airline however has already been taking steps to cut costs, including letting go of 7.5% of its 23,000 strong workforce. The Company has also reportedly brought down its cash expenses by ~50% so far this year. In addition, the company is also engaged in negotiating for payment deferrals with suppliers along with halting aircraft deliveries.

Raising share capital & loans

The airline is now tasked with injecting cash into its business. While Air Asia is exploring options, analysts presume the airline would require a combination of options, especially since banks are less likely to lend in the absence of shareholders agreeing to a capital raising exercise. CGS-CIMB (a Malaysia based research firm) suggests Air Asia would require MYR 3 bn (US$ 700 mn) in additional funding in order to maintain a healthy cash position. SK Group, a South Korean conglomerate is a potential investor who is willing to make a private placement, subject to Air Asia securing MYR 1 bn worth of government and bank loans. A few financial institutions have also indicated their willingness to provide conditional loans to the airline. Even the airlines subsidiaries in Indonesia & Philippines have applied for bank loans. Another key funding option is a sale of stake in Air Asia India (a JV between Air Asia holding 49% and Tata Sons holding 51% stake), to Tata Sons, with discussions already on for the same.

The Group is targeting a bailout of ~MYR 1 bn (US$ 234 mn) in Malaysia, of which some at the very least will be eligible for government support under Malaysia’s ‘Danajamin Prihatin Guarantee Scheme’. The group is also looking at collaborations with third parties that could result in investment in some segments.

Airlines globally have been struggling with the steep decline in travel demand. As per IATA (International Air Transportation Association), the global airline industry is expected to lose ~US$ 84.3 bn in 2020 along with net profit margins contracting 20%,  adding that “Financially, 2020 will go down as the worst year in the history of aviation”. Paul Yong, an equity analyst at DBS, notes, “It’s quite clear globally that for privately owned airlines, this is an exceptionally tough challenge. They don’t have as much government support to fall back on,” and in effect pointing out to peers such as the like of Virgin Australia, which collapsed into administration.

CGS-CIMB Research suggests the heightened need for AirAsia Group Bhd for receiving urgent financial help as the airlines’ cash balance could see it through possibly for the next five months at best. In spite of the apparent hardships, the management at Air Asia continues to remain optimistic. Air Asia Boss Tom Fernandes said in an interview with BBC, that Air Asia would survive the toughest challenge his airline has faced since 2001. In the same interview, Fernandes was quoted as saying, "every crisis is an obstacle to overcome, and we have to restructure the group into a leaner tighter ship." Additionally, he adds, “AirAsia is in a good market because COVID has been pretty well controlled in (Southeast Asia) and North Asia". Some even argue the Malaysian government might not let Air Asia fail, even though it is not government owned, as its failure would hurt Malaysia’s economy. As Air Asia Group Bhd hustles to raise loans and inject cash into the business, the lack of travel demand, at least in 2020, is likely to make the road to recovery even tougher.