Sunday, August 22, 2010

AirAsia X listing under study

10 June 2010

Analysts say long-haul low-cost business model not yet proven

PETALING JAYA: While the listing of AirAsia X Sdn Bhd (AAX) is deemed necessary, some analysts are still studying the viability of its business model as the long-haul low-cost model has yet to chart an established flight path.

It is also on this note that they feel AAX’s listing will have minimal impact on AirAsia Bhd. Not everybody will sell their shares in a proven model such as AirAsia’s for AAX’s relatively new model.

“The success of budget airlines has always hinged on flights not exceeding four hours. Long-haul flights mean that margins will be thinner. Efficiency is also compromised with facilities for inflight entertainment. However, as AirAsia has continuously amazed the market, I won’t be surprised if it succeeds (with AAX),” said an aviation analyst.

An RHB analyst in his report said AAX’s use of wide-body aircraft with a seating capacity of about 400 (versus 180 seats for a narrow-body aircraft) meant it was also harder to fill the plane during off-peak periods.

Nonetheless, the listing is necessary as AAX has placed orders for 17 A330 and 10 A340 aircraft, which are scheduled to be delivered progressively in the next few years.

Without an appropriate equity portion in its balance sheet, it would be difficult for AAX to secure attractive financing for these aircraft, which will cost billions of ringgit.

This listing will also see AAX eventually taking over employment of its own pilots, cabin crew and ground staff, and maintaining its own commercial and marketing teams.

Last year, AAX paid AirAsia RM57mil for a host of airline services.

This will now stop, except for the continued use of the AirAsia brand, its website and the use of the AirAsia academy and training facility.

As no breakdown was provided for these charges, it is uncertain what each service costs. The loss of revenue to AirAsia will, however, be minimal.

On the timing of the initial public offering (IPO) by the second half of 2011, analysts said this suggested that the group would put in extra efforts to churn out better financial numbers to ensure the success of AAX’s listing.

“We believe the group will keep the good news flowing to attract investors’ attention,” said an aviation analyst.

While it is still uncertain how much AAX is planning to raise from the IPO exercise, the recent IPO of budget carrier Tiger Airways on the Singapore Exchange raised S$247.7mil (RM583.5mil). Tiger Airways shares were offered S$1.50 (RM3.53), which values the company at 12.6 times price earnings ratio of its March FY2011 earnings.

AirAsia’s IPO in 2004 raised RM863mil, with its stock priced at RM1.25 for institutional investors and RM1.16 for individual investors.

“On a historical basis, we expect the proceeds to be raised by AAX would be between RM500mil and RM900mil. We believe this would be sufficient for AAX to start on its aircraft expansion,” said an analyst from MIDF Research.

AirAsia presently has a 16% stake in AAX and an option to increase it to 30%. AAX’s other shareholders are Aero Ventures Sdn Bhd (48%), the Virgin Group (16%), Bahrain-based Manara Consortium (10%) and Japan-based Orix Corp (10%).

Aero Ventures is owned by Datuk Seri Tony Fernandes, Datuk Kamarudin Meranun, Datuk Kalimullah Hassan, Lim Kian Onn and former Air Canada chairman and CEO Robert Milton.

By Tee Lin Say

The Star

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