‘Mystery’ shrouded deal to save AirAsia?

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Why is Khazanah giving away 20.5% in 'asset'-rich MAS, which has an extensive network and prized position in the Tier-5 airline market, for a stake in debt-ridden AirAsia?

The boss of Khazanah Nasional says that the MAS-AirAsia deal is, among other things, “not a bail-out” of MAS.

Well, we have questions for him.

Firstly, why was this deal worked out in the first place? Why AirAsia? Isn’t AirAsia operating at some 40 times its price earning (PE) ratio?

Looking at its numbers and the fundamentals, the high PE could mean that AirAsia stocks are overpriced.

That may mean some boys are cooking up the numbers to set up the market and make killings.

Former prime minister Dr Mahathir Mohamad said MAS “can learn” from AirAsia on ways to cut costs.

Does that mean all those damned exercise carried out by former MAS chief Idris Jala wasn’t enough? Why don’t we learn from Singapore Airlines or Qatar Airlines?

Oh… we want to learn from our home-grown talent will be the likely answer.

Commissions, commissions
I know this is a BAD deal because Mahathir said so. Mahathir always says something when he actually means the reverse.

So what can we learn from AirAsia?

Let’s look at the home-grown talent’s (AirAsia) records. As of the first quarter of 2011, AirAsia debts amounted to RM7.7 billion with cash balances amounting to RM1.7 billion.

This part doesn’t require teaching for MAS. Its executives are renowned masters.

Let’s see further. In August 2010, AirAsia announced a deferment of its proposed aircraft purchases but sometime in June 2011 it reversed its decision and proceeded to place an order for an additional 200 new aircraft at the Paris Air Show.

No big deal, we can order as many as we want.

Possibly the commissions earned from the purchases dwarfed the one earned from the Scorpene submarines.

AirAsia’s skyrocketing debts

As of March 31, 2011 (first quarter report), AirAsia’s capital commitments stood at RM19 billion.

With the latest announcement, an additional RM54 billion will be added as capital commitments. The proposed capital commitments of about RM74 billion will be spread over a 15-year period ending 2026.

In other words, AirAsia has to increase its earnings to an average of RM5 billion per annum to meet its future dues.

From 2006 to 2010, AirAsia’s revenue grew by ten-fold from RM110 million to roughly RM1.1 billion. This is an average growth of RM 200 million per annum.

Now how will it reach RM5 billion?

This, we will see in the coming months when AirAsia rationalises all its routes and what not.

AirAsia’s cash reserves rose six-fold from approximately RM300 million to RM1.7 billion. But its debts skyrocketed from RM1.05 billion in 2006 to RM7.7 billion in 2010, an increase of 700%.

Surely this looks like a debt burden that is spiralling out of control.

Scheming Fernandes

This AirAsia-MAS deal is signed, sealed and delivered at an onerous and ominous time.

The world economy, including Asia’s, will be heading into another maelstrom and air travel will invariably be hit.

So what can be done?

One, AirAsia can cancel orders but contract penalties will be onerous.

AirAsia wouldn’t want to pay penalties, would it? The debt with Malaysia Airports Bhd (MAB) too, it dragged on for what seemed to be forever.

That option is no go. But then why would anyone want to forfeit commissions (from the purchase of new planes)?

Also, AirAsia chief Tony Fernandes is probably thinking along what economist John Keynes said: “When you are a big borrower, the banks are scared of you.”

So as a big borrower, Fernandes feels that size does matter after all!

He thinks it will shield him from foreclosure as banks will be wary of bearing heavy losses!

But also, a sizeable chunk of those loans are being held by Malaysian banks and in the worst-case scenario, the government and the taxpayers will have to pick the tab to avert a financial meltdown cascading down the AirAsia slope.

AirAsia – bad debtor

Now let’s take a look at MAS, currently the whipping boy but which is instrumental to further the game being played by Khazanah boss Azman Mokhtar and gang.

MAS has a paid-up capital of RM3.384 billion and has a fixed asset value of RM8.4 billion.

Its net asset is at RM 6.962 billion, where cash constitutes RM 2.086 billion.

Compare that to the position of AirAsia, which we have pointed out above. AirAsia has borrowings of up to RM7.7 billion and its cash position is RM1.7 billion.

In an earlier article, we pointed out that AirAsia has a record of being a bad debtor. It once owed MAB over RM65 million and whenever actions were taken against them, AirAsia would run to their chief counsel, former premier Abdullah Ahmad Badawi.

Now of course AirAsia has Mahathir on its side and also the abrasive and aggressive former International Trade and Industry Minister, Rafidah Aziz, who can be counted on to also be its enforcer.

MAS’ strenghts

MAS’ wealth is actually its network and position in the Tier-5 airline market. MAS’ annual operating turnover is RM12.98 billion versus AirAsia’s RM 3.948 billion.

MAS’ operating revenue from airline operation is at RM11.649 billion against AirAsia’s RM2.839 billion.

Whatever you “name” this MAS-AirAsia – “merger” or “coorperation” – it is a mystery-shrouded takeover with elements of manipulation and failure of disclosures.

Khazanah is giving away 20.5% of its holding in a company with a bigger network, acclaimed higher standard of service, much bigger operating revenue, stronger assets, lesser debts, more cash and better paymaster track record to another company with lesser track record.

AirAsia’s strength is that it excels in hyped-up marketing and showing it can make a lot of net money in shorter time.