Is there a deal on AirAsia?

Privy news: Does group CEO Fernandes have any plans to take AsiaAsia private? 

LAST week AirAsia Bhd’s shares rose on talk of it being taken private.

But the company eventually denied knowledge of it, though its major shareholders chose to remain silent.

This week, a different rumour seems to have emerged.

As the story goes, AirAsia and Khazanah Nasional Bhd have resumed talks to do a deal. Recall that they had struck one before, which was unwound later.

There is also talk that AirAsia’s owner Tan Sri Tony Fernandes is talking to some investors in North Asia and a British based private equity firm.

On the possible deal with Khazanah, a source close to the investment agency said “it is not true’’ though Khazanah declined to comment on the matter.

Just to re-cap, AirAsia was in a deal to be partner of Malaysia Airlines Bhd (MAS) but the deal was aborted after a few months because the then powerful unions of MAS raised enough noise about the deal to get the notice of the powers that be, which then intervened. Malaysia Airlines Bhd (MAB) has since taken over from MAS.

With that deal not likely, the question remains, is there a need for AirAsia to be privatised, and whether funds are really keen to come in?

Shares of AirAsia tumbled from its peak of RM2.60 in April to a low of 78 sen in September. They plunged because Hong Kong based GMT Research raised concerns about its financial accounts and claimed that its business model was not sustainable.

AirAsia has since made some adjustments after the GMT report emerged.

The privatisation talk emerged after a media report said that Fernandes and his long time business partner, Datuk Kamarudin Meranun went across to Singapore to meet bankers and the founders hinted to investors on taking the airline private in a management led buyout.

Subsequently, AirAsia told Bursa Malaysia that it was not aware of any privatisation.

Both Fernandes and Kamarudin hold 19% in AirAsia.

Maybank Investment Bank reckons that the cost of privatising AirAsia would be around RM2.84bil for the remaining 81% stake.

The talk continues

AirAsia has RM12bil of debt.

Fernandes did not reply to queries from StarBizWeek.

By taking the company private the founding members can take their time to sort out the issues as the airline will be off the public glare. This will be the same route that MAS has taken, says an industry executive.

“AirAsia’s problems are primarily its joint ventures in the Philippines, Indonesia, and to a small extent India. Secondly, part of its new fleet is doing sub optimal routes as slots are becoming increasingly challenging for key prime airports.

“The full service carriers like MAB, Thai Airways International and Garuda are putting pressure on yields as they dump fares to compete/maintain market share relative to the low cost carrier’s capacity growth,’’ he says.

The good thing is that AirAsia has deferred some of its deliveries.

The playground in Asia has been competitive and it remains to be seen if the full service carriers will continue to dump fares to compete or will they invest in product offerings to try to push yields up, especially as they scale down long haul and focus on regional flights which overlap with AirAsia, he adds.

For now, MAB, operating since September 1 has yet to announce its business plan. But it is obviously dropping fares to win travellers. This weekend it is offering several destinations at discount prices and this forces the low cost airlines to also drop or match fares.

Malindo Air, another local competitor is offering discounted fares and will begin flights to Amritsar (first direct link from Asia) in India, next week and to Perth in November. AirAsia just launched its 3 million seats up for grabs yesterday.

Experts say demand for air travel has not shown signs of weakening despite threats of an economic slowdown and a weaker ringgit against major currencies. However they add that people are more selective of where they want to go and regional travel will remain the top choice for travellers in this region.

Maybank in a recent report says that load factors for Asia-Pacific airlines and global airlines are steadily rising, and the annualised figures are at record levels. This is despite the fact that airlines have accelerated capacity deployment in 2015.

“Clearly, the underlying demand is healthy and consumers are not cutting back their expenditures,’’ it added.

The bank’s report said ticket yields are down as the lower jet fuel prices have enabled airlines to pass on some of the savings to customers.

Historically, airlines performed well in a deflationary environment as they can effectively leverage on the high price elasticity to demand and in this environment, the onus is on airlines to provide attractive discounts in order to boost load factor and capacity utilisation, it adds.