Author: Tan KW | Publish date: Fri, 22 Jul 2016, 10:43 AM
July 21, 2016
Most of my followers are aware that I am very reluctant to put my money into the airline industry. The reasons can be found HERE. Besides, I was very uncomfortable with Airasia's issuance of shares to its founders to collect RM1 billion of cash. You may refer to it HERE.
So why am I worried for Airasia?
#1, Negative Free Cash Flows
Airline companies like Airasia have an extremely weak economics, which leads to unstable profitability. The recent spike in net profit and free cash flow was mainly due to the prolonged depression in oil prices. Without this tailwind, Airasia has been relatively weak in generating stable profits and cash flows.
#2, High Borrowing Costs
Finance cost has been a substantial part of Airasia's operating cash flows. It even exceeded the OCF in 2014!
#3, High Net Debt Position
As at 2015, Airasia had a net debt position of about RM10 billion! By looking at its free cash flows, I think it's near to impossible for the company to repay its loan purely by relying on internal cash generations.
#4, Overly-ambitious Plan to Expand
Despite of the above weak financial abilities, Airasia announced that it has placed RM61 billion of orders to buy new planes. This amount is close to 6 times of its current net debt position! So the question is how is it going to fund such overly-ambitious plan?
Clearly, getting more loans is no longer a viable way as it has piled up tonnes of borrowings. The only way out is to further look for external funding, either from the shareholders or private placements. Please note that I am not trying to make any predictions here, but I am trying to analyze in a logical way how Airasia will continue to fund this expansion.
Getting money from its current shareholder base (rights issue) is unlikely because the founders are shareholders of the company as well. Having injected RM1 billion of cash few months back, their personal cash piles would have shrunk.
Hence, it is extremely likely that Airasia's founding shareholders will fund the overly-ambitious expansion plan by diluting its current shareholders' interest. Please note that after the RM1 billion cash injection, the founders stake had increased from 19% to 32.5%. They have a lot of room to decrease back to 19%! If that's the case, current minority shareholders will face double-dilution of their shareholdings.
The accuracy of my analysis above is not important. What's more crucial here is that Airasia should not expand aggressively at the expense of the innocent shareholders (if what I predicted above is right). If you don't have the money, borrow or rights issue. When you issue shares, make sure that your shareholders get as much value as possible, which I don't think so in the airline industry - an extremely competitive, capital intensive industry.
Words of Caution
Expanding over-aggressively will only make yourself susceptible to failure in a big way. In short, the bigger you get, the easier to fail. After all, "Now Everyone Can Fly" is a very beautiful vision.
Please note that the portfolios I manage are not the shareholders of Airasia.
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