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AirAsia jet buying spree raises concerns
By Anna Maria Samsudin
bt@nstp.com.my

January 11 2007

AIRASIA'S latest jet buying spree appeared to have raised concerns among analysts and investors that the airline has bitten off more than it can chew.

Many felt the airline could be expanding too fast and the decision to take on more debt could be a risky move.

Aviation analyst Shukor Yusof from Standard & Poor's Equity Research in Singapore said that in an industry that is cyclical in nature, AirAsia is expanding too aggressively.

He also cautioned that heavy investments during boom times could prove unsustainable in a downturn.

"AirAsia's net debt position in June 2006 was about RM400 million. This will increase with the decision to buy more aircraft.

"However, AirAsia already has a number of financial advisers to meet the challenges posed by its latest acquisitions. So, I'm sure they have a game plan to deal with the new debt burden," he added.

OSK Research manager Chris Eng told Business Times AirAsia's aggressive fleet expansion would inevitably push up its gearing.

Even without the additional 50 A320 planes, he said, the airline's net gearing is expected to soar to three times by fiscal year ending June 2009 as the new planes will significantly increase borrowings.

"AirAsia's gearing is a bit high for an airline company. By right they should maintain their gearing below 1.5 times," he added.

In managing the situation, he said AirAsia would have to fly significantly to new routes and projected Thailand, Singapore and Indonesia to be the recipients for most of these new 50 planes.

"The additional capital expenditure for these planes also leads us to believe that AirAsia will proceed with a private placement exercise within the first half this year to raise its equity and manage its gearing," he added.

Meanwhile, TA Securities analyst Rosnani Rasul, when contacted, said it is normal for a growing company like AirAsia to take on high debt.

Based on guidance provided by the airline earlier, she pointed out that AirAsia is due to see 40 per cent growth in its passenger volume this year, followed by another 35 per cent and 30 per cent growth in 2008 and 2009, respectively.

"Looking at its passenger growth forecast, you can see that the airline needed the additional capacity to support the growth.

"I don't think that they are expanding too fast. I think this is something that they have to do," she said.

Despite AirAsia's growth potential, Rosnani, however, said there are concerns about the airline's capability to finance the purchase.

"It is a huge amount. Banking on bank borrowings alone would not be good for AirAsia. They have to look into ways to raise cash, be it via equity call or even bonds.

"However, I am confident that the airline is not short of options on how to raise cash to finance the purchase. If not, I do not think Airbus would be supportive of the purchase," she added.