SINGAPORE – When Tony Fernandes acquired AirAsia nearly two decades ago, the then-music industry executive paid a mere 1 Malaysian ringgit (23 US cents) to take the bankrupt carrier off a state-owned conglomerate’s hands.

Against the odds, Fernandes lifted AirAsia into Southeast Asia’s largest budget carrier on a “Now everyone can fly” motto that pioneered the low-cost aviation industry by leveraging strategically into the region’s rapidly-emerging middle class.

But in a world now ill with Covid-19, the opposite is true: one of Asian aviation’s best-known brands now simply aims to stay aloft at a time when everyone, in fact, cannot fly. “This is by far the biggest challenge we have faced since we began in 2001,” Fernandes, AirAsia’s chief executive, said in a July 6 statement.

Lockdown measures and travel restrictions imposed earlier this year in most of AirAsia’s key markets, including Malaysia, Thailand, Indonesia and the Philippines, among others, resulted in the grounding of nearly its entire fleet.

Now, AirAsia Group Bhd’s focus is to find investors, secure loans and raise funds to ensure the survival of its Malaysia-based operations and other regional branded airlines.

The company’s portfolio of non-airline businesses, which were reorganized into a single entity called RedBeat Ventures in 2018, could also be sold off to raise new funds, analysts predict.

But with a debt load that since the pandemic has swelled to 11.2 billion ringgit ($2.6 billion), the airline that once epitomized the region’s upward mobility may or may not withstand the turbulence ahead.   

Shares in AirAsia have fallen 58% in 2020, leaving its market value at around $550 million. In February, the carrier already faced market headwinds when it was implicated in a long-running Airbus bribery scandal and then as the coronavirus outbreak began to spread.  

AirAsia Executive Officer Tony Fernandes addresses the media during a press conference in Kuala Lumpur in a file photo. Photo: AFP/Manan Vatsyayana

Local investigators cleared Fernandes and AirAsia’s chairman, Kamarudin Meranun, of wrongdoing in March after British prosecutors alleged that Airbus had paid kickbacks to the two men in 2012 to secure a large aircraft order through a $50 million sponsorship deal involving a now-defunct racing team the duo co-owned.

The procurement scandal is said to have soured ties between AirAsia and Airbus, its exclusive supplier. Coronavirus pressures forced the budget carrier to announce in April that it would stop taking deliveries of Airbus jets for the rest of 2020 as part of an aggressive turnaround plan to reduce costs.

AirAsia has sought payment deferrals from suppliers and lenders and says it hopes to halve cash expenses this year. Other cost-cutting measures have included a company-wide temporary salary reduction of 15% to 75% and retrenchments of around 7.5% of its 23,000 employees across its businesses.

“The idea now is really to cut back the cost base as much as possible. This is by no means unique to AirAsia,” said Greg Waldron, Asia managing editor for industry publication FlightGlobal. “You see it with Cathay Pacific, with Singapore Airlines. You see it with Thai Airways, which is looking at a bailout. All of the other carriers are suffering a lot.”

According to the International Air Transport Association (IATA), airlines in the Asia Pacific region will be the hardest-hit by Covid-19 with $29 billion in projected losses in 2020, which the organization said “will go down as the worst year in the history of aviation.” IATA expects the global air transport industry to suffer losses of $84.3 billion this year.  

AirAsia earlier this month reported its biggest first-quarter decline since being listed on the Malaysian bourse in 2004, with a net loss of 803.8 million ringgit ($188.5 million) for the three-month period ending in March. The budget airline carried 9.85 million passengers in the first quarter as the pandemic began to take hold, down 78% from a year earlier.

The airline recorded a 96.1 million ringgit ($22.5 million) net profit in the previous year’s first quarter, but still saw a net loss of 283.2 million ringgit ($66.4 million) in 2019, before the onset of Covid-19. AirAsia’s liabilities exceeded its assets by 1.84 billion ringgit ($431.5 million) at the end of the 2019 financial year, according to auditors.

In an unqualified audit opinion to the Kuala Lumpur Stock Exchange on July 8, auditors Ernst & Young warned that the airline’s 2019 earnings indicated “material uncertainties that may cast significant doubt on the group’s and the company’s ability to continue as a going concern.” AirAsia shares plunged nearly 17.5% following the audit statement.

“Many other airlines would also have this warning if audited in this environment, particularly those airlines that have not yet been able to boost liquidity,” said Brendan Sobie, founder of consulting firm Sobie Aviation. “AirAsia has a very strong brand and should survive following a restructuring that includes securing new equity.”

In an interview with Nikkei Asian Review the following day, Fernandes called the audit opinion “completely fair” and expressed confidence that AirAsia would be able to ride out the Covid-19 turbulence. The flamboyant 56-year-old entrepreneur has bullishly targeted a return to profitability by 2021, a projection analysts doubt AirAsia will hit.

AirAsia crew members in their new red hot PPE chic costumes. Photo: AirAsia

Bouncing back to profitability by next year is “very optimistic as the market is not expected to recover until at least 2022,” said Sobie. “It will be very difficult for any airline to be profitable next year.”

The analyst sees AirAsia securing a government-guaranteed loan and renegotiating its aircraft leasing agreements as part of a high-stakes recovery bid.

AirAsia has said certain financial institutions have supported its request for over 1 billion ringgit ($234.5 million) in financing, a portion of which would be raised in a share offering within the next six months, according to Fernandes. He has claimed the budget carrier would be in “a very comfortable position” if it could raise 2 billion ringgit ($469 million).

However, analysts believe the airline will require closer to 3 billion ringgit ($703.6 billion) in new funds to restore financial health. That capital, they say, could be raised through various financing options, including a rights issue or private placement wherein a funding round of securities are sold to pre-selected investors and institutions rather than a public offering.

South Korea’s third-largest conglomerate SK Corp could be a potential investor amid reports that AirAsia is in negotiations to sell 10% of its equity through a private placement of new shares at 1 ringgit each. That deal would like be subject to it first securing at least 1 billion ringgit through a government or bank loan. AirAsia’s stock price is currently 71 Malaysian sen per share.

“I expect the government to be part of the financial solution,” Sobie told Asia Times. “A government guarantee has been expected for some time and finally seems close to being completed, which will make it easier for AirAsia to secure loans with private financial institutions in Malaysia.”

In June, Finance Minister Tengku Zafrul Aziz ruled out any bailouts for airline operators, despite the devastating impact Covid-19 has wrought on Malaysia’s aviation industry. Industry sources and analysts, however, believe AirAsia is on the verge of securing a 500 million ringgit ($117.2 million) bank loan of which 80% may be guaranteed by the government.

“The current administration has a very limited appetite for providing direct financial assistance to Malaysian carriers, not only because of limited financial capabilities as resources go towards combating Covid-19 and its economic impact,” said Harrison Cheng, an associate director with consulting firm Control Risks.

“There is a real risk of public backlash towards what could be seen as government bailouts for carriers that have struggled with profitability even before the pandemic,” he added. “Nevertheless, although the government has resisted providing direct assistance to major carriers, it is likely that it will eventually have to step in for reasons of political stability.”

Demonstrators hold placards during a protest against Malaysia’s Prime Minister Muhyiddin Yassin in Kuala Lumpur, March 1, 2020. Photo: AFP Forum via NurPhoto/Chris Jung

Allowing major homegrown carriers who dominate domestic and international routes to go under and trigger widespread job losses, says Cheng, could prove too disruptive for Prime Minister Muhyiddin Yassin’s government, which is on politically shaky ground with the thinnest parliamentary majority in Malaysia’s history.

“With regards to AirAsia’s survival, their ability to raise capital and evoke interest from shareholders, I believe they will be able to,” said independent aviation analyst Mohsin Aziz. “There will be interested parties to invest, however, I do suspect that some of these investment and capital injection offers will come with strings attached.”

New financing could be conditional on funds going only to AirAsia’s core Southeast Asian operations, said the analyst, and not to peripheral markets like India and Japan, where the budget carrier’s expansion efforts have struggled. “Investors will deploy capital only to places where they believe business risks are lower,” he added.  

AirAsia India, a loss-making joint venture with Indian conglomerate Tata Sons Ltd, looks particularly uncertain. Tata Sons reportedly seeks to divest its a majority stake in the unprofitable carrier; its Malaysian partner, meanwhile, reputedly recently approached Tata Sons to buy its 49% stake at a steep discount only to have its offer declined.

AirAsia boasts a total of nine branded regional airlines, including joint ventures and its long-haul subsidiary, AirAsia X Bhd. With the resumption of international flight services still seemingly distant and uncertain, AirAsia X could stay grounded, say analysts, who note that its financing needs appear to be even direr than that of its parent company.

“A lot of these joint ventures have never made money since the inception, and the only reason why they stay afloat is largely due to AirAsia keeping them alive,” Mohshin told Asia Times. “There are a lot of interpretations, but it can be said that Malaysia’s operations are cross-subsidizing or sustaining the other non-profitable operations.”

AirAsia’s short-haul airlines in Malaysia and Thailand are by far the strongest and largest of the nine, and will remain the “jewels in the crown,” said Sobie. The other seven airlines in AirAsia’s portfolio – which include three widebody operators under AirAsia X – have struggled to turn profits for many years, the analyst noted.  

“They will need to increase their own liquidity to get through this crisis. Some will succeed in raising capital through their joint venture partners and in some cases government support will be secured as well. However, a few may cease operating. Letting AirAsia X go and focusing on narrowbodies for now would be a sensible move,” Sobie added.  

A Malaysian woman walks past an AirAsia advertisement at Kuala Lumpur Sentral railway station in Kuala Lumpur on May 26, 2016. Photo: AFP/Mohd Rasfan

Analysts are thus weighing whether the company will aggressively divest its portfolio of non-airline businesses, which range from a venture capital fund called RedBeat Capital and digital payments platform BigPay to restaurant chain Santan, which serves in-flight meals in a cafe setting.

Built and acquired as part of a strategy to diversify the airline’s revenue sources, Fernandes has long envisioned transforming AirAsia into a “digital travel company” that utilizes data analytics, digital platforms and financial technology, or fintech, to expand beyond its core aviation business.

“Tony Fernandez spends a considerable amount of time talking about his digital ventures, talking about his excitement and how this is the next big thing for the organization. Not everybody sees eye to eye because at the end of the day people still perceive AirAsia as an airline. That is its bread and butter” said Mohshin.

“When you come to a situation where not everything can survive, it only makes business sense for you to focus on your cash cow,” he added. “The goose that lays the golden eggs is the paramount concern, and everything else that is just sapping capital or slowly draining the business’ strength away, perhaps this is the time to terminate it.”

Many of AirAsia’s non-airline businesses have been positioned to leverage the budget carrier’s trove of passenger data, while Fernandes himself has even claimed assets like BigPay, the first fintech company in Malaysia to offer a fully digital, mobile-only remittance product linked to a physical card, could eventually bypass AirAsia itself in value. 

“AirAsia has put a lot of discussion into really becoming a digital company and so forth, but I think there would be nothing that would be ruled out in terms of selling some of these assets,” said FlightGlobal’s Waldron. “They certainly will be looking at all of their options to raise capital right now because it is such a difficult time for that core airline business.”

A banking source who requested anonymity told Asia Times that AirAsia’s passenger data-reliant non-airline businesses have fallen flat with investors due to the pandemic-spurred collapse in demand. Moreover, the parent company’s distressed finances have hurt the capital raising prospects for independently-run, AirAsia-owned start-ups, the source claimed.

“I cannot imagine any chief executive, or founding team, wanting to stay at AirAsia through Covid-19,” said the same banking source. “The parent is hemorrhaging cash, and is impaired in its ability to raise new money. The smart play for AirAsia is to pull cash out of their non-core assets and simply divest themselves as soon as possible.”

What market participants need to consider, according to Frank Troise, Asia regional chief executive officer at merchant bank SenaHill Partners, is that “Tony can simply partner or joint venture those non-aviation companies or assets and easily de-risk his portfolio while keeping some upside.”

Travelers look on as AirAsia assistance crew assists them at a sales kiosk in Kuala Lumpur International Airport 2 in Sepang, in a file photo. Photo: Joshua Paul/NurPhoto via AFP Forum

“He has built assets at AirAsia that are very well known locally in the region and it would be relatively straightforward for him to re-align the airline with a tighter focus on its core business,” said Troise, one of the region’s leading fintech investment bankers. “In a Covid-19 world, no one would fault him for any decision he has to make now.”

AirAsia declined Asia Times’ emailed request for comment for this article, including on whether it would pursue divestments of its non-airline businesses. A media release dated July 9 said the airline’s board of directors is “confident of the successful continuation of the business,” citing resumed domestic travel in core markets as cause for optimism.

AirAsia resumed domestic travel schedules in Malaysia, where it holds a 73% local market share, at the end of April. The budget carrier has pushed domestic travel promotions that helped to sell 250,000 seats in June. AirAsia representatives say seat capacity will be close to between 40% to 50% by the end of July and should continue to ramp up.

Malaysia has not fully reopened its borders for international travel and analysts say it is unlikely that it will allow international flights from most countries for non-business purposes within the next three months. Discussions on establishing “travel bubbles” and “green lanes” for less restricted travel with key economic partners like neighboring Singapore are ongoing.

“The establishment of travel bubbles in Asia remains an aspiration rather than reality for now,” said Cheng of Control Risks, “as most countries continue to move cautiously due to fears of imported cases and second waves that could necessitate another damaging round of lockdown measures.”

“There is no silver bullet for Malaysian carriers – they will have to make the most out of the current trend of gradually relaxing restrictions on domestic flights, and try where possible to cater to an expected but slow rebound in domestic tourism. Nevertheless, it’s clear they will prioritize Asian routes in the coming weeks and months,” he told Asia Times.

“The near-term outlook is that Malaysian carriers, just like other carriers in the world, will continue to face significant challenges on the road to recovery, which is likely to be a long one,” Cheng added.