Course Lecturer: Professor Dr. Fauzias Bt.

Mat Nor Subject: Financial Management (ZC6303) Test/Assignment: Individual Assignment Prepared by: Ahmad Fauzi Adnan Metric Number: ZP00734

Question (No. 3) Discuss an increase in capital spending for a public listed firm and discuss financing used. Abstract AirAsia Berhad which is also known as AirAsia, is an airline company which provides air transportation service. AirAsia was established in 1993 and started operations on 18 November 1996. AirAsia was founded by a government-owned conglomerate, DRB-Hicom. Later on, it was purchased by Tony Fernandez, former Time Warner executive on 2 December 2001. Air Asia is one of the award winning and largest low fare airlines in the Asia expanding rapidly since 2001. AirAsia have won many awards and recognitions. The recent awards are Airline of the Year by Centre Asia Pasific Aviation (CAPA), Best Asia Low-Cost Carrier by TTG Travel Awards 2009, and Worlds Best Low-cost Airline By Skytrax. With a fleet of 72 aircrafts, AirAsia flies to over 61 domestic and international destinations with 108 routes, and operates over 400 flights daily from hubs located in Malaysia and their subsidiary companies located in Thailand and Indonesia. Air Asia has emerged as one of the best performance company in airlines industry. AirAsia has been experiencing tremendeous expansion since 2001 as the largest low cost carrier in Asia. Financial Analysis (2009) We used AirAsia financial statement to analysed the companys performance and stability. The use of financial statements and considering them plays an important role in the strategic and operation and financial management of airlines, and loss/gain at the successful airlines in the future. (Balance Sheet is accessible from the companys website) Current Ratio Current Asset/Current Liability = 2,220,972/1,709,688 = 1.30 AirAsia has more ability to payback its short term liabilities with its short term assets. Acid-Test Ratio Cash + Receivables/Current Liabilities = (746,312 + 721,028)1,709,688 = 0.86

AirAsias total assets is liquidated in short term to meet it obligation. Receivable Turnover Ratio Sales/Average Net Receivables = 3,132,901/721,082 = 4.34 Air Asia is not that effective in extending credit as well as collecting debts. Debt to Total Assets Ratio Total Debts/Total Assets = 8,777,400/1,1398,420 = 0.77, 77% AirAsia assets proportionate of debt is high i.e. greater degree of outside financing to total assets. Return on Assets Ratio : Net Income/Assets = 506, 267/11,398,420 = 4.44 Air Asia is relatively effective in its management of assets used to generate earnings. Return on Equity Ratio Net Income/Shareholders Equity = 506, 267/2,621,020 = 19.32 Profitability generated using the shareholders funds invested in Air Asia is better. Overall, Air Asia performed well in the current year of 2009 and these are evidenced by the results in LIQUIDITY, PROFITABILITY & SOLVENCY RATIOS of the company.

Capital Spending Hwang DBS Research commented that cash flow remains an "issue" for AirAsia X, given its huge capital commitment near term. It noted that at present, the airline's net gearing is at a high 2.0 times, and the figure is expected to continue rising as borrowings increase to finance new aircraft deliveries. The research house also learnt that AirAsia X is not ruling out a potential merger with AirAsia or an initial public offering in an effort to raise funds for new aircraft deliveries to expand its fleet from 2011 onwards. Hwang DBS noted the airline is scheduled to receive five to six aircraft per year between 2011 and 2013, which is estimated to cost RM4.8 billion. OSK did not rule out the possibility of AirAsia's recent proposed placement is to partly to finance the additional 14% stake in AirAsia X, which was last valued at RM1.3billion. However, it warned that the full consolidation of AirAsia X would also mean further pressure on AirAsia's gearing, which already stood at 3.7 times as at March 31, 2009. OSK also said the combined borrowing may potentially exceed its enlarged shareholders' funds. Affin Investment however said the lower capital expenditure (capex) requirements in tandem with the deferment in aircraft delivery addresses its concerns over AirAsias future funding commitments, and estimated that its net gearing position would fall to 2.6 times from 3.7 times in first quarter. The budget airlines capex has been reduced to RM4.5bil over fiscal year 2010 (FY10) to FY11 from RM6.8bil based on initial aircraft delivery schedule.

Affin also raised their concerned over AirAsias increasingly stretched balance sheet in lieu of its aggressive fleet expansion as well as steep earnings dilution arising from a potential cash call. The local arm of Southeast Asian budget carrier AirAsia Berhad has chosen the airport in Clark, Pampanga as its hub in the country for when it starts ramped up operations by late 2011. On the other hand, from a balance sheet point of view, if the competition became too fierce and operating cash flow at Thai AirAsia turned negative, AirAsia might have to continue financing the working capital requirements of its Thai unit. As of September 2008, the company had a net gearing ratio of 3.1. Many analysts have rightly worried that the large amounts of debt will constrain AirAsias flexibility to manage capacity. It is basically left with only one option, fly more with more passengers. Assuming a 5.4% financing cost on the companys current RM6.4b of debt, interest charges would amount to RM345.6m annually. This is almost 60% of consensus estimates for 2009s EBIT, a perfect storm of spiking fuel prices, an inability to refinance and a sharp drop in passengers could lead to a bailout. Financing Used Analysts have responded positively to AirAsia Bhds plan to place a private placement of 20% of its share capital to raise about RM500mil, saying the move would substantially enhance AirAsias ability to restructure its finances while earnings dilution would be minimal. The airline recently proposed a private placement of new shares amounting to 20% of its existing paid-up share capital or 475 million shares, with the aim to reduce debts and have more cash. AirAsia had received the approval of Bursa Malaysia for the listing and quotation of up to 481.14 million new AirAsia shares pursuant to its proposed private placement. The issue price of the placement shares will be fixed at a date to be determined later by way of book building and the price would not be more than 10% discount to the five-day weighted average market price of AirAsia shares immediately prior to the price fixing. At an indicative price of RM1.25 per share, which translates into a 3.1% discount to the five-day weighted average market price up to and including July 27 of RM1.29, AirAsia would raise RM601.43 million. On top of the placement exercise that will help it lower its gearing, it was noted that its deferral of aircraft delivery would address earlier concerns on miscalculated expansion over a soft patch in consumer demand cycle. Despite slower expansion arising from aircraft deferrals, AirAsia will manage to avoid building up significant capital and finance costs in its books over a soft phase in the passenger demand cycle, lifting their key concern previously on AirAsias aggressive expansion plan amid a weak demand environment, which could have resulted in a mismatch between slowing earnings growth and a huge growth in cost base. A Luxembourg-based fund has emerged as a substantial shareholder in AirAsia Berhad with 170.8 million shares or 6.19% stake as of Sept 29. A filing with Bursa Malaysia showed Genesis Smaller Companies SICAV had subscribed for 37.5 million AirAsia shares on Sept

24, which was part of the low-cost carrier's placement exercise. After subscribing for the placement, it acquired four million shares on Sept 28 and one million shares the next day. On Sept 10, AirAsia completed its book building exercise which involved the offer for sale of 380 million new shares, representing 16% of the paid-up. The issue price was fixed at RM1.33 per placement share, which was a discount of 6.71% to the five-day volume weighted average market price of AirAsia shares up to and including Sept 14 of RM1.4257 per AirAsia share. Based on the issue price of RM1.33 per placement Share and the offering of 380 million placement Shares, the private placement managed to raise gross proceeds of RM505.4 million. CIMB Investment Bank Berhad and Credit Suisse (Singapore) Ltd acted as joint placement agents for the private placement. AirAsia announced that it had deferred the delivery of seven Airbus A320s to 2015 from the original delivery period next year as it expected infrastructural constraints with the current airport facilities. The seven planes are now due for delivery from April to November 2015 from the original March to October 2011. AirAsia said slowing the deliveries would allow it to optimise its fleet and avoid costs associated with leaving the aircraft idle or underutilised due to infrastructural limitations. AirAsia Bhd's decision to defer the delivery of a batch of A320 aircraft is expected to relieve pressure on the balance sheet of the highly-geared low-cost carrier. Market observers, who have largely expected the company to reschedule the delivery of the aircraft even before the announcement was made, explained that the move would help reduce AirAsia's net gearing and maintain it below the 2-time level next year. AirAsia's relatively-high net gearing has always been a concern among some investors despite the company's strong growth over the years. Points to ponder Look at what Warren Buffett had to say about the airlines business: The airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. Youve got huge fixed costs, youve got strong labour unions and youve got commodity pricing. That is not a great recipe for success. The worst sort of business is one that grows rapidly, requires significant capital, and then earns little or no money. Berkshire Hathaway, 2007 Annual Report

References

The Star : 6/8/10, 1/8/09

ABS-CBNnews.com The Edge, 23/7/09, 18/8/09, 1/10/09, 25/2/10 Asia News Network , 15/2/11 MIDF Research : 18/2/09