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AirAsia Bhd’s 49% affiliate PT Indonesia AirAsia (IAA) has received a letter from Indonesia’s Transport Ministry laying out terms for it to ensure a positive equity position by July 31.
In a filing with Bursa Malaysia yesterday, the low-cost carrier said it was going through the letter and intended to meet with the ministry.
It said the letter had no immediate effect on the Indonesian operations and that the airline would at all times continue to operate within the ambit of Indonesian laws.
A recent report by The Jakarta Post said 13 airlines in Indonesia had until July 31 to move their balance sheets into positive figures, in order to avoid having their operating permits suspended.
The ministry discovered that these airlines had negative equity, which occurred when the value of an asset used to secure a loan was less than the outstanding balance on the loan.
Indonesia’s Transportation Minister Ignasius Jonan was reported recently as saying it was important for airlines to maintain positive equity, as it affected an airline’s financial ability to maintain safety standards.
Under the new regulations, planes with a capacity of 70 seats or more must have a paid-up capital of 500 billion rupiah (RM143.4mil).
Credit Suisse aviation analyst Muzhafar Mukhtar said this development would raise the local capital injection into IAA by 25%, and limit the potential forms in which it may come.
“AirAsia has been working on raising for IAA US$86mil in equity from local partners and US$100mil in convertible bonds from new investors. IAA’s negative equity is US$230mil. The convertible bonds can be replaced with convertible preference shares.
“AirAsia could also convert amounts owed to it into equity; locals need to stump up the remaining to maintain majority local ownership. Either way, capital required from locals is higher than previously thought,” said Muzhafar in a report.
He also warned that if IAA’s operating permit was suspended, it might mean the closure of the airline.
However, Muzhafar opined that a closure of IAA should be very positive for AirAsia shareholders in the longer run, although there would be a period of transition – keeping sentiment negative (up to 75 sen per share of amount due from IAA could be written off; reported profits would decline as lease income from IAA disappeared).
Maybank Kim Eng Research analyst Mohshin Aziz said it was unlikely that Indonesian regulators would force abrupt compliance with the equity regulation, and cause the loss of thousands of jobs.
“Which government wants to do this (cut thousands of jobs)? Out of the 13 affected airlines, I believe more than half would find it very difficult to comply. The Indonesian regulators are likely to give some concessions with regards to compliance,” said Mohshin, who also opined that equity should have no bearing on airline safety.
“Of course, an equity positive company would give a better feeling of comfort. But in reality, safety rather depends on the airline’s discipline, procedures, etc, etc.”
Another bank-backed aviation analyst said he believed IAA had a good chance of fulfilling the Indonesian regulation on positive equity.
“It is just a question of pumping in money, and IAA management has been optimistic.”
However, the analyst was less certain about IAA’s plans on its financial turnaround.
“The Indonesian market is unique – there is relatively much less access for consumers via the Internet, and it is not easy to manage seats,” said the analyst.
AirAsia closed unchanged at RM1.49 yesterday, with a market capitalisation RM4.15bil.
