AirAsia: On The Contrary For Being Contrary!

Published on Business Times. On the contrary ...

• By Presenna Nambiar Published: 2008/11/24
  
  For AirAsia boss Datuk Seri Tony Fernandes, a recession is the best time to build, an uncommon opinion to say the least.
  
  DATUK Seri Tony Fernandes is a man who has built his business on being contrary.
  
  When the global airline industry was recording losses in the aftermath of September 11 2001, Fernandes and compatriot Datuk Kamaruddin Meranun were busy trying to get their brainchild AirAsia (5099) off the ground ... which they succeeded in doing, recording a profit in 2002.
  
  When the media and analysts continued to prophesise doom for the airline, Fernandes and his team put in an order for 60 A320s from Airbus in March 2005.
  
  Three years later, with every industry (in particular the airline industry) bracing itself for a long and painful recession, he hasn't changed.
  
  "We (AirAsia) are very bullish and very optimistic (about the future), all the newspapers in Malaysia had wanted me to be negative in the last seven years.
  
  "You are a depressing bunch, but I'm optimistic, my load factors are good, people want to travel, they are not killing themselves every day ... you have to be innovative," Fernandes told Business Times in Kuala Lumpur last week.
  
  For him, a recession is the best time to build, an uncommon opinion to say the least.
  
  "My gut feeling says the best thing to do now is to grow ourselves out of a recession. I think we have enough people to fly with us. By opening up new markets, we are constantly getting new people on our flights," Fernandes said.
  
  His optimism is backed by the fact that AirAsia has seen record bookings for December, with seats sold out in two weeks.
  
  Fernandes said the group also expects its Thai and Indonesian subsidiaries to be "very profitable" in the fourth quarter of the year.
  
  Thai AirAsia recorded an unrecognised share of loss of RM21.7 million, while Indonesia AirAsia registered a loss of RM12.2 million for the quarter ended June 30 2008.
  
  Thai AirAsia is a jointly controlled entity of the budget carrier while Indonesia AirAsia is an associate company.
  
  Fernandes said the Sepang hub also stands to benefit from the growth in passenger movement on its Thai and Indonesian flights.
  
  Despite his optimism, one might say that this time around the odds are stacked against it, what with the International Air Transport Association expecting further losses in 2009 and Centre for Asia Pacific Aviation expecting no Asian airline to make a profit a next year.
  Fernandes would probably say, "When has it ever been different?"

Being contrary.

I always dislike that phrase. I do NOT like to buy a stock just for the sake of being contrary. Most of all, for me, the reasoning to invest has to be justifiable and sound. Same with business.

Yes, in a recession, this is probably the best time to invest but one cannot simply invest. We need to study the durability and the competitive advantage of the business that we want to invest in and most of all, we have to look at our own financial health.

Now, if one is neck deep in debts, like AirAsia, does it make sense to expand like nobody else business?

Are we, the critics, a depressing lots?

Here's a simple reason why perhaps it would be a better option to be more humble and prudent.

Recession can be long and deep. Is this not a possibility?

And if this is the case, a long and deep recession, could not hurt a company but it could also wipe a company out, if it's less than prudent.

Is this not possible?

As it is, is AirAsia expanding via its own financial capabilities or is it on a borrowing orgy?

Here's an interesting issue. Do you know much does AirAsia pays in financial interests every quarter? ( here's the link to AirAsia last reported quarterly earnings: Quarterly rpt on consolidated results for the financial period ended 30/6/2008 - see page 12. Do you see the interest costs from its bank borrowing equates to a whopping 59 million?)

Well, in my opinion, if AirAsia was a cash rich giant, I would probably agree that it would be a good idea for it to look for business opportunities. (In my opinion, this means buying good businesses at a great price). However, the problem for me is that currently AirAsia has already borrowed way to much. For it to continue to expand and borrow even more, just makes no business sense. And worse still, the earnings performance from its last reported earnings in August (see link above) was downright poor.

Think about it.

What are we seeing here?

Are we not seeing a downright poor performing company, extremely leveraged, borrowing more money to expand in times like this?

How do you even rate its chances for success?

For it to continue to expand with more borrowings is a recipe for disaster!

See also

• AirAsia X: No slowing down
  
  AirAsia X Sdn Bhd hopes to grow sales by 10 times to US$1 billion (RM3.62 billion) by the end of 2010, after it achieves its target of becoming a billion-ringgit company next year, said its chief.