Tuesday, June 11, 2013

About IPO Airasia X

It is seeking funds for its fleet expansion as it targets buoyant travel demand in Asia Pacific and looks to fend of regional rivals.

It has plans to add 13 Airbus A330 wide bodied planers in total for 2013 and next, to take its fleet to 23 aircraft by 2014.

The company plans to use 33.3% of the proceeds to repay bank loans, with another 33.3% set for capex and 33.3% as growing working capital.

The expansion would come through more flights on existing routes as well as from new routes within some countries where it already operates.

It is banking on retail participation to boost the take up of its impending IPO, will not have cornerstone investors. Bankers familiar with the listing said this will be one of the few large offerings without cornerstone investors.

Besides offering what is to be the largest retail proposal allowed by the SC to date, Airasia X is set to create another milestone in the history of Malaysia’s IPO as it does away with conventional cornerstone investors. In the last few years, major IPOs in Malaysia have normally had a set of cornerstone investors – normally subject to a lock up period of six months. This is to ensure that there is some stability in the share prices in large offerings.

However Airasia X will have several anchor investors keen on taking up a long term position in the airline. It will keep it to about six or seven anchor investors and they will not subject to a lock up period.

The airline is offering 790 million shares and can raise up to rm1.15 billion assuming the shares are taken up at a higher end of the indicative range. It is offering 252 million shares or 10.6% of its enlarged share capital to retail investors.

A carrot for retail investors would be if they hold on to the shares for more than a year, they will receive sweeteners such as free flight tickets.

Sources say Airasia Bhd will holds a 18.3% stake in the company pre IPO, is also looking to pare down its stake to 15%.

Airasia X’s three largest shareholders are looking to reduce their interest are Aero Ventures Sdn Bhd is looking to trim down its stake to 34.4% from 52.2%, Orix Airline Holdings Ltd and Manara Malaysia I Ltd are seeking to reduce its stake in 6.4% each.

Upon the IPO, the three shareholders will hold on aggregate of 1.1 billion shares, which represent 47.2% stake of the company’s enlarged issued and paid up capital compared to a larger stake of 74% before the IPO.

On gross proceeds raised from the listing, the company plans to use 21.5% for capex, 43.8% for the repayment of bank borrowings, 31.5% for general working capital and the remaining 3.2% for listing expenses.

It has been categorized as syariah compliant. This will not only give the airline further mileage, but will lock in bumiputera investors in its soon to be traded shares.

Its Prospects … dated June 2013

It is believed it has cracked the code of creating a sustainable business model for no frills long haul carriers, which will enable it to stay relevant to the industry.

The challenge was to come up with a business model that could deliver a significant unit of cost difference compared with existing legacy carriers.

Apart from leveraging its sister company Airasia Bhd, which has an 18.3% stake in it at the moment (10 June 2013) the management had said that it has managed to create a breakthrough business model.

Its first insight is that it could indeed generate a significant aircraft utilization difference (of over 30%) by bypassing scheduling limitations that legacy carriers apply to cater for the premium paeesngers.

Airasia which currently (June 2013) flies to destinations in Jeddah, China, Australia, Taiwan, South Korea, Japan and Nepal has been able to turn around in just 75 minutes compared with legacy carriers that may only fly out the following day to meet the needs of premium passengers and their flights schedules.

Furthermore, he pointed out that the short haul feeder network connecting over 80 destinations that its affiliate Airasia provides plays a significant role in according its passengers crticial connecting transfers.

In 2012, 40% of Airasia X’s passengers were on connecting flights.

Airasia has benefited from Airasia’s existing infra such as IT infra system, training academy and ready pool of pilots, engineers and airport operations staff.

The airline is operating at the lowest known unit cost of any airline around the world and stimulating demand by 50% to 100% on the routes.

Airasia Group’s multi hub model through JV in Thailand, Indonesia and the Philippines and Japan and the combination of short and long haul networks also give Airasia X a powerful reach across Asia Pacific, far ahead of other regional LCC.

It has the highest ancillary revenue per passenger in 2012.

In its core markets of Australia and North Asia it had a steady track record of profitability for more than three years because of the scale it had built. It will be deploying its capacity to build its pole position in these markets instead of trying to be in many different markets where it end up being subscale.

It had also stated that it will look at the possibilities of reviving its previously axed routes to Europe and India. It is believed that the renewed routes would serve as a feeder for its latest venture into India, given that the domestic aviation rules do not permit new airlines to operate international routes for the first five years of operations.

Meanwhile Airaisa X takes delivery of the Airbus A350-900 aircraft in the next few years from 2013, it might commence flights to Europe and likely revive the London and Paris routes.

Airasia X has firm order of ten A350-900s to be delivered beyond 2017.

Is the long haul low cost model for airlines works?

Such concerns are not unfounded, especially many long haul low cost carriers have had their wings clipped since the 2008/2009 global financial crisis.

New entrant Scoot – a subsidiary of SIA may give Airasia X a run for its money.

In reality this business is highly capex and the gestation period before it reaches a stage where it generates sufficient cash is long.

It is worth nothing here that Airasia X has had a few rounds of capital injection since its birth. The first was when Virgin subscribed for a 20% stake in Airasia X, Then it was the private placement in 2008, which brought in Manara Consortium and Orix Corp. The third was a rights issue involving most of the shareholders. Following the private placement and rights issue, Virgin’s 20% stake was diluted to 10%.

In March 2012, Airasia X proposed to raise US$200 million via a sukuk, but it has postponed the plan for at least another 12 months.

However, Airasia had hinted that it may exit Airasia X via the IPO although, the former later stated that the exit was one of the options that would require further deliberation by its board.

For now the more pressing question is will the other shareholders of Airasia X hold on their stakes or will they also be looking to depart?

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