AirAsia

AirAsia is the largest LCC in a rapidly expanding market.

Their expansion is fueled by debt. How do their numbers stack up?

Balance sheet and Cashflows

Cashflows from Operations are quite good (ignoring unwinding of interest rate swaps). eg: in 09 they generated enough CFO to pay off their debt in 10 years.

Problem is due to the Capex, mostly funded by debt. CFI has been larger than CFO every year since listing (with the single exception of 09).... and not just a little but larger, usually double or triple....

Existing Debt

How is their debt hedged?

Footnotes 28 and 35:

• Approx 80% term loans, 5% bonds (sukuk)
• Approx 90% denominated in USD (700m). 35c: Abt 60% of this protected by a currency hedges (settlement dates "in accordance with the loan instalment repayment dates").
  
• Overall interest rate approx 5%.
• 2.7% long term debt is floating, the rest covered by interest rate caps or swaps.

Not much risk there...

When is refinancing required? Safe for the next five years, with 4-500m a year due for refinancing, should be safely covered by CFI. The are:

• 2013, when 420m sukuk due (940m in total due for that year)
• More than half their debt (400m out of 700m) is due after 2015, not detailed when.
  

I believe that current debt levels are sustainable.

Future Capex

As of 09: 16bn contractual capital commitments., with 8bn optional.

AirAsia has deferred aircraft orders 3 times: in July 09 8 A320s, another 8 in October, and 7 in October this year.

Year	Planes Due
2011	9
2012	24
2013	24
2014	26
2015	7

Source: table from The Star, adding the latest deferment. I did not find anywhere to confirm these numbers.

Tony Fernandez stated they would like to receive 12 aircraft per year, and keep their current gearing level (Oct 2010). additional financing may come from the planned IPO of AirAsia Thailand, Air Asia Indonesia and AirAsiaX.

Main risks:

• Fuel prices. In 09, fuel was their largest cost (30% of revenue). Higher fuel prices will increase airline ticket prices industry-wide, lowering the difference between full service and LCCs.
• External events. e.g.: SARS, 911, tsunami
• They trip up on execution. eg: New routes/planes are not filled as they expected.
  

Conclusion

Sexy, fast growing and profitable company. But too much debt. Need to see:

• Clarification of future expansion plans. In particular: timetable for plane deliveries, debt refinancing schedule. Calculate if their cashflow can support it.
  
• Since I only buy shares in a severe downturn, see how well revenues hold up. Rising or flat sales in a declining economy will confirm that the Asian LCC market is still in its growth stage. Eventually the market will mature, and follow the general economy.