Thursday, July 23, 2015

Airasia's comparisons against others

I am wary of the fear in investing into an airline given the past experiences of many collapses - and Malaysia Airlines has been our closest example. Thai Airways did not fare well either. The list goes on and on. But those are the traditional airlines and their possible collapse could be due to the proliferation of low costs model. Airasia's drop however warrant me to look deeper into the company as I feel that it is managed by people who are capable.

Let's look at comparison of Airasia's successful peers (except for Tiger) than look at the non-performing ones. I have taken some examples of Ryanair, Easyjet, Cebu Air (Airasia's top furious competitor in Philippines) and Tiger Airways. Why did I chose those?

Ryanair - model low costs airline operating only in Europe
Easyjet - second to Ryanair and hugely successful as well
Cebu Air - as mentioned, Airasia's top competitor in Philippines. It is dominant there and Airasia is having a tough competitor. But it is predominantly a Philippines airline.
Tiger - well, nearest financially available competitor to Airasia. Not very successful and it needed injection of capital last year.

The significant names that are not here - Southwest (largest low costs in the world and operating only in US) and Lion Air (not listed). I did not pick up Southwest because over the last year, non-US airlines have suffered from the appreciation of US Dollar but benefited from the huge drop in oil price. US Dollar of course appreciated against many currencies and Malaysian Ringgit suffered the most. However, if one is to believe that USD could not appreciate much further, this forex losses will stop. No single currency will appreciate the way USD appreciated in the last few months and continue to appreciate. Think of what the consequences would be to US economy if that happens.

Anyway on the numbers, I have picked up revenue operating gain / loss, GP and shareholders funds. Why I did not use Net Profit is due to the forex loss that some of the companies experienced including Airasia which I do not think will be a long term thing. Fundamentally it is how well the company manages the gross margin as well as the fuel hedges.

The accounting policy for foreign exchange for Airasia is as below.


Comparison

As below are the important numbers for the list of companies.


Airasia's of course is the Malaysian operation only where it can consolidate the numbers. Others are based on equity accounting.
While one can understand that Airasia's balance sheet is not that strong as compared to its stronger peers like RyanAir and Easyjet, I do not think that it is cashflow starved. One should note that Airasia's business model is to collect cash upfront and pay later. There is a period where it is benefiting from customer financing and that business model is great especially if applied to one's advantage. Airasia, to some extent have managed to use that to its advantage.

And based on its market value to its book value, would it be a reason to buy? Personally, I would say yes, especially for an airline which is still growing. There should be continuous competition but gone are the days where "everyone wants to own a low costs airline" as the barriers of entry is getting much much tougher.

Remember, the stock market in the short run is a voting machine, but in the long term is a weighing machine. What's substance is more important. Think of Airasia's substance.

7 comments:

AdCool said...

Seem to me that you are looking into entering AA counter. Waiting for the right entry price?

felicity said...

It is attractive now, unless Airasia did a big misstep. Even with rights issue (I am not saying they are doing), it is not unusual considering their pace of growth.

Fung C.F. said...

Nothing in an airline business is predictable - passenger load, fuel price, forex rate, etc., and those are the main causes of the terrible ROI. There are too many things that Tony can't control, e.g. earthquake, disease breakout, riots, plane crash, fluctuation of fuel prices, etc. Too many Black Swans in one sector.

I think, theoretically, there is only one way to make an airline business viable, i.e. to have an "ExxonMobil Boeing" conglomerate as parent company - low fuel cost and low capex cost. But that's practically impossible.

I hope I'm not over-aggressive in condemning AirAsia. Tony is a great man, he fulfilled our dreams to fly and he created a great brand that makes Malaysians proud. AirAsia is apparently a value now, chances of making money by trading the stock is high. But I would argue this case with a famous Warren-Buffett quote - "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

If I may ask, Felice, would you sell at RM2.00 or would you hold the stock for long term (as you usually do)?

felicity said...

Sell some (less), hold more. But perhaps not at RM2.00. Higher price. If I were to track Ryanair, Southwest - and believe that there is a case for low costs airline business in Asia, I definitely will hold. That is as long as Airasia is the leader. Currently it is. The scenario in Asia is different between Europe, US than Asia - but looks like they have their style of doing things (Tony). Asia is a lot more diverse - each country there's more protectionism. Less liberal. Hence Airasia style is to hold minority stake while replicating their model to those whom are interested and capable to do a JV.

If you see, those challenges Ryanair, Easyjet does not face.
Airasia is not great. Low cost airline with great implementors are great. Its true that airline is a unpredictable and cyclical. The best out there seems to be able to have a model to survive and the best out there are Southwest and Ryanair. They are not competitor to Airasia. This is a race for who is dominant in Asia and Airasia is having a lead. That is if we believe that low costs carrier has a business case.

谭振聪 said...

Bro, there is no put warrant for Airasia, no point talking it much.

Now Tony is a rich man, he has already joined the 1% rich man club.

Now he is using his fame to make money, like doing education business. He biz re diversified.

Why dun u talk about another Tony, Tony Tiah, any updates on TA and TAGB?

AdCool said...

I also interested on Tony Tiah. Seem so quiet lately but he has been accumulating TAGB slowly.

Lt. Aldo Raine said...

Airasia seems to be operating with a unique business model. The airline company, to me, is not meant to make money for the shareholders. The way I see it, the airline is used as the front to create strong brand equity which could be leveraged by the peripheral businesses under the group. That is the epitome of the Virgin/AA business model. It is no coincidence that the Tune business is so diversified.