Tuesday, December 27, 2016

What is one question to ask Airasia?

To me it is time to be really be excited about Airasia again. At my point of writing, it has dropped to RM2.23, hence even with the addition of shares issued to both Tony and Kamaruddin, its market cap would be around RM7.25 billion. In dollar terms it is around USD1.63 billion. If Asia Aviation, the leasing arm is USD1 billion as assumed, the entire airline ex-leasing is USD630 million. Let's ask ourselves, whether Airasia is a low costs operating airline or a leasing company. If our answer is LCC, we should be focused on how it can be operating advantageously as a LCC.

It is now the largest LCC with Lion Air being the second closer competitor in the region. To me, it is no doubt that USD being strong, it will impact Airasia as a company - not because of its current costs as most of its USD costs are already hedged - for fuel and currency. What is important as a question to Airasia is

How much of its future planes purchases in terms of USD is being hedged?

In the article on the Edge today, it is mentioned by Tony Fernandez
“We are looking good. The year 2016 is set to be a record year and we will build on it [in the coming year]. We have hedged 80% of our [anticipated] fuel [use in 2017], while most of our aircraft purchases are hedged against the US dollar with fixed interest rate loans. So, our risks are mostly covered,”.

For 2017 and beyond, Airasia will be getting lots of new planes to the tune of 20+ every year. That would be in USD. If it is already hedged partially, then that's good. If it is not, then not so good although it is not fully doomed as firstly, it is competing against other airlines that are also buying in USD terms. Prices will be adjusted according to competition. Secondly, if it is selling its leasing arm, Airasia is supposed to be leasing back some of its future planes from the leasing company in USD and I am sure the sale would incorporate the future planes (bought at attractive price) which are discounted to today's valuation (in USD). I am quite sure that the current assumed USD1 billion valuation incorporates the purchase terms of upcoming planes into the leasing arm - not just its current fleet.

Hence, if we assume USD is good pricing today, Airasia should sell its leasing arm. If we think USD will appreciate further over the next 5 years, then not so good for Airasia as selling the leasing company would deprive it of a better value in Ringgit terms in future.

I am not good at seeing where USD will head in the future but one thing for sure, United States cannot be a competitive country if its USD is too strong. Its imbalance of trade would grow worse and that is not what Trump wants.

Whatever it is, I am thinking it is oversold basically due to its high foreign holdings - which is good if we want to buy cheap, wouldn't it?

6 comments:

Test Diit said...

How many % and at what rate has the currency been hedged for the fuel costs

felicity said...


From Line 33 in 3Q16 accounts as below:

http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=193822&name=EA_FR_ATTACHMENTS

(i) Forward Foreign Exchange Contracts
As at 30 September 2016, AirAsia Berhad has hedged approximately 62% of the US dollar
liabilities of its aircraft (which are deployed to Malaysia) into Malaysian Ringgit (“MYR”).
The latest weighted average of USD/MYR forward exchange rate is 3.2368.

(ii) Fuel Hedging
As at 30 September 2016, the Group has entered into Singapore Jet Kerosene fixed swaps,
Brent options, Brent swaps, and Crack swaps which represents up to 75% of the Group’s total
budgeted fuel consumption for year 2016 and 58% of the Group’s total budgeted fuel
consumption for year 2017.

Valuegrowth said...

Hi Felicity, thanks for your insight.
I just found this info which maybe useful for your question, please look at slide 11 of this 3Q16 presentation slide: http://www.airasia.com/docs/common-docs/investor-relations/airasia-bhd-3q16-presentation.pdf

USD loan:
47% - MAA aircraft hedged at 3.2348!!!
33% - MAA aircraft unhedged
20% - Associates aircraft, natural hedged as they pay in USD

felicity said...

Thanks Valuegrowth for sharing.

Kilo said...

Hi felicity, in your response above:

(ii) Fuel Hedging
As at 30 September 2016, the Group has entered into Singapore Jet Kerosene fixed swaps,
Brent options, Brent swaps, and Crack swaps which represents up to 75% of the Group’s total
budgeted fuel consumption for year 2016 and 58% of the Group’s total budgeted fuel
consumption for year 2017.

The 58% budgeted fuel (based on news, probably higher now) is at USD59. The real question is, at what USD/MYR exchange rate? The currency hedge is only for their aircraft. So you see, airasia is probably still at a net disadvantage with a higher USD

felicity said...

Hi Kilo

47% of the aircraft are hedged at 3.2348 as provided above. I am not sure at what price its competitors hedged, but looking at the current USD:MYR, 3.235 is low.

Towards the future, as I said it depends whether they have hedged the forward currency for new planes.