Tuesday, May 5, 2020

Sold almost all Airasia - Why

I have sold almost all (16700 @ RM0.81) of Airasia par 200 units on 23 April 2020. Well, the rationale is almost similar to Warren Buffett's idea of selling all his holdings but it is different. Let me put the reasons.

For Berkshire Hathaway, he basically owned the Big 4 airlines - United, Delta, Southwest, American Airlines. When he bought the airlines I believe, it was due to the industry was facing reduced or managed competition, and the number of seats was much more controlled. One notice that Berkshire  did not own a particular company but instead owned the Big 4. There was a reason to this, he did not want to make a picking on a company but rather made an industry call. COVID-19 pandemic however, changed that landscape much due to unforeseen oversupply even after the lockdown is over. The government of US was in fact putting $25 billion to support its airline industry during this trying times.

How the airline industry is going to change? The way people travel is going to be different and there are various thoughts - such as foregoing the middle seats for a single aisle, more sanitation and control etc. These are going to reduce the revenue for the airline companies but instead increased their costs. Nowhere in the world would be dissimilar when comes to this issue. 

Malaysia or our region which includes China and India's situation is somewhat different although there are much similarities. These airlines be it Singapore Airlines, Thai Airways, MAS, Airasia, Lion Air - they are operating off different bases and registered as airlines businesses operating off a specific country. We know that Singapore government gave a rescue package of around $13 billion to SIA. Emirates and Qatar Airways which are representing much richer countries would have done the same - if not already done. We hear of Australia - at the moment - would allow Richard Branson's Virgin Australia to go under although airline industry plays a pivotal role in providing strength for the business and tourism industry - which is unforeseen in my opinion. I think China, would the same in rescuing its airlines as they are pretty much state-owned anyway.

What about Airasia? Well, the only thing we have heard is that the government may consider the amalgamation of Airasia-MAS and maybe including the much affected AAX. I however think that it is going to be very hard - depending on how hard Airasia or MAS are being hit. MAS would have been hit harder as it was not in any situation to survive, unless Khazanah continues to pump in cash. One must notice that at this moment, Khazanah would also be needed to perform its call of duty to support government's financial need.

Airasia was being lucky that it sold more than 110 planes over the last 2 years. It was holding cash as it managed to secure more than RM11 billion of sale. We also have gotten some of the cash in the form of dividends (about RM1.35 per share) from that results, and I have heard of analysts mentioning that the cash situation would have been better if it was not distributed. Well, let's put it that some of the cash may have remained in the hands of the largest shareholders and when in need, there would possibly be a cash call exercise. So I think, Airasia would be saved despite it being a private company.

Why would I then sell Airasia? First of all, it is probably the hardest hit industry and no one can predict the outcome. No matter how our modelling is done, it is hard to predict. Let's say the worst case scenario - what if no vaccine is found even after 2 years? People may not be able to fly inter-country for months or quarters. I still think at this moment the fittest will survive and given the balance sheet of Airasia, it is the fitter one. HOWEVER, where Airasia is operating from i.e. Malaysia, Thailand, Philippines, Indonesia - these countries are not the fit ones.

These countries would have enough trouble supporting their economies whatever the outcome may be from COVID-19 and they would not have the financial power to support their airlines. Malaysia is hit by the virus, political uncertainties, oil. Thailand is hit as well and it is probably thrashed by the automotive industry situation.

Post COVID-19, the ones with the balance sheet will survive and prosper. The same is onto a particular company - and the similar situation would be for countries.

What I am afraid is - the SIAs, Scoot, Qatar, Emirates would be outrunning the air space. There would be oversupply of seats for a while. The situation is people would be still hungry to travel but not for the shorter term. I know I have heard of behavior will change but I think certain behavior like wanting to travel will stay, but the bigger thing I fear is that the poorer countries may not be able to support their own industries and airline industry needs support no matter what the outcome would be in future.


reyes430 said...

Hi Felicity, thank you for the sharing all these times, i have been followed closely on most of your post especially on Airasia.

We might have to wait until next year for the vaccines to come out and mass produced, do you think that Airasia will be able to survive throughout this hardship? Despite they are low in gearing but it would be tough for bank to lend, so what left would be equity cash call.

and given existing capacity, do you think they can maintain 50% load factor?


felicity said...

Hi Reyes,

Let's look at it this way. If Airasia is not managed to do a cash call, so will the rest that are not able to get govt's help. However, cash call through equity may not be discounted.

I have a feeling that Airasia will manage the seats made available to maintain 50% load, unless they are forced not to sell certain seats.