Airline Weekly - June 22, 2015
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Airline Weekly - June 22, 2015

Phony Fernandes? Not exactly. AirAsia has messy accounting, but its low-cost credentials are indisputable

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Cover Story

Phony Fernandes? Not exactly. AirAsia has messy accounting, but its low-cost credentials are indisputable

As Airline Weekly regularly warns when reporting AirAsia’s quarterly net results, things are not always as they seem. Last fall, for example (on Sept. 1, 2014), readers were advised to “keep in mind that [AirAsia’s] Malaysia unit’s revenues are plumped with lease transfer payments from subsidiaries.” We added: “It’s tough to calculate an accurate figure for the group as a whole due to accounting complexities.” Last quarter’s earnings summary included another surgeon general’s warning: “AirAsia has the most complex financial statements of any airline in the world that reports, due to its multiple joint ventures and large lease payments flowing from one subsidiary to another.”

All of this took on a new level of relevance last week after analysts pronounced similar concerns about the transparency of AirAsia’s accounts, with at least one warning that its true profits have largely disappeared—and adding concerns about its true cash flow and debt burden. The airline’s shares tanked in response, losing 30% of their value compared to earlier in the month before recovering somewhat following reassurances from the company.

The questions about AirAsia’s financial transparency aren’t helped by the company’s unusual refusal to allow journalists to listen to its quarterly investor conference call—among the world’s large publicly traded airlines, that’s almost unheard of. (The company did not respond to an Airline Weekly request last week for a response to the allegations.)

Last quarter, AirAsia boasted a 21% operating margin which, if taken at face value, would have been the fifth highest figure of any reporting airline in the world. But a full 17% of its revenue came from leasing airplanes to its own partly owned subsidiaries, whose own results are not fully accounted for in AirAsia’s income statement. But as it happens, subsidiaries in Indonesia, the Philippines and India all posted operating margins of roughly negative 30% in Q1, meaning the AirAsia group as a whole is not doing nearly as well as that 21% margin suggests.

The company, defending itself last week in a lengthy statement filed with Malaysia’s stock exchange, said it’s “one of the most transparent airlines in the world” in the sense that it makes its aircraft lease income very clear in its financial statements. This is true. It also rightly claims accounting rules don’t allow it to consolidate subsidiary income into the accounts of its core Malaysian unit, the result of foreign ownership laws that prevent it from holding majority stakes in airlines based overseas—it would love to see these laws overturned and operate AirAsia as a single entity, it has been saying for many years... (445 of 1,780 words)

Also Inside this Issue:

Even with fuel prices down, economies sluggish and the U.S. dollar strong, Airbus and Boeing left Paris with a healthy haul of new orders, especially for NEO and MAX narrowbodies. As for widebodies, Garuda made the biggest airshow splash with orders for both A350s and B787s.

SAS didn’t order any more planes in Paris. But it is shopping for a few more widebodies to expand longhaul flying in the wake of its recent pilot agreements. It’s also doing better financially this year, if still not great, thanks in big part to a lull in competitive pressures throughout Scandinavia—easyJet, for one, seems uninterested in the market, and Norwegian is throwing lots of its capacity into markets like U.K.-Spain. Norwegian, of course, also suffered a big pilot strike this spring, temporarily boosting unit revenues at SAS.

Air France/KLM badly needs a unit revenue boost—and hopes to get it by cutting routes and reducing capacity. Turkish Airlines seems to have unit revenue headaches too, judging from falling load factors in key regions, especially Africa. It didn’t give any updated information on yields, but trends can’t be too bullish given forex realities and Turkey’s economic troubles. Its extremely aggressive U.S. growth—Atlanta is next on its hit list—can’t be great for yields either.

Unable to profit at New York JFK, United is pulling out, retreating from an expensive transcon arms race with American, Delta, JetBlue and Virgin America. Instead, it plans to swap with Delta for more slots at its Newark fortress hub, enabling it to create a better transcon offering there. Delta, for its part, is giving up on Seattle-Tokyo Haneda.

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