Aras Sejagat Sdn Bhd - 2010

MARC has affirmed its AA+IS(bg) rating on Aras Sejagat Sdn Bhd’s (Aras Sejagat) Bank Guaranteed Sukuk Ijarah (Sukuk Ijarah) issuance of up to RM500 million in nominal value. The rating reflects the strength of the unconditional and irrevocable bank guarantee of up to RM420 million by Kuwait Finance House (Malaysia) Berhad (KFHMB). MARC has recently affirmed KFHMB’s long-term financial institution rating at AA+ with a Negative outlook. Accordingly, the outlook on Aras Sejagat’s rating has also been revised to Negative from developing to mirror the outlook of the facility’s guarantor.

Aras Sejagat is a wholly-owned subsidiary of AirAsia Berhad (AirAsia) incorporated for the sole purpose of raising the Sukuk Ijarah. With AirAsia’s operations being the source of the Ijarah payments, the underlying repayment ability of the Sukuk is driven by the credit profile of AirAsia. AirAsia’s credit profile is supported by its strong market position enabling it to capitalise on an expected increase in demand for air travel in the Asia Pacific region, robust load factors, high operating profit margins and strong operating cash-generating ability. AirAsia’s financial profile is, however, held back by its exposure to volatile jet-fuel prices, its rather aggressive growth strategy which has resulted in the company consistently reporting negative free cash flow over recent years and high debt leverage. MARC believes that AirAsia’s financial flexibility is helped by its continued ability to maintain satisfactory operating margins and report strong earnings amid pricing pressure. The Sukuk’s non-amortising repayment profile also provides additional financial flexibility to AirAsia, although this increases refinancing risk towards the end of the Sukuk’s tenure.

AirAsia Group is the leading low-cost carrier (LCC) in the Asia Pacific region with an extensive route network of 122 routes and a fleet of 85 airplanes as at June 30, 2010. The group’s early expansion puts it ahead of Jetstar and Tiger Airways, its competitors which currently operate 52 and 19 aircrafts respectively. This gives AirAsia a clear advantage over its main competitors to capitalise on increasing demand for air travel in the Asia Pacific region. AirAsia’s ‘Load Active, Yield Passive’ strategy, which emphasises filling up the aircrafts, allows revenue passenger kilometre (RPK) to fluctuate based on demand, while load factors remain relatively constant. AirAsia’s yields increased in FY2009 as lower fuel costs outweighed a slight decrease in RPK during the year.

In FY2009, jet fuel expenses constituted 40% (FY2008: 42%) of the group’s operating costs. As at March 31, 2010, AirAsia had hedged 7% of its jet fuel requirements until December 31, 2010 in crude oil futures and 26% in crack fixed swaps. MARC views that the relatively low hedged position allows the group to reduce overall fuel costs, but would inevitably expose the airline to any fuel price hikes. Based on its existing delivery schedule, the group is expected to add 99 aircrafts to its fleet by 2015. The rapid expansion would pose significant challenges to support providers in terms of developing the necessary infrastructure required by the group’s operations. With the group’s projected growth, AirAsia’s immediate concern would be the timely completion of the new permanent low-cost carrier terminal at Kuala Lumpur International Airport which is now expected to be completed by 1Q2012. 

AirAsia registered a profit before tax of RM622.3 million for FY2009, recovering from a loss in the previous year, which were partially due to unwinding and provisioning for losses on jet fuel and interest rate derivatives. The group’s operating profit margin was strong at 29.13% and OPBIT interest coverage was satisfactory at 3.08 times. AirAsia’s cash generation ability in FY2009 as measured by its CFO increased to RM1.25 billion (FY2008: negative RM197.3 million), and cash balances as at December 31, 2009 have recovered to RM746.3 million (December 31, 2008: 153.8 million). Meanwhile, its debt-to-equity ratio as at December 31, 2009 declined to 2.90 times (FY2008: 4.11 times). MARC expects AirAsia to continue investing fairly aggressively, noting the need for a significant portion of the financing to come from internally generated cash flow so that the group’s financial profile will not materially weaken from current levels. AirAsia’s capex in FY2010 is estimated to be around RM2.4 billion for 16 A320s which are expected to be delivered during the year, of which six have been received as of June 30, 2010. Thereafter, it is scheduled to receive another 89 aircrafts until FY2015.

AirAsia’s aggressive growth strategy is likely to limit opportunities for significant improvement in its credit profile in the near or intermediate term. The supported ratings on the Sukuk Ijarah will be revised if the rating of KFHMB changes.

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