✈️ AirAsia 1Q22 Quarterly Review - What Goes Down Must Come Up (statistically speaking)
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AirAsia still has plenty of revenue headroom in the near-future - with 1Q22 RPK and ASK still at just 20% of 4Q19 pre-pandemic levels. Assuming a recovery back to pre-pandemic passenger volumes, their annualized revenues can still increase by another 300% from here.
Can they service their debt going forward, especially in the short-term? Fortunately it appears they can - helped by recently renegotiated +50% longer lease terms.
In the Valuation section of this report, we shall explore why the expected shareholder dilution from the rumored fundraising round in the near-future is unlikely to significantly impact their existing valuations.
Assuming average fuel prices of $80/bbl into perpetuity, the airline business AirAsia alone would justify their current valuation at 13.6x normalized EV/E (i.e. no contribution from Digital businesses).
Even conservatively assuming average fuel prices of $100/bbl into perpetuity (which is unlikely), this valuation only goes up to 17.3x EV/E - demonstrating the impressive unit economics of the airline.
AirAsia’s corporate tagline is, “Now Everyone Can Fly” - and with light at the end of the tunnel with respect to the end of the pandemic, it certainly seems that way. I’ve previously written about AirAsia in three separate reports, so if you need a refresher on them do wander over and gawk at them first:
This review is meant to provide a quick update based on their 1Q22 results, which was released last Thursday (26 May). Since 1Q22 is the first quarter since the pandemic began that global lockdowns were more or less fully lifted and international air travel really started to take off - and in light of rumors of a potential new round of external fundraising - I thought it was worth reviewing how they performed in 1Q22. I’m pleased to report that based on the latest financial datau know, the outlook for them is encouraging.
This report is meant to complement my earlier AirAsia Part 3 report linked above - so please read it first if you find yourself missing any crucial context. I’ve also updated the Excel file from the previous AirAsia report with their 1Q22 results, and added a new 1-page summary - both of which you can download at the bottom of this report.
Note: AirAsia recently changed its name to Capital A. In this report, I will be using “AirAsia” to refer exclusively to their passenger airline business; while “Capital A” will be used to refer to all their businesses as a whole (including their other aviation businesses, e.g. air freight).
Capital A (5099.KL) Links:
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1Q22 Financial Performance Review
To start from the end, anyone entertaining an investment in AirAsia today needs to appreciate one thing - as with any other non-flag carrier airline today, going concern risk is still closer to 10% than 0%. Should the pandemic suddenly decide to flare up again, it could see the reimplementation of global lockdowns which will likely restrict air travel again. Furthermore, should prevailing news headlines be correct about a potential global recession, it will be salt in the wounds of these already ailing airlines. In this report, we shall be exploring the impact from the latter possible development below, and attempt to determine what their cash runway looks like.
Having said that, it’s not all gloom and doom for the global LCC industry - in fact, presently available facts seem to imply the opposite. With passenger air travel roaring back to life amidst pent-up demand, airlines around the world are seeing a resurgence in pricing power - with US airlines notably raising ticket prices to the scorn of US travelers. Even most layman would agree that the balance of risks lies towards the upside - as evidenced by recent complaints of people being kicked off planes due to airlines overbooking despite having bought a ticket.
In AirAsia’s main market of ASEAN, things are looking up as well. Anecdotal observation by friends in various regional countries suggest that the plane hulls they were occupying were filled to the brim both ways - an assertion backed by AirAsia’s latest 1Q22 Load Factor of 76% and 4Q21 Load Factor of 80% (pre-pandemic average: 90%). We’ll get to analyzing their quarterly KPI performance shortly - but first, let’s get their 1Q22 three statement analysis out of the way.
Profit & Loss
No surprises here, Airasia wasn’t profitable during 1Q22 - and by extension of being the group’s largest contributor, neither was Capital A as a whole. Aviation revenues were RM 601M, Logistics revenues were RM 147M (i.e. Teleport), while Digital revenues were RM 63M (Logistics & Digital revenues were previously combined).
Most of their EBITDAR losses (reported as EBITDA) were contributed by increased Fuel and Maintenance expenses during 1Q22. Both are easy to understand - the former was due to 39% higher unit oil prices vs. 4Q19 (as demonstrated below), while the latter is presumably due to the company ramping up available seat kilometers (ASK) in preparation for higher passenger volumes. In any case, all of their variable cost trends in 1Q22 are within expectations.
Fixed costs - notably depreciation of airline lease ROUA - mostly stayed at the same level in 1Q22 as they did throughout FY20-21. Other than that, the only notable development was that they shifted the line item Share of results of associates/joint ventures from the EBITDA section down to the Other Income section of their P&L statement. I suspect this was done to agglomerate the performance reporting of their airline and non-airline associate companies - since post-disposal of their main airline associate/joint ventures (i.e. AirAsia India/Japan), the profit contribution from their remaining airline associates has dwindled to negligible levels.
Net Profit for 1Q22 was down -10% from 1Q21’s already negative territory, largely owing to the aforementioned reasons. However, there’s also not much insight to glean from this as their annualized Revenues for 1Q22 were still only 26% of FY19’s revenues. If we assume that their Revenues can eventually recover to pre-pandemic levels in the coming years, this QoQ trend is basically irrelevant.
That wraps up the assessment of their Group-level income statement. However, there are still more interesting trends to be observed in their segmental income statements:
Firstly, note the highlighted blue column in the top-left titled ”1Q22a vs. 12M19”? That column compares their post-pandemic annualized 1Q22 performance to their pre-pandemic 12M19 performance. As we can see, their Aviation revenues are still at only 20% of their pre-pandemic levels - which still implies plenty of headroom going forward. Furthermore, their Digital + Logistics revenues have since ramped up significantly to 144% of their pre-pandemic levels - with Teleport revenues commanding an 18% share of total 1Q22 Group revenues (or 3.6% of pre-pandemic Group revenues). That’s a decently impressive trend for their Logistics segment, which only really started gaining traction when the pandemic hit.
We’ll take a deeper look at their Airline KPI performance as well as the impact from higher oil prices in the Valuation section below; but I’d just like to quickly touch on their Digital section here. For the first time, Capital A has provided a proper EBITDA breakdown of their Digital businesses in their 1Q22 report. While I think it’s still far too early to draw any material conclusions from their Digital business performance (I assumed zero contribution from Digital in my previous AirAsia Part 3 report), it’s always cool whenever management voluntarily provides incremental disclosure:
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Paid subscribers can download Capital A's 1-page summary sheet & a robust 300-row Excel model of their historical three statements (FY14-FY21) by clicking the links below: