AirAsia has a valuation problem.
The Malaysian company saw its stock soar at the start of the year. Investors flocked to the company’s shares in January, ahead of a full-year profit announcement that saw the company earn RM2.03 billion ($470 million) after tax, a jump of around 275% compared to 2015. A share price fall after weaker first quarter profits turned out to be a temporary blip, and the stock is now up more than 40% on the year.
But despite the rally, AirAsia still trades at much lower multiples than its rivals around the world. The company was trading at RM3.32 on June 12, giving it a price-to-earnings ratio of around 5.58.
That is just a fraction of where other low-cost carriers were trading at the time. EasyJet was changing hands at around 21 times earnings, and both Southwest Airlines — a US budget airline partly owned by Warren Buffet’s Berkshire Hathaway — and Ryanair were trading at PEs of over 17.
But AirAsia faces a regulatory burden that these companies don’t. As much as being ‘the Asean airline’ puts the company in line for potential growth if tourism into Southeast Asia grows, it also forces AirAsia to deal with numerous different regulators.
For all the hype that the Association of Southeast Nations (Asean) attracts, the bloc has made scant progress in some important areas. For AirAsia, none are more important than air traffic regulations. The attempt to create ‘open skies’ — which would allow easy passage for airlines between different Asean countries — has so far been half-hearted, at best.
The tight rules have forced AirAsia to operate using a joint-venture model, owning minority stakes in subsidiaries across Southeast Asia. That makes sense for an airline with regional ambitions, but it does not appear to have helped encourage investors to push the stock to significantly higher multiples.
When GMT Research, a Hong Kong based accounting company, released a negative report on the company in June 2015, how AirAsia accounts for profits and losses at its joint ventures was reportedly among its criticisms.
Aireen Omar, chief executive of AirAsia Berhad, the Malaysian entity, told FinanceAsia the company’s valuation has also been obscured by the operation of its aircraft leasing subsidiary, Asia Aviation Capital. The two issues should perhaps not be separated — among the 63 aircraft it owned by the end of 2016, 61 were leased to companies affiliated with AirAsia.
“We find that some investors don’t seem to understand how to value the company,” said Omar. “They seem unsure how to treat the fact that we lease our aircrafts to our joint ventures, and the fact that our business model is so different to the others. We have so many JVs in order to operate in this region.”
This is a problem that has long plagued the company. But executives at AirAsia, never known for resting on their laurels, have come up with a plan.
“I always feel that airlines under-utilise their assets,” said AirAsia’s chief executive Tony Fernandes during an analyst call after the company announced its fourth quarter results on February 23.
He plans to make sure that his company is the exception.
AirAsia is considering spinning off several subsidiaries, among them AAC, which Fernandes has previously said in worth around $1 billion.
The company could potentially be spun-off from a stock market listing, said Omar. But a private sale looks just as likely.
There has been “interest from all sides”, said Omar, who pointed to “investment houses and leasing houses” as among the bidders. But in late March, Korea Transport Asset Management, a little-known private company, emerged as the leading candidate, according to press reports.
AirAsia is also planning to list the Asian Aviation Centre of Excellence (AACE), a training school that it set up for its own pilots but that has since morphed into a joint venture with CAE, a third-party training company.
The listing is likely to be worth somewhere between $125 million and $180 million, Fernandes said.
That is far from the end of it. The company is also eyeing a dual-listing of Air Asia Berhad, which is already listed in Malaysia, on either the Hong Kong or New York Stock Exchanges. This is a plan the company has been mulling since at least 2011, but after the latest results, Fernandes once again reiterated the idea.
The most ambitious plan, though, is AirAsia’s goal of listing an Asean holding company.
This will require a restructuring of the business — and is likely to come only after AirAsia lists its subsidiaries in Indonesia and the Philippines. The sheer complexity of so many moving parts may cause headaches for executives at AirAsia, but Omar says it is something they have been mulling for a long time.
“Technically, Malaysia is a regional holding company and all of the regional functions sit in Malaysia,” she said. “Is this the most effective structure? We’ve often toyed with this idea of having an Asean holding company, having all of the local entities below that holding company.”
The holding company could be listed on the Hong Kong stock exchange, although this is not assured.
AirAsia is, then, eyeing five potential listings, and another spin-off — AAC — that could be done through the stock market if a private sale does not pan out.
The company can certainly not be faulted for its ambition.
The reorganisation of AirAsia’s business is part of a wider drive to identify unexploited ways to improve efficiency, including making sure to keep costs as low as possible.
The company invested in a fleet of Neo A320 aircraft for its short-haul routes last year, continuing its long relationship with Airbus. These planes are 15% more fuel efficient, according to Omar, and allow AirAsia an additional six seats per plane.
Omar is putting a renewed emphasis on costs, making sure that the company is always as disciplined as possible when it comes to getting the best possible deal.
“There are many ways to do this, certainly us working as a group plays a huge role because then we can realise economies of scale,” she said. “As a group, we have operations in Thailand, Indonesia, the Philippines, Japan, India, and all that. By us consolidating certain functions, naturally it will make the operations more efficient.”
Cost-cutting only goes so far, of course. For AirAsia to take full advantage of the opportunities in its home region — and for it to obtain the valuations of its European rivals — it will have to rely on the political goodwill of Asean leaders.
The bloc has taken steps towards a single aviation market, allowing easy flights between capital cities and secondary cities across much of Southeast Asia. But airlines are still limited in how easily they can fly citizens in and out of the region, especially when neither the destination nor the origin is in their domestic market.
Omar thinks that ‘open skies’ across the region will “maybe, maybe” be a reality in five years. But until then, she has no plans to sit around and wait.
Investors will have plenty to consider from AirAsia over the coming years, as its mix of IPOs and private sales hits the market. The tighter regulatory environment for Asean airlines means the company’s executives should probably not expect to see the valuations enjoyed by Ryanair or Easyjet.
But they are going in the right direction.
This article is an updated version of a story that appeared in FinanceAsia's May/June issue.