Asia’s biggest low cost airline, AirAsia, is exploring the sale of its aircraft leasing business as the highly-leveraged carrier moves to reduce its gearing and shift to an asset-light business model.
In a statement to Bursa Malaysia, Kuala Lumpur-headquartered AirAsia confirmed recent market speculation about the sale of Asia Aviation Capital (AAC), confirming it was carrying out a strategic review of the aircraft leasing unit that would include divestment of a substantial portion of its interest in it.
Analysts said the potential sale of AAC could raise around RM4 billion ($1 billion), equivalent to nearly half of AirAsia's current $2.06 billion market capitalisation, and could help AirAsia refocus on its core airline business.
The potential sale of AAC, which was established less than two years ago, shows AirAsia is increasingly turning to a light-asset, high-cash-flow model that enables it to speed up expansion and develop new routes.
Company founder and chief executive Tony Fernandes said last year the airline “was back on an expansion mode” after two years of slower growth. That ambition was highlighted when AirAsia placed a $12.4 billion order for 100 Airbus A321neo aircraft at the Farnborough International Air Show last month.
Including the new purchase, AirAsia has 404 planes on order, more than twice the size of the airline’s existing fleet of 176 aircrafts.
Selling AAC, which owns and manages 55 aircraft leased to AirAsia affiliates based outside Malaysia, will allow the airline to free up cash locked up in these planes.
AirAsia plans to sell and lease back as many as 120 planes by 2025 which would allow it to book a net cash gain of $2.5 billion, according to Fernandes. “Investors haven’t really given us the credit for the fact that we own everything and that there is $2 billion worth of cash there,” he said last year in response to questions about the group’s strategy.
Apart from capacity expansion, AirAsia also needs cash to reduce its high gearing brought about by depreciation of the Malaysian ringgit against the US dollar, in which the majority of its borrowings are denominated.
The airline’s net gearing ratio was reduced to 2.29 times as of the end of last year - from 2.5 times in 2014 - after the company sold and leased back 16 of its planes. But the company’s debt of $2.4 billion as of the end of March was still way above its cash holdings of $300 million.
To alleviate debt, AirAsia is also planning to raise $200 million by selling convertible bonds in its Philippines and Indonesia units before listing them on their respective stock markets next year.