AirAsia, Asia’s biggest low-cost airline, completed the biggest divestment in its corporate history after agreeing to sell its aircraft leasing operations to US aircraft lessor BBAM for RM$4.6 billion ($1.18 billion) on Thursday.
News of Asia Aviation Capital's sale, the culmination of a near-two year process, was well received by the market since the price tag is higher than the $1 billion bid AirAsia had received in May 2016. AirAsia's share price rebounded 5% on Thursday after dipping as much as 6.7% on Wednesday on a disappointing set of full-year results.
The deal will see BBAM taking over AirAsia’s portfolio of 84 aircraft and 14 engines. With the exception of five planes, all of these assets will be leased back to the Malaysian airline.
BBAM’s offer values the aircraft leasing business at an enterprise valuation of $2.85 billion, according to AirAsia’s statement on Thursday. The deal was struck at a price that is about 1.5 times its net book value of RM$7.4 billion as of the end of 2016, although the actual figure should be slightly lower since AirAsia has purchased another 10 planes since then.
The agreed price nonetheless looks to be at a premium to publicly listed aircraft leasing companies such as BOC Aviation, which is trading at 1.1 times book value. Avolon, the Irish leasing company backed by China’s HNA Group, acquired American lessor CIT at about 1.2 times book value last year.
The sale of its aircraft leasing business, which officially started in August 2016, will see AirAsia turning into an asset-light model and focus on its core airline business.
“Today’s sale is much in line with our stated strategy of disposing non-core assets and businesses, an undertaking which we have successfully executed over the last six months – starting with our training centre, ground handling unit and now our leasing unit – and unveiling the true value of AirAsia,” the group's chief executive Tony Fernandes said in the statement.
The transaction raised a hefty $902 million in net cash proceeds – nearly twice AirAsia's current cash holdings – that can be earmarked for expanding its routes to meet growing travel demand in the region.
Airline companies are increasingly adopting the asset-light model instead of owning planes themselves. In particular, many airline-backed lessors are less successful than independent lessors because they lack the technical skills for marketing, contracting, and managing the assets, DBS analysts said in a report.
In addition, airline lessors like AirAsia lack the cost-of-funding advantage possessed by bank-backed lessors such as China’s ICBC Leasing, CDB Leasing, and BOC Aviation.