Wednesday, June 24, 2009

Air Asia battles "swine"

YB Wee Choo Keong's question to the Prime Minister/First Minister of Finance on the RM65 million debt due and owing by Air Asia to Malaysian Airports Holdings Berhad and, whether any special privileges were accorded Air Asia met with a reply that MAHB did not take any drastic action to claim the arrears in airport tax owed by AirAsia because it will only affect the operation of the low-cost carrier terminal (LCCT).

The response does seem to confirm that Air Asia is not without some leverage borne from its commercial impact on air passenger transportation in Malaysia despite suffering widespread opprobrium over the Sime Darby Labu LCCT proposal a few months ago.

But, perhaps Air Asia's greatest challenge is the threat of implosion from the debt edifice that it has had to create in its aggressive and, almost Icarian (i.e. from the Greek myth of Icarus) obssession to gain dominance over large parts of the Malaysian skies and niche parts of the international skies.

I should state that, like many Malaysians, I am an admirer of Air Asia and the entrepreneurial prowess of Tony Fernandes and his team. Air Asia is an excellent example for all Malaysians to emulate. Having said that there are some perturbation over the the manner in which airline operators, admirable as they are, deal with the matter of debt financing. Often, it appears as if the airline operators are racing just one pace ahead of the debt tsunami that they create to support their business model. Of particular concern is the size of the debt and, the risk prospects of public investors who subscribe to their airline adventure. I do wish Air Asia well. But, at the same time, like many, I do not choose to be blinkered and submit to blind adulation.

Read Bloomberg columnist William Pesek's recent sympathetic opinion on Air Asia's continuing travails below. Pesek's piece uses Air Asia as a focal point. But, his central thesis is clear. It is a harsh critique on the unwieldy global banking and finance practices that have come into stark relief over the past year. I have taken the liberty to emphasise in bold the apects of the opinion that is worth reflecting on:

Journalists strive to be objective, while opinion writers try to give their side of the story without being too biased.

Where Tony Fernandes is concerned, it’s a difficult balancing act. The truth is, I’m rooting for the founder of Kuala-Lumpur-based AirAsia Bhd. This region needs more entrepreneurs like him if it’s going to thrive, and I want Fernandes to succeed.

So it was with a tinge of sadness that I read his recent comments about how difficult it still is to borrow money. His words explain, perhaps better than anything, why the global recession may have a long way to go.

The worst of the financial crisis may be past, as hedge- fund manager George Soros argues, yet that’s different from the recession. Even if markets stop reeling, the fallout from the loss of wealth is still filtering through to broader economies - - and it will for some time.

Just ask Fernandes, an executive who is as much on the front lines of today’s uncertainties as anyone.

“We’ve been through SARS, bird flu, the tsunami, you name it,” the chief executive officer of Southeast Asia’s biggest discount airline said at the Paris Air Show on June. 19. “The only swine now are bankers.”

Fernandes, 45, says he made that comment in jest. Yet there’s as much truth as hyperbole to it.

Stingy Financiers

For all the hysteria about swine flu -- the mask-wearing passengers, the long queues at customs, even the risks of death -- the biggest threat to global industries is stingy financiers. In AirAsia’s case, the challenge is to find banks willing to finance aircraft purchases.

Liquidity trap, anyone? That’s the imminent threat right now. If companies can’t grow during economic hardship, more jobs may be lost. That dynamic, more than any, will ensure that healthy growth remains elusive.

Granted, AirAsia is a contrarian outfit. As most industries hunker down, it is expanding apace, adding new planes and routes to prepare for an eventual rebound. Here, it’s possible that bankers have a point that Fernandes’s ambitions may be running ahead of demand.

When I rang Fernandes yesterday, he was as bullish as ever: “For seven years now, people have been saying we are overstretched, and we have proved them wrong. We’ve been very aggressive, but we haven’t been silly about it.”

McDonald’s Dynamic

Fernandes launched the budget carrier in December 2001. Starting the airline just after the Sept. 11 terrorist attacks in the U.S. seemed like commercial suicide. AirAsia was soon turning profits. In the first quarter of 2009, earnings climbed 26 percent as Singapore Airlines Ltd. and Cathay Pacific Airways Ltd. reported mounting losses. It’s not unlike how McDonald’s Corp. thrives in recessions; no-frills beats the rest.

It’s also impressive that Ferdandes did it in Asia’s 10th- biggest economy. Malaysia has long picked national champions and protected its flagship airline. Getting the go-ahead to compete directly with Malaysian Airline System Bhd. was no small feat.

Risks abound. A surge in oil prices would be problematic, as would the global economy experiencing a Japan-like lost decade. That could make the 175 Airbus SAS planes that Fernandes has on order rather hard to pay for.

AirAsia also may suffer from a bit of a Steve Jobs-like problem. The company is built largely around Fernandes’s charisma, as Apple Inc. is around Jobs. Investors were reminded of that on June 1, when Fernandes fainted in Kuala Lumpur, reportedly from exhaustion.

Swine Flu

Should the swine-flu pandemic unfold, AirAsia’s long-haul affiliate, AirAsia X, could be in for a rough ride. AirAsia owns about 15 percent of closely held AirAsia X. Other investors include Richard Branson, the Virgin Group billionaire.

It’s not surprising that Fernandes would be down on bankers. Politicians watching bailed-out banks refuse to extend credit also have reason to be annoyed. An even bigger concern may be how the global credit system is malfunctioning.

U.S. Treasury Secretary Timothy Geithner was right when he said on June 13 that “it is too early to shift toward policy restraint.” His appeal was to Group of Eight finance ministers looking to roll back budget deficits and bank bailouts as economies show signs of recovery.

The real issue is devising a new financial system that makes sense. The current one, decades in the making, was all about rich nations being at the center and financing poor ones. The emerging one features poorer nations financing the richest. Research into how that shift is affecting credit channels and monetary-policy links is in its infancy.

In the meantime, the walls of money that central banks are pouring into markets aren’t likely to have the intended effect. Inflation, for example, is less of a threat in a liquidity trap. The multiplier effects that make monetary policy so potent aren’t working as they once did.

Bankers are an obvious target. Another is how little is going on to fix the problems that grounded markets in the first place. Getting them aloft again will help innovators such as Fernandes improve Asia’s economies.


Patricia said...

I liked this one, CT. Lots to think about here.

'The real issue is devising a new financial system that makes sense.' Yes, cos it does seem to be malfunctioning, doesn't it?

If we keep lending, then how do we cull those businesses that aren't efficient, or are just being buoyed up on a prayer and borrowed money?

I see the need to save jobs. But I also see the need for a system that's sound.

But nothing I see happening now seems to be based on sound financial sense. To me, lah.

'Survival of the fittest'. That seems like a healthy way to proceed: both for man, and for the economies of the world.

But what do I know? I'm just an ex-English teacher, eh? ;)

de minimis said...

Hi Pat

At this stage, no one is an expert to crystal-gaze the economic downturn. So, you might as well weigh in with your views :D, I know I am!

walla said...

World Economy 2009-2010

The Turquality Presentations (en)

Chindia Rising

On AirAsia and LCCs

Repost: Montier on Happiness