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Financial Analysis of AirAsia, Malaysian Airlines and Singapore Airlines
Course: Corporate Finance Course Code: FIN6257 Lecturer:
Asrul Dahari International Islamic University Malaysia Graduate School of Management
www.canadean-winesandspirits.com April 2013
Authors:
Athar Mazhar
G1126319 Mirza Zia
G1213229 Naeem Nasser
G1139591
Yang Yan Li G1211126
Table of Contents ................................................................................................ i List of Figures..................................................................................................... ii List of Tables ...................................................................................................... ii 1. Introduction ................................................................................................ 1 1.1
Industry Overview .............................................................................................. 1
1.2
Company Profiles ............................................................................................... 3
2.
Performance Review .................................................................................11
2.1
Financial Performance ..................................................................................... 11
2.2
Operating Performance .................................................................................... 14
3.
Ratio Analysis............................................................................................16
3.1
Profitability Ratios ............................................................................................ 16
3.2
Liquidity Ratios ................................................................................................. 20
3.3
Leverage Ratios ............................................................................................... 21
4. 5. 6. 7. 8. 9.
Dividend Policy..........................................................................................23 Capital Structure .......................................................................................25 Cost of Capital ...........................................................................................28 Fair Price Valuation ...................................................................................31 Glossary .....................................................................................................35 Bibliography ..............................................................................................36
Contents
Table of Contents
Figure 1: Asian Airlines – Revenues (MYR billion), 2007–2011 ...................................................................................... 12 Figure 2: Asian Airlines – Operating Profit (MYR million), 2007–2011 ............................................................................ 12 Figure 3: Asian Airlines – Net Profit (MYR million), 2007–2011 ...................................................................................... 13 Figure 4: AirAsia, Capital Structure, 2007–2011 ............................................................................................................. 25 Figure 5: Malaysian Airlines, Capital Structure, 2007–2011 ........................................................................................... 26 Figure 6: Singapore Airlines, Capital Structure, 2007–2011 ........................................................................................... 27 Figure 7: AirAsia Stock Price, 2007–2011 ...................................................................................................................... 31 Figure 8: Malaysian Airlines Stock Price, 2007–2011 ..................................................................................................... 32 Figure 9: Singapore Airlines Stock Price, 2007–2011 ..................................................................................................... 33
List of Tables Table 1: AirAsia Group, Key Facts (FY2011).................................................................................................................... 3 Table 2: AirAsia Fleet Details (as of December 2012) ...................................................................................................... 4 Table 3: Malaysian Airlines, Key Facts (FY2011) ............................................................................................................. 6 Table 4: Singapore Airlines, Key Facts (FY2011) ............................................................................................................. 9 Table 5: Operating Statistics Peer Review, 2011............................................................................................................ 15 Table 6: Return on Asset Peer Analysis (FY2011) ......................................................................................................... 16 Table 7: Return on Equity Peer Analysis (FY2011) ........................................................................................................ 17 Table 8: Operating Margin Peer Analysis (FY2011) ....................................................................................................... 18 Table 9: Net Margin Peer Analysis (FY2011) ................................................................................................................. 19 Table 10: Current Ratio Peer Analysis (FY2011) ............................................................................................................ 20 Table 11: Quick Ratio Peer Analysis (FY2011) .............................................................................................................. 20 Table 12: Debt to Equity Peer Analysis (FY2011)........................................................................................................... 21 Table 13: Long Term Debt to Equity(FY2011) ................................................................................................................ 21 Table 14: Debt to Assets (FY2011) ................................................................................................................................ 22 Table 15: Singapore Airlines, Dividend Policy ................................................................................................................ 24 Table 16: Cost of Capital Peer Analysis(FY2011)........................................................................................................... 28
Contents
List of Figures
Introduction
1. Introduction 1.1
Industry Overview
Despite the slow recovery in the U.S., Japanese and European markets, Asian economies were comparatively more resilient due to high savings, controlled public spending and sound government policies. As the emerging Asian market grows affluent, demand for travel has increased as well. An increasing number of engers from India, China and Indonesia are travelling abroad (Malaysian Airports Holding Bhd, 2012), (Changi Airport Group, 2013), many of them attracted to the Singapore and Malaysia. This demand has been further boosted by the adoption of various strategies to boost inbound tourism to the countries. Malaysia has laid emphasis on promoting itself has a modern urban as well as nature haven through its “Malaysia, Truly Asia” campaign, while Singapore has positioned itself as a leading business and travel hub. The popularity of low cost carriers too has helped fuel this growth, with engers preferring low cost airlines to full service airlines, especially in the short-haul segment.
In light of positive market conditions, the Asian airline industry has performed extremely well. In fact, a number of Asian airlines have posted profits that outstrip their American or European counterparts (Lau & Chan, 2012), many of whom have files for bankruptcy in the past decade. The low cost and segment has performed especially well in the Asia Pacific region, with low cost carriers such as Cebu Pacific (Cebu Air Inc, 2012), AirAsia (AirAsia, 2011), and JetStar Airways (Jetstar Airways, 2012) all reporting increase in revenues and recording profits over the previous year. airlines, such as Singapore Airlines and Cathay Pacific, taking advantage of the healthy macro-economic variables in Asia, and the demand for luxury in the region, too have been able to post profits as well.
High fuel prices present the biggest challenge for airlines, and a softening forward economic outlook implies potential for weak profits in 2013. Fuel costs comprise about 30-50% of the airlines total operating expenses, and are expected to remain volatile due to economic uncertainty in the developed economies and wild cards such as Middle East political issues. In addition, inclusion of aviation in European Union
1
Introduction
Emission Trading Scheme (EU ETS) has had an impact on airlines since the beginning of 2012 as well. Airlines have to pay for carbon emitted in EU airspace, as a result of which operators have withdrawn some older aircraft. This factor led to incremental increase in air fares as costs were ed on to consumers.
In this paper, we attempt to evaluate three South East Asian airlines, namely, AirAsia, Malaysian Airlines and Singapore Airlines on the basis of:
Profitability, Liquidity and Operating Ratios
Capital Structure
Dividend Policy
Cost of Capital
Theoretical Valuation
2
Introduction
1.2
Company Profiles
1.2.1
AirAsia
Table 1: AirAsia Group, Key Facts (FY2011) Key Facts
Headquarters
LCC Terminal, Jalan KLIA S3, Southern Zone, Kuala Lumpur International Airport, 64000 Sepang, Selangor Darul Ehsan, Malaysia
Employees
5,137
Founded
1993
Total Revenues
MYR4,495.14 million (US$1,453.09 million)
Number of Aircraft
97
Average Fleet Age
4 years
engers Carried
29.86 million
Source: Annual report, company website
AirAsia Berhad (“AirAsia”) is among the leading low cost carriers in Asia, headquartered in Kuala Lumpur, Malaysia. Initially, the airline was incorporated in 1993 by DRB-HICOM, and commenced operations in 1996 as the nation’s second national carrier, offering full-service flights. However, the airline suffered numerous losses and was eventually sold off in December 2001 to Tune Air Sdn. Bhd, along with its MYR40 million debt obligations. The airline commenced operations in its present form in January 2002 as a low-fare carrier and quickly settled its earlier debts. (Caterham F1, n.d.). The airlines was listed on the main market of Bursa Malaysia securities board in November 2004 under the stock ticker “5099” (AirAsia Bhd, 2004).
AirAsia serves 20 countries through 154 routes, and operates off 14 hubs in four countries –Malaysia, Thailand, Indonesia and Philippines, through a number of s, t ventures and subsidiaries.
3
Introduction
Table 2: AirAsia Fleet Details (as of December 2012) /Subsidiary/t Venture Name
Number of Aircraft
AirAsia
64
Thai AirAsia
27
Indonesia AirAsia
22
AirAsia X
9
AirAsia Japan
3
AirAsia Philippines
2
Source: Annual report, company website
In December 2004, the airline embarked on a program to replace its then ageing fleet of Boeing aircrafts with new Airbus aircrafts. As a result, AirAsia phased out its entire Boeing aircraft fleet and replaced it with its current fleet comprising of only Airbus A320-200 aircrafts (AirAsia, 2008). In June 2011, the airline placed a US$18.5 billion order with Airbus for 200 A320-210neo aircrafts to be delivered between 2016 and 2026 (Rothman, 2011). In addition to the current fleet, the airline currently has orders outstanding for 91 A320-200, 264 A320neo, 16 A330-300 and 15 A350-900 aircraft, the earliest of which are expected to enter service in 2016 through 2026. The carrier employed 5,137 people as of 31 December 2012 (AirAsia, 2011). In 2011, it was awarded the “World’s Best Low Cost Airline” for the 4th consecutive year by Skytrax (AirAsia, n.d.).
Business Analysis AirAsia states its goal is to establish itself as a leading low cost carrier in Asia. Among the strategies adopted by the airline to achieve the goals are as follows:
Offering low fares: The airline is focused on offering significantly lower fares than the published fares of full service airlines to attract a broad range of guests. engers are offered no frills
4
Introduction
such as frequent-flyer miles, airport lounges, inflight entertainment and have the choice of paying for add-on services such as inflight meals, drinks and snacks.
Operational efficiency: AirAsia aims to keep operating costs low by a high turnaround of flights coupled with increased flight frequency. Services such as aircraft maintenance and ground services are outsourced to increase efficiencies leading to high aircraft utilization. Increased flight frequencies lead to both scheduling and enger convenience whilst reducing costs.
Point-to-Point network: AirAsia operates on high-volume, short-haul routes to cities within a four-hour flight radius or less, and include routes that are under-served or not catered to by other airlines.
5
Introduction
1.2.2
Malaysian Airlines
Table 3: Malaysian Airlines, Key Facts (FY2011) Key Facts Headquarters
Employees Founded Total Revenues
istration Building 1 , 3rd Floor, MAS Complex A, Sultan Abdul Aziz Shah Airport,47200 Subang, Selangor Darul Ehsan, Malaysia 20,477 1937 MYR13,901.42 million (US$4,493.75 million)
Number of Aircraft
129
Average Fleet Age
12 years 3 months
engers Carried
17.05 million
Source: Annual report, company website
The airline initially formed under the name of Malayan Airways in 1937, and changed it to Malaysian Airlines after the formation of Malaysia in 1963. Later, in 1965, after the separation of Singapore, the airline became a bi-national carrier and operated under the name of Malaysia-Singapore Airlines. The airlines separated eight years later and Malaysia launched Malaysian Airline, headquartered at the Sultan Abdul Aziz Shah Airport in Subang, Selangor. Malaysian Airlines parent company, Malaysian Airline System Berhad, is listed on the main market of Bursa Malaysia, and trades under the symbol: “3786”.
The group’s business comprises of two business segments; traffic and other. Traffic services comprises of enger, mail and cargo transportation, while other revenue is generated through the lease of aircraft and engines, airport handling and engineering services, catering and cleaning services, charter services, etc.
6
Introduction
Under its traffic segment, the airline operates a fleet of 129 aircrafts, flying to nearly 111 destinations across the US, South America, Europe, Africa and Asia. This includes traffic services offered by subsidiaries MASKargo, MASwings and Firefly. MASwings is a regional carrier serving the Sabah and Sarawak region, primarily through turboprop aircrafts, while Firefly is a full service point-to-point carrier serving Peninsular Malaysia, Thailand and Indonesia. As of February 2012, the airline has a 53 additional 53 aircrafts on its order books. Traffic revenues were up by 15.95% in 2011, standing at MYR9,646.97 million, compared to MYR9,495.55 million in 2010. The airline in 2012 ed the oneworld alliance.
Business Analysis In December 2011, the airlines board and management outlined a new business plan to turnaround the airline to be profitable by 2013 and achieve the highest customer satisfaction while improving our revenues and operating as efficiently as possible. The document, named “Business Plan; Our Way Forward”, outlines three steps the airline plans to undertake in order to return to profitability, namely, recovery plan, “game changers”, and foundation. Key highlights of the strategy include:
Recovery Plan: The airline plans to shift its focus from catering to leisure and business customers to becoming the preferred carrier. The airline aims to achieve this through the implementation of the following:
o
Smaller yet profitable network
o
Win back customers
o
Relentless cost focus
o
Keep it simple
o
Bridge the funding gap
Game Changers: Beyond the recovery, the airline plans to pursue a series of ‘game changers’ that will overhaul the airline’s business model and sustain performance. These strategic initiatives include: o
Launch of a new regional airline
7
Introduction
o
Alliances and partnerships
o
Collaboration with AirAsia
o
Ancillary business spin-off
Foundations: The airline, in order to properly implement its recovery plan hopes to develop the following three foundational elements as well: o
Branded customer experience
o
Continuous operational improvement
o
Winning organization
8
Introduction
1.2.3
Singapore Airlines
Table 4: Singapore Airlines, Key Facts (FY2011) Key Facts Headquarters
Employees Founded Total Revenues
Airline House, 25 Airline Road, Singapore 819829 13,893 1937 SGD14,587.8 million (US$11,754.88 million)
Number of Aircraft
133
Average Fleet Age
6 years 2 months
engers Carried
20.18 million
Source: Annual report, company website
The airline initially formed under the name of Malayan Airways in 1937, and changed it to Malaysian Airlines after the formation of Malaysia in 1963. Later, in 1965, after the separation of Singapore, the airline became a bi-national carrier and operated under the name of Malaysia-Singapore Airlines. The airlines separated eight years later and Singapore launched Singapore Airline, headquartered in Singapore. The airline is listed on the main board of the Singapore Exchange, and trades under the ticker: “C6L.SI”.
The group’s business comprises of four business segments; namely, airline operations, cargo operations, engineering services, and others. The airline operations segment provides enger transport services and is operated under the Singapore Airlines and SilkAir banners, while the cargo segment is involved in air cargo and related activities. The engineering services segment provides airframe maintenance and overhaul services, line maintenance, technical ground handling services and fleet management program. In addition, the segment also manufactures aircraft cabin equipment, refurbishes aircraft galleys, provides technical and non-technical handling services and repair and
9
Introduction
overhaul of hydro-mechanical aircraft equipment. The groups other revenues are generated from training of pilots, air charters and tour wholesaling, etc.
The firm has a total of 133 aircraft, if which Singapore Airlines operates 100, SIA Cargo 13 and SilkAir 20. Singapore Airiness has an order book of an additional 66 aircraft, with an option of 46 aircraft. Singapore Airlines has an average age of 6 years and 2 months.
Business Analysis Singapore Airlines states its goal is to create the world’s best travel experience overall. It aims to achieve the above goals by following the following strategies:
Maintain young fleet: Singapore Airlines aims to maintain a young and modern fleet of aircraft which are fuel efficient, especially to maintain competitiveness with Middle East carriers such as Emirates and Qatar Airways. As a result, the airline has one of the youngest fleet with an average age of six years and two months. It was also the world’s first airline to take delivery of Airbus A380 aircraft and was able to command a for the customer offering.
Cost efficiency: The airline is very cost conscious and regularly reviews its operations and services to ensure that it remains cost competitive and cut costs where possible without compromising on safety or customer products and services.
Expand its low cost carrier offering: The carrier in November 2011 launched ‘Scoot’ to cater to medium- to long-haul low cost carrier segment, to compete with AirAsia X. The operations commenced in June 2012, flying to Sydney, Australia, from its base in Singapore. Scoot will enable Singapore Airlines to compete with the low cost airlines in the region.
10
2.1
Performance Review
2. Performance Review Financial Performance
AirAsia: The airline recorded revenues of MYR4.5 billion in 2011, up from MYR3.5 billion in 2010, representing a year-on-year growth of 13.86%. During the period 2007–2011, revenues grew at a CAGR of 29.4%. Over this period, AirAsia reported losses only once, in 2008, during which it recorded an operating loss of MYR352.0 million and a net loss of MYR496.2 million. The losses incurred were primarily due to oil prices shocks in the first half of the year, and onset of the global financial meltdown in the latter half of the year. In 2011, operating profit grew by 8.96%, to MYR1,162.5 million. However, net profit decline over the previous year by 47.68%, from MYR1,067.0 million in 2010, to MYR555.3 million in 2011. Unrealised foreign exchange losses and deferred tax charges, from the sale of aircraft to AirAsia Indonesia, were the causes of the net profit decline.
Malaysian Airlines: Malaysian Airlines revenues declined by 1.81% during the 2007–2011 period, reflecting the troubled times the airline is experiencing at the moment. Though revenues in 2011 grew by 5.19%, the airline faced the largest operating loss in its history, of MYR2,584.5 million. The losses arose from high fuel costs, and provisions for aircraft redelivery, freighter impairment and stock obsolescence. Net profit for the year stood at MYR2,584.3 million.
Singapore Airlines: Revenues for the airline grew by 5.49% in 2011, the second consecutive year of growth since 2008, when revenues declined by 18.26% due to the global financial crisis. The airline however, has remained profitable throughout the four year period, though they have been erratic. Reasons for the volatility in financial performance lies in economic uncertainty arising of the US and European markets, shot consumer confidence, and high energy prices. Operating profit fell by 76.81% in 2011, while net profit fell by 66.39%, representing the airlines worst performance since 2008.
11
Performance Review
Figure 1: Asian Airlines – Revenues (MYR billion), 2007–2011
AirAsia
36.1 13.7
34.2
4.5
13.0 3.9
11.3
3.1
1.6
2.6
14.7
15.0
30.7
36.3
37.6
REVENUES, 2011
Malaysian Airlines
Singapore Airlines
Source: Annual Reports
Figure 2: Asian Airlines – Operating Profit (MYR million), 2007–2011
694.3
1,162.5
100.2
1,067.0
152.7
913.0
Malaysian Airlines
Singapore Airlines
-2,584.3
AirAsia
-682.9
-352.0
270.9
828.3
219.0
2,122.0
2,993.6
4,830.3
OPERATING PROFIT
Source: Annual Reports
12
Performance Review
Figure 3: Asian Airlines – Net Profit (MYR million), 2007–2011
2008
AirAsia
Malaysian Airlines
2010
Singapore Airlines
864.3
555.3
237.3
1,061.4
521.4
522.9
506.0
2009
2011
-2,521.3
-496.0
2007
271.8
852.7
426.0
2,492.8
2,571.4
4,659.5
NET PROFIT
Source: Annual Reports
13
Operating Performance
Performance Review
2.2
Please refer to the Glossary section for indicator definitions.
2.2.1
Load factor
While all three airlines share a similar load factor, AirAsia has seen massive improvement in seat utilization. Low fares and aggressive marketing campaigns has helped the airline increase load factor from 74.9% in 2007 to 80.7% in 2011.
2.2.2
enger yield
enger yields of Malaysian Airlines have generally been in line with peer group average (2011 – 24cents), whilst that of AirAsia was lower than the peer group mean. While AirAsia engers pay the lowest for each kilometre travelled, reaffirming its low cost strategy, enger yields have been creeping up since 2009.
2.2.3
Cost per available seat kilometre (CASK)
Comparing CASK across the airlines, it can be seen that AirAsia has been able to maintain cost discipline through the 2007–2011 period. CASK for the airline has declined from 17 cents in 2007 to 13 cents in 2011. On the other hand, it is also apparent Malaysian Airlines has been unsuccessful in doing the same. CASK for the airline has risen sharply from 25 cents in 2007 to 29 cents, while enger yield has witnessed a decline from 26 cents to 24 cents during the same period. In short, its costs the airline more to fly a single seat a distance of one kilometre, than what engers are paying for flying the same distance.
14
Performance Review
Table 5: Operating Statistics Peer Review, 2011 AirAsia
Malaysian Airlines
Singapore Airlines
29.86
17.05
20.18
Revenue enger-km (millions)
35,091
39,731
87,824
Available seat-km (millions)
43,940
52,998
113,410
enger load factor
80.7%
74.5%
76.5%
enger yield (MYR)
0.17
0.24
0.30
Cost per available seat kilometer (CASK)
0.13
0.29
0.30
Operating Indicators
engers carried (million)
Legend
AirAsia
Malaysian Airlines
Five Year Trend vs. 2011 Average
Singapore Airlines
Source: Annual report, company website
15
Ratio Analysis
3. Ratio Analysis 3.1
Profitability Ratios
Profitability ratios measure a company’s ability to generate earnings relative to sales, assets and equity. These ratios assess the ability of a company to generate earnings, profits and cash flows relative to relative to some metric, often the amount of money invested. They highlight how effectively the profitability of a company is being managed.
3.1.1
Return on Asset
Table 6: Return on Asset Peer Analysis (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
13.6%
10.0%
7.8%
2008
-6.9%
2.4%
4.1%
2009
4.9%
5.3%
0.9%
20.0%
15.0% 10.0% 5.0%
0.0% -5.0%
2007
2008
2009
2010
2011
-10.0% -15.0%
2010
8.6%
2.2%
4.5%
2011
4.1%
-20.2%
1.4%
-20.0% -25.0% AirAsia
Malaysian Airlines
Singapore Airlines
Source: Annual report
Oil price volatility and the financial crisis in 2008 saw airlines witness a decline in their ROA, with AirAsia performing the worst. ROA for AirAsia in 2008 was negative 6.9%, due to losses incurred from high fuel costs and the onset of the global financial crisis. Malaysian Airlines and Singapore Airlines in the same year were able to maintain positive ROA’s, standing at 2.4% and 4.1% respectively. Singapore Airlines has been able to maintain a positive ROA for the entire 2007–2011 period, indicating far more efficient asset management as compared to Malaysian Airlines, which reported a negative 20.2% ROA in 2011. The airline had been witnessing a consistent decline in profits over the past five years.
16
Ratio Analysis
3.1.2
Return on Equity
Table 7: Return on Equity Peer Analysis (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
60.0%
40.0% 20.0%
2007
34.5%
29.3%
13.6%
2008
-30.4%
6.0%
7.3%
2009
24.0%
19.9%
1.6%
-60.0%
7.9%
-100.0%
0.0%
-20.0%
2007
2008
2009
2010
2011
-40.0%
-80.0%
2010
33.9%
11.1%
-120.0%
2011
14.5%
-110.5%
2.5%
AirAsia
Malaysian Airlines
Singapore Airlines
Source: Annual report
ROE performance of the three airlines is similar to that of ROA. AirAsia in 2008 witnessed a sharp decline but soon returned to profitability. With the exception of that year, AirAsia has in fact performed better than its peers, including Singapore Airlines. However, it is worth noting that Singapore Airlines does not have large debt obligations, due to which its ROE will be supressed. In 2011, borrowings for nearly 50% of AirAsia’s capital structure, as opposed to 7% of Singapore Airlines. Owing to the largest loss in its history, Malaysian Airlines saw its ROE decline from 11.1% in 2010 to -110.5% in 2011.
17
Ratio Analysis
3.1.1
Operating Margin
Table 8: Operating Margin Peer Analysis (FY2011) Year 2007
AirAsia 17.4%
Malaysian Airlines
Singapore Airlines
5.6%
13.3%
40.0% 30.0% 20.0%
2008
-13.4%
1.8%
5.6%
2009
29.1%
-6.0%
0.5%
2010
27.0%
0.8%
8.8%
10.0% 0.0%
-10.0%
2007
2008
2009
2010
2011
-20.0% -30.0%
2011
25.9%
-18.9%
1.9%
AirAsia
Malaysian Airlines
Singapore Airlines
Source: Annual report
With the exception of 2008, AirAsia has consistently outperformed its rivals in the past five years. This comes as no surprise as the firm’s low-cost model aids in keeping costs under control. Singapore Airlines has performed reasonably well in this category, and has shown its ability to match revenues and expenditures well. However, revenue growth has been sluggish, compared to the growth in expenses, with revenues growing at 5.49% during the 2007–2011 period, and operating expenses growing at 5.23% during the same period. While the airline has been successful in reducing staff costs, fuel expenses are managed by hedging and other energy derivatives. Operating activities that have seen significant increases in expenses include aircraft maintenance and overhaul, landing parking and overflying, handling charges, inflight meals and other expenses, which includes crew expenses, company accommodation cost, foreign exchange revaluation and hedging loss, comprehensive aviation insurance cost, airport lounge expenses, non-information technology contract and professional fees, expenses incurred to mount non-scheduled services, aircraft licence fees and recoveries. Malaysian Airlines on the other hand has shown itself to be completely incapable of accelerating revenues growth or controlling operating costs. Revenue growth during the past five years has been sluggish at best, while operating costs have risen at an extremely rapid pace. In 2011 itself, fuel and oil costs, which makes nearly 40% of the airlines operating costs, grew by 33.3%, while revenues declined by 1.8%.
18
Ratio Analysis
3.1.1
Net Margin
Table 9: Net Margin Peer Analysis (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
31.1%
5.8%
12.8%
40.0% 30.0%
2008
-18.8%
1.8%
6.6%
20.0% 10.0%
2009
16.2%
4.6%
1.7%
0.0%
-10.0%
2010
26.9%
1.8%
7.5%
2007
2008
2009
2010
2011
-20.0% -30.0%
2011
12.4%
-18.5%
2.4%
AirAsia
Malaysian Airlines
Singapore Airlines
Source: Annual report
Net margin for the three firms trends similarly to operating margins. Singapore Airlines holds minimal debt, and therefore does not incur large finance costs. On the other hand borrowings exceed 50% and 80% in the case of AirAsia and Malaysian Airlines, resulting large finance costs. AirAsia has been successful to keep its net margin above 10% post its 2008 slump.
19
Ratio Analysis
3.2
Liquidity Ratios
Table 10: Current Ratio Peer Analysis (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
1.76
1.42
1.40
2008
1.09
1.38
1.16
2009
1.30
0.86
1.45
2010
1.56
0.74
1.57
2011
1.73
0.39
1.37
2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
2007
2008 AirAsia
2009
Malaysian Airlines
2010
2011
Singapore Airlines
Source: Annual report
Table 11: Quick Ratio Peer Analysis (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
0.76
1.20
1.28
2008
0.09
0.82
1.01
2009
0.46
0.64
1.32
2010
1.27
0.53
1.48
1.6 1.4 1.2 1.0 0.8
2011
1.01
0.25
1.27
0.6 0.4 0.2 0.0
2007
2008 AirAsia
2009
Malaysian Airlines
2010
2011
Singapore Airlines
Source: Annual report
Malaysian Airlines clearly seems to have a tough time maintaining its current ratio, which is no surprise given is lacklustre performance profit wise in the past five years. However, given that it is a GLC, it is unlikely that shareholders will be exposed to a bankrupt Malaysian Airlines. Through the new business transformation plan the airline plans to return to profitability, primarily through focusing on the segment of the airline market. Looking at AirAsia, it can be clearly seen that the firm’s cash position during times of economic downturns becomes extremely risky. The firm, in 2008, held an extremely
20
Ratio Analysis
limited amount in cash, as nearly MYR364.8 million was parked as cash collateral for derivatives and deposits for maintenance of aircraft.
3.3
Leverage Ratios
Table 12: Debt to Equity Peer Analysis (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
1.53
0.21
0.11
2008
4.16
0.33
0.13
2009
2.90
3.10
0.11
2010
2.15
1.04
0.14
16.0 14.0 12.0
2011
1.92
5.36
10.0 8.0 6.0 4.0
2.0 0.0
2007 AirAsia
0.08
2008
2009
Malaysian Airlines
2010
2011
Singapore Airlines
Source: Annual report
Table 13: Long Term Debt to Equity(FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
1.39
0.22
0.10
2008
3.83
0.23
0.10
2009
2.70
2.68
0.10
2010
2.01
0.97
0.07
2011
1.78
4.06
0.08
4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00
2007 AirAsia
2008
2009
Malaysian Airlines
2010
2011
Singapore Airlines
Source: Annual report
21
Ratio Analysis
Table 14: Debt to Assets (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
53%
9%
6%
2008
70%
14%
7%
2009
67%
27%
7%
2010
59%
30%
8%
0.80 0.70 0.60
2011
56%
45%
5%
0.50 0.40 0.30 0.20
0.10 0.00
2007 AirAsia
2008
2009
Malaysian Airlines
2010
2011
Singapore Airlines
Source: Annual report
Singapore Airlines bucks the trend of high debt leverage, while Malaysian Airlines has been increasing its debt financing. While both airlines have a sizable amounts of lease agreements that make up a large portion of these debts, Malaysian Airlines holds on to nearly MYR701.6 million in unsecured, non-current term loans and an additional MYR625.8 million in secured term loans. Singapore Airlines on the other hand has opted to finance its operations with minimal debt undertakings. In 2011, merely 5% of the airlines assets were financed by debt, as opposed nearly half of those of AirAsia and Malaysian Airlines. The management believes the current capital structure gives the airline “efficient mix of debt and equity in order to achieve a low cost of capital, while taking into the desirability of retaining financial flexibility to pursue business opportunities and adequate access to liquidity to mitigate the effect of unforeseen events on cash flows.”
22
Dividend Policy
4. Dividend Policy The airline industry in general does not prefer paying out dividends to its investors. There are several reasons regarding to the nature of industry operated. In part it is primarily due to the volatility of the industry and the need to invest on extensive capital projects. In addition, the industry has not seen consistency in financial performance. As such, profits are added to the financial reserves of the company, or to finance the future renovation/replacement of their production facilities. Below we will analyses dividend policy of the three firms.
4.1.1
AirAsia
As such, AirAsia declared it company does not have a dividend policy. However, AirAsia has paid its maiden dividend in 2011 of 3 cents per ordinary share to reward loyal shareholders. The management believes that the business is in the early stages of development where capital requirements are high. As result, earnings are to be reinvested for the future's wellbeing. The airline had a payout ratio of 25.01%
4.1.2
Malaysia Airlines
As 2011 annual report stated, there is RM2.52 billion loss suffered by Malaysia Airlines in 2011. No dividend has been paid. The firm has no dividend policy, and did not announce any dividends during the 2007–2011 period.
4.1.1
Singapore Airlines
Singapore Airlines bucked the trend again, and has announced dividends every year since 2008. For the fiscal year 2011–12, the firm announced an ordinary dividend per share of 20 cents.
23
Dividend Policy
We calculate the airlines dividend yield at 1.8% and payout ratio as 70.2%. Table 15: Singapore Airlines, Dividend Policy
Stock Price (as of March 2013) Price-Book Value Last Total Dividend Paid
SGD10.87 0.98 20.0 cents
P/E Ratio
38.06
Dividend Yield
1.8%
Source: Annual report
24
Capital Structure
5. Capital Structure 5.1.1
AirAsia
AirAsia operates with a comparatively highly leveraged capital structure. The firm monitors its capital structure on the basis of its gearing ratio. As of 2011, the firm had a gearing ratio of 1.92 times, in line with that of the previous year, which stood at 2.15 times. Figure 4: AirAsia, Capital Structure, 2007–2011 100%
90%
22%
22%
80%
70%
41% 52%
60%
60% 50% 40%
78%
78%
30% 20%
59% 48%
40%
10%
0% 2007
2008 Borrowings
2009
Shareholders Equity
2010
2011
Preference Shares
Source: Annual Reports
25
Capital Structure
5.1.2
Malaysian Airlines
Malaysian Airlines with an extremely high gearing ratio, which stood at 5.4 times in 2011. This is a significant increase from 2010, when the airline had a gearing ratio of 1.0 times. The major reason for this drastic shift in capital structure is the undertaking of large amounts of secured and unsecured term loans and financial leases in 2011. Figure 5: Malaysian Airlines, Capital Structure, 2007–2011 100%
0.4%
0.3%
0.4%
0.2%
0.2% 16%
90%
23%
80% 49%
70% 60%
73%
75%
50% 84%
40%
76%
30% 51% 20% 10%
27%
24%
2007
2008
0%
Borrowings
2009 Shareholders Equity
2010
2011
Preference Shares
Source: Annual Reports
26
Capital Structure
5.1.3
Singapore Airlines
Unlike its Malaysian counterparts, Singapore Airlines operates on an equity driven capital structure. The carrier had a meagre gearing ratio of 0.08 times. The firm believes that such a capital structure allows it to “achieve a low cost of capital, while taking into the desirability of retaining financial flexibility to pursue business opportunities and adequate access to liquidity to mitigate the effect of unforeseen events on cash flows”. Figure 6: Singapore Airlines, Capital Structure, 2007–2011 100%
3.2%
5.5%
1.8%
2.7%
3.3%
90% 80%
70% 60% 50%
86%
77%
79% 89%
85%
40%
30% 20% 10% 11%
18%
18% 10%
12%
0% 2007
2008 Borrowings
2009 Shareholders Equity
2010
2011
Preference Shares
Source: Annual Reports
27
Cost of Capital
6. Cost of Capital 6.1.1
Cost of Capital Computation
Table 16: Cost of Capital Peer Analysis(FY2011) Cost of Equity (ke)
Equity Weightag e (we)
Cost of Debt (kd)
Debt Weightag e (wd)
WACC
Beta
Tax Rate
Malaysian Airlines
9.80%
15.7%
4.50%
84.1%
5.32%
0.853
25%
Singapore Airlines
9.50%
84.7%
1.80%
12.0%
8.26%
0.966
20%
15.50%
48.1%
4.30%
51.9%
9.67%
1.34
25%
Company
AirAsia Note:
Of the three airlines in the peer group, Malaysian Airlines has not paid dividend during the 2007–2011, while AirAsia paid its once, and Singapore Airlines has paid it every year since 2008. In order to maintain uniformity, only CAPM will be used to calculate airline WACC.
6.1.2
Analysis
Singapore Airlines (SIA) Singapore Airlines (SIA) has a WACC of 8.26%, compared to the around .8.03% Singapore Airlines does not pay dividend, so our analysis regarding cost of equity will be based on CAPM model. Looking at the CAPM formula, we can say that SIA cannot do much regarding risk free rate and market , it just has been determined based on current market situations.
Looking at current SIA capital structure 84.7% equity, and 12.0% debt, we can say that they have an their financial leverage is relatively low, comparing with airline industry, where companies usually use 50–65% debt and rest is equity.
28
Cost of Capital
Malaysian Airlines (MAS) On reviewing MAS WACC, which stands at 5.32%, compared to the average industry WACC of 8.03%, we can say the airline enjoys the lowest cost of capital among the peers. According to Bloomberg, MAS currently has a beta estimate of 0.852. The fact that it operates as a GLC with financial backing from the Malaysian government could be a major reason for a low beta, despite its dismal financial performance.
High Leverage
Looking at current MAS capital structure 84.1% debt, and 15.7% equity, we can say financial leverage is significantly higher than its peers. This high percentage of debt has many effects on MAS:
a) High leverage causes higher beta: Whenever the company increase their borrowing (i.e. higher debt), the companies risk increases and because of that risk increase. Investors usually are wary of firms that operate with high levels of leverage, and demand a higher rate of return on the their investment
b) High interest obligations
AirAsia AirAsia has a WACC of 9.67% with industry average standing at around 8.03%. AirAsia paid its first dividend in FY2010. In view of the high capex requirements, there is a likelihood of no dividends being paid in coming quarters. Comparing AirAsia’s beta of 1.606, with the industry beta of 1.0, there is a significant difference, signifying the higher level of risk associated with AirAsia as compare to the market.
Looking at current AirAsia’s capital structure 51.9% debt, and 48.1% equity, we can say financial leverage is close to the industry average of 50–65% of debt. The stock carries an Earning Price per Share (EPS) of 0.401 and Dividend Price per Share (DPS) of 0.053. Growth rate of the company is estimated to be 4.2%. The leverage for the airline should not be a major concern as such as cash collection has improved over the last few years. As of the most recent quarter end, its uncollected
29
Cost of Capital
receivables totalled 1.4B MYR, which, at the current sales rate provides a Days Receivables Outstanding of 88.22.
30
7.1.1
Fair Price Valuation
7. Fair Price Valuation AirAsia
Closing price as of April 1, 2013 – MYR2.77 Figure 7: AirAsia Stock Price, 2007–2011
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
Source: Annual Reports
EPS: 20 cents Discount Rate: 7.47% (Bloomberg Country ) Assumptions: Expected annual growth: 4.2% (Bloomberg) Growth Years: 9 years Estimated Fair Price: MYR3.57
AirAsia enjoys the lowest operating costs among its peers giving it a competitive edge. Furthermore, fast turnaround times, and an increasing number of price sensitive engers will help the airline expand rapidly. The firm has a strong cash flow position, which allays fears arising from the high gearing ratio.
31
Fair Price Valuation
Though fuel price volatility might possibly deter its expansion plans, the airline definitely has high growth prospects.
7.1.2
Malaysian Airlines
Closing price as of April 1, 2013 – MYR0.755 Figure 8: Malaysian Airlines Stock Price, 2007–2011 7 6
5 4 3 2
1 0 1-Jan-07
1-Jan-08
1-Jan-09
1-Jan-10
1-Jan-11
Source: Annual Reports
EPS: -75.5 cents Discount Rate: 7.48% (Bloomberg Country ) Assumptions: Expected annual growth: 195.745% (Bloomberg) Growth Years: 3 years Estimated Fair Price: MYR-23384.61
Malaysian Airlines has come under intense pressure from AirAsia in the low cost segment, which off late has been expanding its low cost long haul offering. In its 2011 New Business Plan, the airline plans to focus solely on the full service segment. The airline will no doubt face stiff competition in this
32
Fair Price Valuation
segment as well, given the presence of well established brands such as Singapore Airlines, Cathay Pacific, Qatar Airways and Emirates. The firm has an extremely weak financial position given the large loss incurred in 2011, and the debt heavy balance sheet. Given that this is the third turnaround plan implemented by the airline in the past one and a half decade, there is significant pessimism with regards to the implementation of the new business plan. If aggressive steps are not taken to turnaround the airline, the carrier is likely to face further losses in 2012 and 2013 as well.
7.1.1
Singapore Airlines
Closing price as of April 1, 2013 – SGD10.88 Figure 9: Singapore Airlines Stock Price, 2007–2011 25
20
15
10
5
0 2-Apr-07
2-Apr-08
2-Apr-09
2-Apr-10
2-Apr-11
Source: Annual Reports
EPS: 28.3 cents Discount Rate: 8.16% (Bloomberg Country ) Assumptions: Expected annual growth: 14.25% (Bloomberg) Growth Years: 9 years Estimated Fair Price: MYR9.06
33
Fair Price Valuation
The airline with a young fleet and fares will be able to keep costs in control while at the same time grow its revenues. However, the given the slowing economic travel, business and travel could suffer declines. The airline has also faced pressure in its cargo segment, and is likely to pull down the group financials. However, given the strong financial cash position, high levels of liquidity, strong cash flow and balance sheet, and the airline we believe that the airline will be resilient in a weak economic environment.
34
Glossary
8. Glossary The following definition have been sourced from the Airline Data Project by the Massachusetts Institute of Technology. For more information please refer to the http://web.mit.edu/airlinedata/www/default.html.
Revenue enger: A revenue enger is someone who has paid for the trip. This excludes nonpaying engers such as airline employees, infant and children, etc.
Revenues enger Kilometer (RPK): Is a measure of airline enger traffic. It reflects how many of an airline's available seats were actually sold. It is calculated by multiplying the number revenue engers with the distance travelled.
Available Seat Kilometer (ASK): Measurement of airline output that refers to one aircraft seat flown one mile, whether occupied or not. An aircraft with 100 enger seats, flown a distance of 100 km, generates 10,000 available seat km.
Load Factor: Revenue enger Kilometer (RPKs) expressed as a percentage of ASKs. Load factor represents the proportion of airline output that is actually consumed.
enger Yield: Measure of average fare paid per mile, per enger, calculated by dividing enger revenue by revenue enger miles. enger yield is a useful measure in assessing changes in fares over time.
Cost per Available Seat Kilometer (CASK): Represent how much it costs to fly one seat (empty or filled) one-mile. CASM is calculated by dividing operating expenses by the total number of available seat km produced.
35
Bibliography
9. Bibliography AirAsia. (2008). AirAsia Annual Report. AirAsia. AirAsia. (2011). Annual Report. AirAsia. AirAsia. (n.d.). AirAsia | Achievements. Retrieved from AirAsia.com: http://www.airasia.com/ot/en/aboutus/awards.page AirAsia Bhd. (2004). AirAsia Prospectus. Caterham F1. (n.d.). Caterham F1 Team. Retrieved from Caterham F1 Team - Tony Fernandes: http://www.caterhamf1.com/team/management/tony-fernandes Cebu Air Inc. (2012). 2012 Results of Operation. Cebu Air. Changi Airport Group. (2013, January). Facts & Statistics - Changi Airport. Retrieved March 2013, from Changi Airport: http://www.changiairport.com/our-business/about-changi-airport/facts-statistics Jetstar
Airways.
(2012).
Facts
and
Stats.
Retrieved
2013,
from
Jetstar.com:
http://www.jetstar.com/mediacentre/facts-and-stats/jetstar-group Lau, K., & Chan, K. (2012). Asian airlines set to fly higher. Daiwa Capital Markets. Malaysian Airports Holding Bhd. (2012). MAHB Statistics. MAHB. Rothman, A. (2011, June 23). Airbus Wins Record $18 Billion AirAsia Deal for 200 Neo Jets. Retrieved from
Bloomberg:
http://www.bloomberg.com/news/2011-06-23/airbus-wins-record-18-billion-airasia-
order.html
36
Course: Corporate Finance Course Code: FIN6257 Lecturer:
Asrul Dahari International Islamic University Malaysia Graduate School of Management
www.canadean-winesandspirits.com April 2013
Authors:
Athar Mazhar
G1126319 Mirza Zia
G1213229 Naeem Nasser
G1139591
Yang Yan Li G1211126
Table of Contents ................................................................................................ i List of Figures..................................................................................................... ii List of Tables ...................................................................................................... ii 1. Introduction ................................................................................................ 1 1.1
Industry Overview .............................................................................................. 1
1.2
Company Profiles ............................................................................................... 3
2.
Performance Review .................................................................................11
2.1
Financial Performance ..................................................................................... 11
2.2
Operating Performance .................................................................................... 14
3.
Ratio Analysis............................................................................................16
3.1
Profitability Ratios ............................................................................................ 16
3.2
Liquidity Ratios ................................................................................................. 20
3.3
Leverage Ratios ............................................................................................... 21
4. 5. 6. 7. 8. 9.
Dividend Policy..........................................................................................23 Capital Structure .......................................................................................25 Cost of Capital ...........................................................................................28 Fair Price Valuation ...................................................................................31 Glossary .....................................................................................................35 Bibliography ..............................................................................................36
Contents
Table of Contents
Figure 1: Asian Airlines – Revenues (MYR billion), 2007–2011 ...................................................................................... 12 Figure 2: Asian Airlines – Operating Profit (MYR million), 2007–2011 ............................................................................ 12 Figure 3: Asian Airlines – Net Profit (MYR million), 2007–2011 ...................................................................................... 13 Figure 4: AirAsia, Capital Structure, 2007–2011 ............................................................................................................. 25 Figure 5: Malaysian Airlines, Capital Structure, 2007–2011 ........................................................................................... 26 Figure 6: Singapore Airlines, Capital Structure, 2007–2011 ........................................................................................... 27 Figure 7: AirAsia Stock Price, 2007–2011 ...................................................................................................................... 31 Figure 8: Malaysian Airlines Stock Price, 2007–2011 ..................................................................................................... 32 Figure 9: Singapore Airlines Stock Price, 2007–2011 ..................................................................................................... 33
List of Tables Table 1: AirAsia Group, Key Facts (FY2011).................................................................................................................... 3 Table 2: AirAsia Fleet Details (as of December 2012) ...................................................................................................... 4 Table 3: Malaysian Airlines, Key Facts (FY2011) ............................................................................................................. 6 Table 4: Singapore Airlines, Key Facts (FY2011) ............................................................................................................. 9 Table 5: Operating Statistics Peer Review, 2011............................................................................................................ 15 Table 6: Return on Asset Peer Analysis (FY2011) ......................................................................................................... 16 Table 7: Return on Equity Peer Analysis (FY2011) ........................................................................................................ 17 Table 8: Operating Margin Peer Analysis (FY2011) ....................................................................................................... 18 Table 9: Net Margin Peer Analysis (FY2011) ................................................................................................................. 19 Table 10: Current Ratio Peer Analysis (FY2011) ............................................................................................................ 20 Table 11: Quick Ratio Peer Analysis (FY2011) .............................................................................................................. 20 Table 12: Debt to Equity Peer Analysis (FY2011)........................................................................................................... 21 Table 13: Long Term Debt to Equity(FY2011) ................................................................................................................ 21 Table 14: Debt to Assets (FY2011) ................................................................................................................................ 22 Table 15: Singapore Airlines, Dividend Policy ................................................................................................................ 24 Table 16: Cost of Capital Peer Analysis(FY2011)........................................................................................................... 28
Contents
List of Figures
Introduction
1. Introduction 1.1
Industry Overview
Despite the slow recovery in the U.S., Japanese and European markets, Asian economies were comparatively more resilient due to high savings, controlled public spending and sound government policies. As the emerging Asian market grows affluent, demand for travel has increased as well. An increasing number of engers from India, China and Indonesia are travelling abroad (Malaysian Airports Holding Bhd, 2012), (Changi Airport Group, 2013), many of them attracted to the Singapore and Malaysia. This demand has been further boosted by the adoption of various strategies to boost inbound tourism to the countries. Malaysia has laid emphasis on promoting itself has a modern urban as well as nature haven through its “Malaysia, Truly Asia” campaign, while Singapore has positioned itself as a leading business and travel hub. The popularity of low cost carriers too has helped fuel this growth, with engers preferring low cost airlines to full service airlines, especially in the short-haul segment.
In light of positive market conditions, the Asian airline industry has performed extremely well. In fact, a number of Asian airlines have posted profits that outstrip their American or European counterparts (Lau & Chan, 2012), many of whom have files for bankruptcy in the past decade. The low cost and segment has performed especially well in the Asia Pacific region, with low cost carriers such as Cebu Pacific (Cebu Air Inc, 2012), AirAsia (AirAsia, 2011), and JetStar Airways (Jetstar Airways, 2012) all reporting increase in revenues and recording profits over the previous year. airlines, such as Singapore Airlines and Cathay Pacific, taking advantage of the healthy macro-economic variables in Asia, and the demand for luxury in the region, too have been able to post profits as well.
High fuel prices present the biggest challenge for airlines, and a softening forward economic outlook implies potential for weak profits in 2013. Fuel costs comprise about 30-50% of the airlines total operating expenses, and are expected to remain volatile due to economic uncertainty in the developed economies and wild cards such as Middle East political issues. In addition, inclusion of aviation in European Union
1
Introduction
Emission Trading Scheme (EU ETS) has had an impact on airlines since the beginning of 2012 as well. Airlines have to pay for carbon emitted in EU airspace, as a result of which operators have withdrawn some older aircraft. This factor led to incremental increase in air fares as costs were ed on to consumers.
In this paper, we attempt to evaluate three South East Asian airlines, namely, AirAsia, Malaysian Airlines and Singapore Airlines on the basis of:
Profitability, Liquidity and Operating Ratios
Capital Structure
Dividend Policy
Cost of Capital
Theoretical Valuation
2
Introduction
1.2
Company Profiles
1.2.1
AirAsia
Table 1: AirAsia Group, Key Facts (FY2011) Key Facts
Headquarters
LCC Terminal, Jalan KLIA S3, Southern Zone, Kuala Lumpur International Airport, 64000 Sepang, Selangor Darul Ehsan, Malaysia
Employees
5,137
Founded
1993
Total Revenues
MYR4,495.14 million (US$1,453.09 million)
Number of Aircraft
97
Average Fleet Age
4 years
engers Carried
29.86 million
Source: Annual report, company website
AirAsia Berhad (“AirAsia”) is among the leading low cost carriers in Asia, headquartered in Kuala Lumpur, Malaysia. Initially, the airline was incorporated in 1993 by DRB-HICOM, and commenced operations in 1996 as the nation’s second national carrier, offering full-service flights. However, the airline suffered numerous losses and was eventually sold off in December 2001 to Tune Air Sdn. Bhd, along with its MYR40 million debt obligations. The airline commenced operations in its present form in January 2002 as a low-fare carrier and quickly settled its earlier debts. (Caterham F1, n.d.). The airlines was listed on the main market of Bursa Malaysia securities board in November 2004 under the stock ticker “5099” (AirAsia Bhd, 2004).
AirAsia serves 20 countries through 154 routes, and operates off 14 hubs in four countries –Malaysia, Thailand, Indonesia and Philippines, through a number of s, t ventures and subsidiaries.
3
Introduction
Table 2: AirAsia Fleet Details (as of December 2012) /Subsidiary/t Venture Name
Number of Aircraft
AirAsia
64
Thai AirAsia
27
Indonesia AirAsia
22
AirAsia X
9
AirAsia Japan
3
AirAsia Philippines
2
Source: Annual report, company website
In December 2004, the airline embarked on a program to replace its then ageing fleet of Boeing aircrafts with new Airbus aircrafts. As a result, AirAsia phased out its entire Boeing aircraft fleet and replaced it with its current fleet comprising of only Airbus A320-200 aircrafts (AirAsia, 2008). In June 2011, the airline placed a US$18.5 billion order with Airbus for 200 A320-210neo aircrafts to be delivered between 2016 and 2026 (Rothman, 2011). In addition to the current fleet, the airline currently has orders outstanding for 91 A320-200, 264 A320neo, 16 A330-300 and 15 A350-900 aircraft, the earliest of which are expected to enter service in 2016 through 2026. The carrier employed 5,137 people as of 31 December 2012 (AirAsia, 2011). In 2011, it was awarded the “World’s Best Low Cost Airline” for the 4th consecutive year by Skytrax (AirAsia, n.d.).
Business Analysis AirAsia states its goal is to establish itself as a leading low cost carrier in Asia. Among the strategies adopted by the airline to achieve the goals are as follows:
Offering low fares: The airline is focused on offering significantly lower fares than the published fares of full service airlines to attract a broad range of guests. engers are offered no frills
4
Introduction
such as frequent-flyer miles, airport lounges, inflight entertainment and have the choice of paying for add-on services such as inflight meals, drinks and snacks.
Operational efficiency: AirAsia aims to keep operating costs low by a high turnaround of flights coupled with increased flight frequency. Services such as aircraft maintenance and ground services are outsourced to increase efficiencies leading to high aircraft utilization. Increased flight frequencies lead to both scheduling and enger convenience whilst reducing costs.
Point-to-Point network: AirAsia operates on high-volume, short-haul routes to cities within a four-hour flight radius or less, and include routes that are under-served or not catered to by other airlines.
5
Introduction
1.2.2
Malaysian Airlines
Table 3: Malaysian Airlines, Key Facts (FY2011) Key Facts Headquarters
Employees Founded Total Revenues
istration Building 1 , 3rd Floor, MAS Complex A, Sultan Abdul Aziz Shah Airport,47200 Subang, Selangor Darul Ehsan, Malaysia 20,477 1937 MYR13,901.42 million (US$4,493.75 million)
Number of Aircraft
129
Average Fleet Age
12 years 3 months
engers Carried
17.05 million
Source: Annual report, company website
The airline initially formed under the name of Malayan Airways in 1937, and changed it to Malaysian Airlines after the formation of Malaysia in 1963. Later, in 1965, after the separation of Singapore, the airline became a bi-national carrier and operated under the name of Malaysia-Singapore Airlines. The airlines separated eight years later and Malaysia launched Malaysian Airline, headquartered at the Sultan Abdul Aziz Shah Airport in Subang, Selangor. Malaysian Airlines parent company, Malaysian Airline System Berhad, is listed on the main market of Bursa Malaysia, and trades under the symbol: “3786”.
The group’s business comprises of two business segments; traffic and other. Traffic services comprises of enger, mail and cargo transportation, while other revenue is generated through the lease of aircraft and engines, airport handling and engineering services, catering and cleaning services, charter services, etc.
6
Introduction
Under its traffic segment, the airline operates a fleet of 129 aircrafts, flying to nearly 111 destinations across the US, South America, Europe, Africa and Asia. This includes traffic services offered by subsidiaries MASKargo, MASwings and Firefly. MASwings is a regional carrier serving the Sabah and Sarawak region, primarily through turboprop aircrafts, while Firefly is a full service point-to-point carrier serving Peninsular Malaysia, Thailand and Indonesia. As of February 2012, the airline has a 53 additional 53 aircrafts on its order books. Traffic revenues were up by 15.95% in 2011, standing at MYR9,646.97 million, compared to MYR9,495.55 million in 2010. The airline in 2012 ed the oneworld alliance.
Business Analysis In December 2011, the airlines board and management outlined a new business plan to turnaround the airline to be profitable by 2013 and achieve the highest customer satisfaction while improving our revenues and operating as efficiently as possible. The document, named “Business Plan; Our Way Forward”, outlines three steps the airline plans to undertake in order to return to profitability, namely, recovery plan, “game changers”, and foundation. Key highlights of the strategy include:
Recovery Plan: The airline plans to shift its focus from catering to leisure and business customers to becoming the preferred carrier. The airline aims to achieve this through the implementation of the following:
o
Smaller yet profitable network
o
Win back customers
o
Relentless cost focus
o
Keep it simple
o
Bridge the funding gap
Game Changers: Beyond the recovery, the airline plans to pursue a series of ‘game changers’ that will overhaul the airline’s business model and sustain performance. These strategic initiatives include: o
Launch of a new regional airline
7
Introduction
o
Alliances and partnerships
o
Collaboration with AirAsia
o
Ancillary business spin-off
Foundations: The airline, in order to properly implement its recovery plan hopes to develop the following three foundational elements as well: o
Branded customer experience
o
Continuous operational improvement
o
Winning organization
8
Introduction
1.2.3
Singapore Airlines
Table 4: Singapore Airlines, Key Facts (FY2011) Key Facts Headquarters
Employees Founded Total Revenues
Airline House, 25 Airline Road, Singapore 819829 13,893 1937 SGD14,587.8 million (US$11,754.88 million)
Number of Aircraft
133
Average Fleet Age
6 years 2 months
engers Carried
20.18 million
Source: Annual report, company website
The airline initially formed under the name of Malayan Airways in 1937, and changed it to Malaysian Airlines after the formation of Malaysia in 1963. Later, in 1965, after the separation of Singapore, the airline became a bi-national carrier and operated under the name of Malaysia-Singapore Airlines. The airlines separated eight years later and Singapore launched Singapore Airline, headquartered in Singapore. The airline is listed on the main board of the Singapore Exchange, and trades under the ticker: “C6L.SI”.
The group’s business comprises of four business segments; namely, airline operations, cargo operations, engineering services, and others. The airline operations segment provides enger transport services and is operated under the Singapore Airlines and SilkAir banners, while the cargo segment is involved in air cargo and related activities. The engineering services segment provides airframe maintenance and overhaul services, line maintenance, technical ground handling services and fleet management program. In addition, the segment also manufactures aircraft cabin equipment, refurbishes aircraft galleys, provides technical and non-technical handling services and repair and
9
Introduction
overhaul of hydro-mechanical aircraft equipment. The groups other revenues are generated from training of pilots, air charters and tour wholesaling, etc.
The firm has a total of 133 aircraft, if which Singapore Airlines operates 100, SIA Cargo 13 and SilkAir 20. Singapore Airiness has an order book of an additional 66 aircraft, with an option of 46 aircraft. Singapore Airlines has an average age of 6 years and 2 months.
Business Analysis Singapore Airlines states its goal is to create the world’s best travel experience overall. It aims to achieve the above goals by following the following strategies:
Maintain young fleet: Singapore Airlines aims to maintain a young and modern fleet of aircraft which are fuel efficient, especially to maintain competitiveness with Middle East carriers such as Emirates and Qatar Airways. As a result, the airline has one of the youngest fleet with an average age of six years and two months. It was also the world’s first airline to take delivery of Airbus A380 aircraft and was able to command a for the customer offering.
Cost efficiency: The airline is very cost conscious and regularly reviews its operations and services to ensure that it remains cost competitive and cut costs where possible without compromising on safety or customer products and services.
Expand its low cost carrier offering: The carrier in November 2011 launched ‘Scoot’ to cater to medium- to long-haul low cost carrier segment, to compete with AirAsia X. The operations commenced in June 2012, flying to Sydney, Australia, from its base in Singapore. Scoot will enable Singapore Airlines to compete with the low cost airlines in the region.
10
2.1
Performance Review
2. Performance Review Financial Performance
AirAsia: The airline recorded revenues of MYR4.5 billion in 2011, up from MYR3.5 billion in 2010, representing a year-on-year growth of 13.86%. During the period 2007–2011, revenues grew at a CAGR of 29.4%. Over this period, AirAsia reported losses only once, in 2008, during which it recorded an operating loss of MYR352.0 million and a net loss of MYR496.2 million. The losses incurred were primarily due to oil prices shocks in the first half of the year, and onset of the global financial meltdown in the latter half of the year. In 2011, operating profit grew by 8.96%, to MYR1,162.5 million. However, net profit decline over the previous year by 47.68%, from MYR1,067.0 million in 2010, to MYR555.3 million in 2011. Unrealised foreign exchange losses and deferred tax charges, from the sale of aircraft to AirAsia Indonesia, were the causes of the net profit decline.
Malaysian Airlines: Malaysian Airlines revenues declined by 1.81% during the 2007–2011 period, reflecting the troubled times the airline is experiencing at the moment. Though revenues in 2011 grew by 5.19%, the airline faced the largest operating loss in its history, of MYR2,584.5 million. The losses arose from high fuel costs, and provisions for aircraft redelivery, freighter impairment and stock obsolescence. Net profit for the year stood at MYR2,584.3 million.
Singapore Airlines: Revenues for the airline grew by 5.49% in 2011, the second consecutive year of growth since 2008, when revenues declined by 18.26% due to the global financial crisis. The airline however, has remained profitable throughout the four year period, though they have been erratic. Reasons for the volatility in financial performance lies in economic uncertainty arising of the US and European markets, shot consumer confidence, and high energy prices. Operating profit fell by 76.81% in 2011, while net profit fell by 66.39%, representing the airlines worst performance since 2008.
11
Performance Review
Figure 1: Asian Airlines – Revenues (MYR billion), 2007–2011
AirAsia
36.1 13.7
34.2
4.5
13.0 3.9
11.3
3.1
1.6
2.6
14.7
15.0
30.7
36.3
37.6
REVENUES, 2011
Malaysian Airlines
Singapore Airlines
Source: Annual Reports
Figure 2: Asian Airlines – Operating Profit (MYR million), 2007–2011
694.3
1,162.5
100.2
1,067.0
152.7
913.0
Malaysian Airlines
Singapore Airlines
-2,584.3
AirAsia
-682.9
-352.0
270.9
828.3
219.0
2,122.0
2,993.6
4,830.3
OPERATING PROFIT
Source: Annual Reports
12
Performance Review
Figure 3: Asian Airlines – Net Profit (MYR million), 2007–2011
2008
AirAsia
Malaysian Airlines
2010
Singapore Airlines
864.3
555.3
237.3
1,061.4
521.4
522.9
506.0
2009
2011
-2,521.3
-496.0
2007
271.8
852.7
426.0
2,492.8
2,571.4
4,659.5
NET PROFIT
Source: Annual Reports
13
Operating Performance
Performance Review
2.2
Please refer to the Glossary section for indicator definitions.
2.2.1
Load factor
While all three airlines share a similar load factor, AirAsia has seen massive improvement in seat utilization. Low fares and aggressive marketing campaigns has helped the airline increase load factor from 74.9% in 2007 to 80.7% in 2011.
2.2.2
enger yield
enger yields of Malaysian Airlines have generally been in line with peer group average (2011 – 24cents), whilst that of AirAsia was lower than the peer group mean. While AirAsia engers pay the lowest for each kilometre travelled, reaffirming its low cost strategy, enger yields have been creeping up since 2009.
2.2.3
Cost per available seat kilometre (CASK)
Comparing CASK across the airlines, it can be seen that AirAsia has been able to maintain cost discipline through the 2007–2011 period. CASK for the airline has declined from 17 cents in 2007 to 13 cents in 2011. On the other hand, it is also apparent Malaysian Airlines has been unsuccessful in doing the same. CASK for the airline has risen sharply from 25 cents in 2007 to 29 cents, while enger yield has witnessed a decline from 26 cents to 24 cents during the same period. In short, its costs the airline more to fly a single seat a distance of one kilometre, than what engers are paying for flying the same distance.
14
Performance Review
Table 5: Operating Statistics Peer Review, 2011 AirAsia
Malaysian Airlines
Singapore Airlines
29.86
17.05
20.18
Revenue enger-km (millions)
35,091
39,731
87,824
Available seat-km (millions)
43,940
52,998
113,410
enger load factor
80.7%
74.5%
76.5%
enger yield (MYR)
0.17
0.24
0.30
Cost per available seat kilometer (CASK)
0.13
0.29
0.30
Operating Indicators
engers carried (million)
Legend
AirAsia
Malaysian Airlines
Five Year Trend vs. 2011 Average
Singapore Airlines
Source: Annual report, company website
15
Ratio Analysis
3. Ratio Analysis 3.1
Profitability Ratios
Profitability ratios measure a company’s ability to generate earnings relative to sales, assets and equity. These ratios assess the ability of a company to generate earnings, profits and cash flows relative to relative to some metric, often the amount of money invested. They highlight how effectively the profitability of a company is being managed.
3.1.1
Return on Asset
Table 6: Return on Asset Peer Analysis (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
13.6%
10.0%
7.8%
2008
-6.9%
2.4%
4.1%
2009
4.9%
5.3%
0.9%
20.0%
15.0% 10.0% 5.0%
0.0% -5.0%
2007
2008
2009
2010
2011
-10.0% -15.0%
2010
8.6%
2.2%
4.5%
2011
4.1%
-20.2%
1.4%
-20.0% -25.0% AirAsia
Malaysian Airlines
Singapore Airlines
Source: Annual report
Oil price volatility and the financial crisis in 2008 saw airlines witness a decline in their ROA, with AirAsia performing the worst. ROA for AirAsia in 2008 was negative 6.9%, due to losses incurred from high fuel costs and the onset of the global financial crisis. Malaysian Airlines and Singapore Airlines in the same year were able to maintain positive ROA’s, standing at 2.4% and 4.1% respectively. Singapore Airlines has been able to maintain a positive ROA for the entire 2007–2011 period, indicating far more efficient asset management as compared to Malaysian Airlines, which reported a negative 20.2% ROA in 2011. The airline had been witnessing a consistent decline in profits over the past five years.
16
Ratio Analysis
3.1.2
Return on Equity
Table 7: Return on Equity Peer Analysis (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
60.0%
40.0% 20.0%
2007
34.5%
29.3%
13.6%
2008
-30.4%
6.0%
7.3%
2009
24.0%
19.9%
1.6%
-60.0%
7.9%
-100.0%
0.0%
-20.0%
2007
2008
2009
2010
2011
-40.0%
-80.0%
2010
33.9%
11.1%
-120.0%
2011
14.5%
-110.5%
2.5%
AirAsia
Malaysian Airlines
Singapore Airlines
Source: Annual report
ROE performance of the three airlines is similar to that of ROA. AirAsia in 2008 witnessed a sharp decline but soon returned to profitability. With the exception of that year, AirAsia has in fact performed better than its peers, including Singapore Airlines. However, it is worth noting that Singapore Airlines does not have large debt obligations, due to which its ROE will be supressed. In 2011, borrowings for nearly 50% of AirAsia’s capital structure, as opposed to 7% of Singapore Airlines. Owing to the largest loss in its history, Malaysian Airlines saw its ROE decline from 11.1% in 2010 to -110.5% in 2011.
17
Ratio Analysis
3.1.1
Operating Margin
Table 8: Operating Margin Peer Analysis (FY2011) Year 2007
AirAsia 17.4%
Malaysian Airlines
Singapore Airlines
5.6%
13.3%
40.0% 30.0% 20.0%
2008
-13.4%
1.8%
5.6%
2009
29.1%
-6.0%
0.5%
2010
27.0%
0.8%
8.8%
10.0% 0.0%
-10.0%
2007
2008
2009
2010
2011
-20.0% -30.0%
2011
25.9%
-18.9%
1.9%
AirAsia
Malaysian Airlines
Singapore Airlines
Source: Annual report
With the exception of 2008, AirAsia has consistently outperformed its rivals in the past five years. This comes as no surprise as the firm’s low-cost model aids in keeping costs under control. Singapore Airlines has performed reasonably well in this category, and has shown its ability to match revenues and expenditures well. However, revenue growth has been sluggish, compared to the growth in expenses, with revenues growing at 5.49% during the 2007–2011 period, and operating expenses growing at 5.23% during the same period. While the airline has been successful in reducing staff costs, fuel expenses are managed by hedging and other energy derivatives. Operating activities that have seen significant increases in expenses include aircraft maintenance and overhaul, landing parking and overflying, handling charges, inflight meals and other expenses, which includes crew expenses, company accommodation cost, foreign exchange revaluation and hedging loss, comprehensive aviation insurance cost, airport lounge expenses, non-information technology contract and professional fees, expenses incurred to mount non-scheduled services, aircraft licence fees and recoveries. Malaysian Airlines on the other hand has shown itself to be completely incapable of accelerating revenues growth or controlling operating costs. Revenue growth during the past five years has been sluggish at best, while operating costs have risen at an extremely rapid pace. In 2011 itself, fuel and oil costs, which makes nearly 40% of the airlines operating costs, grew by 33.3%, while revenues declined by 1.8%.
18
Ratio Analysis
3.1.1
Net Margin
Table 9: Net Margin Peer Analysis (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
31.1%
5.8%
12.8%
40.0% 30.0%
2008
-18.8%
1.8%
6.6%
20.0% 10.0%
2009
16.2%
4.6%
1.7%
0.0%
-10.0%
2010
26.9%
1.8%
7.5%
2007
2008
2009
2010
2011
-20.0% -30.0%
2011
12.4%
-18.5%
2.4%
AirAsia
Malaysian Airlines
Singapore Airlines
Source: Annual report
Net margin for the three firms trends similarly to operating margins. Singapore Airlines holds minimal debt, and therefore does not incur large finance costs. On the other hand borrowings exceed 50% and 80% in the case of AirAsia and Malaysian Airlines, resulting large finance costs. AirAsia has been successful to keep its net margin above 10% post its 2008 slump.
19
Ratio Analysis
3.2
Liquidity Ratios
Table 10: Current Ratio Peer Analysis (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
1.76
1.42
1.40
2008
1.09
1.38
1.16
2009
1.30
0.86
1.45
2010
1.56
0.74
1.57
2011
1.73
0.39
1.37
2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
2007
2008 AirAsia
2009
Malaysian Airlines
2010
2011
Singapore Airlines
Source: Annual report
Table 11: Quick Ratio Peer Analysis (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
0.76
1.20
1.28
2008
0.09
0.82
1.01
2009
0.46
0.64
1.32
2010
1.27
0.53
1.48
1.6 1.4 1.2 1.0 0.8
2011
1.01
0.25
1.27
0.6 0.4 0.2 0.0
2007
2008 AirAsia
2009
Malaysian Airlines
2010
2011
Singapore Airlines
Source: Annual report
Malaysian Airlines clearly seems to have a tough time maintaining its current ratio, which is no surprise given is lacklustre performance profit wise in the past five years. However, given that it is a GLC, it is unlikely that shareholders will be exposed to a bankrupt Malaysian Airlines. Through the new business transformation plan the airline plans to return to profitability, primarily through focusing on the segment of the airline market. Looking at AirAsia, it can be clearly seen that the firm’s cash position during times of economic downturns becomes extremely risky. The firm, in 2008, held an extremely
20
Ratio Analysis
limited amount in cash, as nearly MYR364.8 million was parked as cash collateral for derivatives and deposits for maintenance of aircraft.
3.3
Leverage Ratios
Table 12: Debt to Equity Peer Analysis (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
1.53
0.21
0.11
2008
4.16
0.33
0.13
2009
2.90
3.10
0.11
2010
2.15
1.04
0.14
16.0 14.0 12.0
2011
1.92
5.36
10.0 8.0 6.0 4.0
2.0 0.0
2007 AirAsia
0.08
2008
2009
Malaysian Airlines
2010
2011
Singapore Airlines
Source: Annual report
Table 13: Long Term Debt to Equity(FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
1.39
0.22
0.10
2008
3.83
0.23
0.10
2009
2.70
2.68
0.10
2010
2.01
0.97
0.07
2011
1.78
4.06
0.08
4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00
2007 AirAsia
2008
2009
Malaysian Airlines
2010
2011
Singapore Airlines
Source: Annual report
21
Ratio Analysis
Table 14: Debt to Assets (FY2011) Year
AirAsia
Malaysian Airlines
Singapore Airlines
2007
53%
9%
6%
2008
70%
14%
7%
2009
67%
27%
7%
2010
59%
30%
8%
0.80 0.70 0.60
2011
56%
45%
5%
0.50 0.40 0.30 0.20
0.10 0.00
2007 AirAsia
2008
2009
Malaysian Airlines
2010
2011
Singapore Airlines
Source: Annual report
Singapore Airlines bucks the trend of high debt leverage, while Malaysian Airlines has been increasing its debt financing. While both airlines have a sizable amounts of lease agreements that make up a large portion of these debts, Malaysian Airlines holds on to nearly MYR701.6 million in unsecured, non-current term loans and an additional MYR625.8 million in secured term loans. Singapore Airlines on the other hand has opted to finance its operations with minimal debt undertakings. In 2011, merely 5% of the airlines assets were financed by debt, as opposed nearly half of those of AirAsia and Malaysian Airlines. The management believes the current capital structure gives the airline “efficient mix of debt and equity in order to achieve a low cost of capital, while taking into the desirability of retaining financial flexibility to pursue business opportunities and adequate access to liquidity to mitigate the effect of unforeseen events on cash flows.”
22
Dividend Policy
4. Dividend Policy The airline industry in general does not prefer paying out dividends to its investors. There are several reasons regarding to the nature of industry operated. In part it is primarily due to the volatility of the industry and the need to invest on extensive capital projects. In addition, the industry has not seen consistency in financial performance. As such, profits are added to the financial reserves of the company, or to finance the future renovation/replacement of their production facilities. Below we will analyses dividend policy of the three firms.
4.1.1
AirAsia
As such, AirAsia declared it company does not have a dividend policy. However, AirAsia has paid its maiden dividend in 2011 of 3 cents per ordinary share to reward loyal shareholders. The management believes that the business is in the early stages of development where capital requirements are high. As result, earnings are to be reinvested for the future's wellbeing. The airline had a payout ratio of 25.01%
4.1.2
Malaysia Airlines
As 2011 annual report stated, there is RM2.52 billion loss suffered by Malaysia Airlines in 2011. No dividend has been paid. The firm has no dividend policy, and did not announce any dividends during the 2007–2011 period.
4.1.1
Singapore Airlines
Singapore Airlines bucked the trend again, and has announced dividends every year since 2008. For the fiscal year 2011–12, the firm announced an ordinary dividend per share of 20 cents.
23
Dividend Policy
We calculate the airlines dividend yield at 1.8% and payout ratio as 70.2%. Table 15: Singapore Airlines, Dividend Policy
Stock Price (as of March 2013) Price-Book Value Last Total Dividend Paid
SGD10.87 0.98 20.0 cents
P/E Ratio
38.06
Dividend Yield
1.8%
Source: Annual report
24
Capital Structure
5. Capital Structure 5.1.1
AirAsia
AirAsia operates with a comparatively highly leveraged capital structure. The firm monitors its capital structure on the basis of its gearing ratio. As of 2011, the firm had a gearing ratio of 1.92 times, in line with that of the previous year, which stood at 2.15 times. Figure 4: AirAsia, Capital Structure, 2007–2011 100%
90%
22%
22%
80%
70%
41% 52%
60%
60% 50% 40%
78%
78%
30% 20%
59% 48%
40%
10%
0% 2007
2008 Borrowings
2009
Shareholders Equity
2010
2011
Preference Shares
Source: Annual Reports
25
Capital Structure
5.1.2
Malaysian Airlines
Malaysian Airlines with an extremely high gearing ratio, which stood at 5.4 times in 2011. This is a significant increase from 2010, when the airline had a gearing ratio of 1.0 times. The major reason for this drastic shift in capital structure is the undertaking of large amounts of secured and unsecured term loans and financial leases in 2011. Figure 5: Malaysian Airlines, Capital Structure, 2007–2011 100%
0.4%
0.3%
0.4%
0.2%
0.2% 16%
90%
23%
80% 49%
70% 60%
73%
75%
50% 84%
40%
76%
30% 51% 20% 10%
27%
24%
2007
2008
0%
Borrowings
2009 Shareholders Equity
2010
2011
Preference Shares
Source: Annual Reports
26
Capital Structure
5.1.3
Singapore Airlines
Unlike its Malaysian counterparts, Singapore Airlines operates on an equity driven capital structure. The carrier had a meagre gearing ratio of 0.08 times. The firm believes that such a capital structure allows it to “achieve a low cost of capital, while taking into the desirability of retaining financial flexibility to pursue business opportunities and adequate access to liquidity to mitigate the effect of unforeseen events on cash flows”. Figure 6: Singapore Airlines, Capital Structure, 2007–2011 100%
3.2%
5.5%
1.8%
2.7%
3.3%
90% 80%
70% 60% 50%
86%
77%
79% 89%
85%
40%
30% 20% 10% 11%
18%
18% 10%
12%
0% 2007
2008 Borrowings
2009 Shareholders Equity
2010
2011
Preference Shares
Source: Annual Reports
27
Cost of Capital
6. Cost of Capital 6.1.1
Cost of Capital Computation
Table 16: Cost of Capital Peer Analysis(FY2011) Cost of Equity (ke)
Equity Weightag e (we)
Cost of Debt (kd)
Debt Weightag e (wd)
WACC
Beta
Tax Rate
Malaysian Airlines
9.80%
15.7%
4.50%
84.1%
5.32%
0.853
25%
Singapore Airlines
9.50%
84.7%
1.80%
12.0%
8.26%
0.966
20%
15.50%
48.1%
4.30%
51.9%
9.67%
1.34
25%
Company
AirAsia Note:
Of the three airlines in the peer group, Malaysian Airlines has not paid dividend during the 2007–2011, while AirAsia paid its once, and Singapore Airlines has paid it every year since 2008. In order to maintain uniformity, only CAPM will be used to calculate airline WACC.
6.1.2
Analysis
Singapore Airlines (SIA) Singapore Airlines (SIA) has a WACC of 8.26%, compared to the around .8.03% Singapore Airlines does not pay dividend, so our analysis regarding cost of equity will be based on CAPM model. Looking at the CAPM formula, we can say that SIA cannot do much regarding risk free rate and market , it just has been determined based on current market situations.
Looking at current SIA capital structure 84.7% equity, and 12.0% debt, we can say that they have an their financial leverage is relatively low, comparing with airline industry, where companies usually use 50–65% debt and rest is equity.
28
Cost of Capital
Malaysian Airlines (MAS) On reviewing MAS WACC, which stands at 5.32%, compared to the average industry WACC of 8.03%, we can say the airline enjoys the lowest cost of capital among the peers. According to Bloomberg, MAS currently has a beta estimate of 0.852. The fact that it operates as a GLC with financial backing from the Malaysian government could be a major reason for a low beta, despite its dismal financial performance.
High Leverage
Looking at current MAS capital structure 84.1% debt, and 15.7% equity, we can say financial leverage is significantly higher than its peers. This high percentage of debt has many effects on MAS:
a) High leverage causes higher beta: Whenever the company increase their borrowing (i.e. higher debt), the companies risk increases and because of that risk increase. Investors usually are wary of firms that operate with high levels of leverage, and demand a higher rate of return on the their investment
b) High interest obligations
AirAsia AirAsia has a WACC of 9.67% with industry average standing at around 8.03%. AirAsia paid its first dividend in FY2010. In view of the high capex requirements, there is a likelihood of no dividends being paid in coming quarters. Comparing AirAsia’s beta of 1.606, with the industry beta of 1.0, there is a significant difference, signifying the higher level of risk associated with AirAsia as compare to the market.
Looking at current AirAsia’s capital structure 51.9% debt, and 48.1% equity, we can say financial leverage is close to the industry average of 50–65% of debt. The stock carries an Earning Price per Share (EPS) of 0.401 and Dividend Price per Share (DPS) of 0.053. Growth rate of the company is estimated to be 4.2%. The leverage for the airline should not be a major concern as such as cash collection has improved over the last few years. As of the most recent quarter end, its uncollected
29
Cost of Capital
receivables totalled 1.4B MYR, which, at the current sales rate provides a Days Receivables Outstanding of 88.22.
30
7.1.1
Fair Price Valuation
7. Fair Price Valuation AirAsia
Closing price as of April 1, 2013 – MYR2.77 Figure 7: AirAsia Stock Price, 2007–2011
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
Source: Annual Reports
EPS: 20 cents Discount Rate: 7.47% (Bloomberg Country ) Assumptions: Expected annual growth: 4.2% (Bloomberg) Growth Years: 9 years Estimated Fair Price: MYR3.57
AirAsia enjoys the lowest operating costs among its peers giving it a competitive edge. Furthermore, fast turnaround times, and an increasing number of price sensitive engers will help the airline expand rapidly. The firm has a strong cash flow position, which allays fears arising from the high gearing ratio.
31
Fair Price Valuation
Though fuel price volatility might possibly deter its expansion plans, the airline definitely has high growth prospects.
7.1.2
Malaysian Airlines
Closing price as of April 1, 2013 – MYR0.755 Figure 8: Malaysian Airlines Stock Price, 2007–2011 7 6
5 4 3 2
1 0 1-Jan-07
1-Jan-08
1-Jan-09
1-Jan-10
1-Jan-11
Source: Annual Reports
EPS: -75.5 cents Discount Rate: 7.48% (Bloomberg Country ) Assumptions: Expected annual growth: 195.745% (Bloomberg) Growth Years: 3 years Estimated Fair Price: MYR-23384.61
Malaysian Airlines has come under intense pressure from AirAsia in the low cost segment, which off late has been expanding its low cost long haul offering. In its 2011 New Business Plan, the airline plans to focus solely on the full service segment. The airline will no doubt face stiff competition in this
32
Fair Price Valuation
segment as well, given the presence of well established brands such as Singapore Airlines, Cathay Pacific, Qatar Airways and Emirates. The firm has an extremely weak financial position given the large loss incurred in 2011, and the debt heavy balance sheet. Given that this is the third turnaround plan implemented by the airline in the past one and a half decade, there is significant pessimism with regards to the implementation of the new business plan. If aggressive steps are not taken to turnaround the airline, the carrier is likely to face further losses in 2012 and 2013 as well.
7.1.1
Singapore Airlines
Closing price as of April 1, 2013 – SGD10.88 Figure 9: Singapore Airlines Stock Price, 2007–2011 25
20
15
10
5
0 2-Apr-07
2-Apr-08
2-Apr-09
2-Apr-10
2-Apr-11
Source: Annual Reports
EPS: 28.3 cents Discount Rate: 8.16% (Bloomberg Country ) Assumptions: Expected annual growth: 14.25% (Bloomberg) Growth Years: 9 years Estimated Fair Price: MYR9.06
33
Fair Price Valuation
The airline with a young fleet and fares will be able to keep costs in control while at the same time grow its revenues. However, the given the slowing economic travel, business and travel could suffer declines. The airline has also faced pressure in its cargo segment, and is likely to pull down the group financials. However, given the strong financial cash position, high levels of liquidity, strong cash flow and balance sheet, and the airline we believe that the airline will be resilient in a weak economic environment.
34
Glossary
8. Glossary The following definition have been sourced from the Airline Data Project by the Massachusetts Institute of Technology. For more information please refer to the http://web.mit.edu/airlinedata/www/default.html.
Revenue enger: A revenue enger is someone who has paid for the trip. This excludes nonpaying engers such as airline employees, infant and children, etc.
Revenues enger Kilometer (RPK): Is a measure of airline enger traffic. It reflects how many of an airline's available seats were actually sold. It is calculated by multiplying the number revenue engers with the distance travelled.
Available Seat Kilometer (ASK): Measurement of airline output that refers to one aircraft seat flown one mile, whether occupied or not. An aircraft with 100 enger seats, flown a distance of 100 km, generates 10,000 available seat km.
Load Factor: Revenue enger Kilometer (RPKs) expressed as a percentage of ASKs. Load factor represents the proportion of airline output that is actually consumed.
enger Yield: Measure of average fare paid per mile, per enger, calculated by dividing enger revenue by revenue enger miles. enger yield is a useful measure in assessing changes in fares over time.
Cost per Available Seat Kilometer (CASK): Represent how much it costs to fly one seat (empty or filled) one-mile. CASM is calculated by dividing operating expenses by the total number of available seat km produced.
35
Bibliography
9. Bibliography AirAsia. (2008). AirAsia Annual Report. AirAsia. AirAsia. (2011). Annual Report. AirAsia. AirAsia. (n.d.). AirAsia | Achievements. Retrieved from AirAsia.com: http://www.airasia.com/ot/en/aboutus/awards.page AirAsia Bhd. (2004). AirAsia Prospectus. Caterham F1. (n.d.). Caterham F1 Team. Retrieved from Caterham F1 Team - Tony Fernandes: http://www.caterhamf1.com/team/management/tony-fernandes Cebu Air Inc. (2012). 2012 Results of Operation. Cebu Air. Changi Airport Group. (2013, January). Facts & Statistics - Changi Airport. Retrieved March 2013, from Changi Airport: http://www.changiairport.com/our-business/about-changi-airport/facts-statistics Jetstar
Airways.
(2012).
Facts
and
Stats.
Retrieved
2013,
from
Jetstar.com:
http://www.jetstar.com/mediacentre/facts-and-stats/jetstar-group Lau, K., & Chan, K. (2012). Asian airlines set to fly higher. Daiwa Capital Markets. Malaysian Airports Holding Bhd. (2012). MAHB Statistics. MAHB. Rothman, A. (2011, June 23). Airbus Wins Record $18 Billion AirAsia Deal for 200 Neo Jets. Retrieved from
Bloomberg:
http://www.bloomberg.com/news/2011-06-23/airbus-wins-record-18-billion-airasia-
order.html
36
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