The Indonesian affiliate of AirAsia, the low-cost carrier, has four weeks to raise new equity or risk withdrawal of its operating licence in a key market.
The transport ministry of Southeast Asia’s biggest economy has set a July 31 deadline for AirAsia Indonesia and 12 local airlines to exit “negative equity” — in which their loans are greater than the value of their assets — or lose their flying permits.
Musyaffar Ismail, director of airworthiness at the ministry’s civil aviation department, said existing rules prevent airlines from going into negative equity and that “everybody has to comply by the end of July”.
Malaysia-based AirAsia, Asia’s biggest budget carrier, has had a host of problems. A crash in Indonesia late last year hit demand at a time when sales were suffering from a slowing economy and competition from Lion Air, the Indonesia market leader.
AirAsia, co-founded in 2001 by Tony Fernandes, the Malaysian entrepreneur, said it was “in the process of taking the necessary steps to recapitalise our equity to meet government regulations”. There had been “no impact” on daily operations.
Last month, GMT, an independent equity research house, criticised AirAsia’s accounting practices and said the company was “teetering on default”.
AirAsia rejected the allegations, insisting it was run professionally and had a strong balance sheet.
It said it plans to inject $72.9m of new share capital into its Indonesian and Philippine units, alongside its local partners, and raise at least another $100m for each associate by issuing convertible bonds to new investors.
However, analysts have questioned the company’s ability to raise new equity swiftly given its problems.
“We not only view AirAsia’s recent updates on funding plans for associates with scepticism, but also argue claims of improving prospects are unvalidated,” Rajani Khetan, an analyst at HSBC, wrote in a note to clients.
Ignasius Jonan, Indonesia’s transport minister, promised to step up oversight after an AirAsia Indonesia Airbus crashed in December with the loss of all 162 on board on a flight that lacked the correct permit.
Budget airlines were endangering safety by cutting costs too far, said Mr Jonan, an allegation that AirAsia rejected.
Gerry Soejatman, an aviation analyst in Jakarta, said negative equity was not a good measure of airline safety.
“The whole point of what they’re saying is that if you’re not adequately funded, you’re not going to be able to pay for your maintenance,” he said. “To use equity as an absolute factor is not something that is relevant.
“We have charter operators whose equity is extremely small — and maybe negative — but the aircraft maintenance costs are fully paid because they are paid for by the client.”