analysis of airasia, malaysian airlines and singapore airlines

www.canadean-winesandspirits.com

Financial Analysis of

AirAsia, Malaysian Airlines and Singapore Airlines

Authors: Athar Mazhar

G1126319

Mirza Zia G1213229

Naeem Nasser

G1139591

Yang Yan Li G1211126

Course: Corporate Finance Course Code: FIN6257 Lecturer: Asrul Dahari International Islamic University Malaysia Graduate School of Management April 2013

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Table of Contents

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. Dividend Policy ..........................................................................................23

5. Capital Structure .......................................................................................25

6. Cost of Capital ...........................................................................................28

7. Fair Price Valuation ...................................................................................31

8. Glossary .....................................................................................................35

9. Bibliography ..............................................................................................36

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List of Figures

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

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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 passengers 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

passengers 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 premium

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. Premium 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

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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 passed 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

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1.2 Company Profiles

1.2.1 AirAsia

Table 1: AirAsia Group, Key Facts (FY2011)

Key Facts

Headquarters

LCC Terminal, Jalan KLIA S3, Southern

Support 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

Passengers 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 affiliates, joint ventures and subsidiaries.

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Table 2: AirAsia Fleet Details (as of December 2012)

Affiliate/Subsidiary/Joint Venture Name Number of Aircraft

AirAsia 64

Thai AirAsia 27

Indonesia AirAsia 22

AirAsia X 9

AirAsia Japan 3

AirAsia Philippines 2


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. Passengers are offered no frills

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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

support services are outsourced to increase efficiencies leading to high aircraft utilization.

Increased flight frequencies lead to both scheduling and passenger 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.

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1.2.2 Malaysian Airlines

Table 3: Malaysian Airlines, Key Facts (FY2011)

Key Facts

Headquarters Administration Building 1 , 3rd Floor, MAS

Complex A, Sultan Abdul Aziz Shah

Airport,47200 Subang, Selangor Darul

Ehsan, Malaysia

Employees 20,477

Founded 1937

Total Revenues MYR13,901.42 million (US$4,493.75 million)


Average Fleet Age 12 years 3 months



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 passenger, 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.

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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 joined 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 premium 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 premium airline

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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

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1.2.3 Singapore Airlines

Table 4: Singapore Airlines, Key Facts (FY2011)

Key Facts

Headquarters Airline House, 25 Airline Road, Singapore

819829

Employees 13,893

Founded 1937

Total Revenues SGD14,587.8 million (US$11,754.88 million)


Average Fleet Age 6 years 2 months



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 passenger

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

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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 premium 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 premium 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.

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2. Performance Review

2.1 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.

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Figure 1: Asian Airlines – Revenues (MYR billion), 2007–2011

Source: Annual Reports

Figure 2: Asian Airlines – Operating Profit (MYR million), 2007–2011


1.6 2

.6 3.1 3.9 4.5

14

.7

15

.0

11

.3 13

.0

13

.7

36

.3 37

.6

30

.7

34

.2 36

.1

R E V E N U E S , 2 0 1 1

AirAsia Malaysian Airlines Singapore Airlines

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9.0

-35

2.0

91

3.0

1,0

67

.0

1,1

62

.5

82

8.3

27

0.9

-68

2.9

10

0.2

-2,5

84

.3

4,8

30

.3

2,1

22

.0

15

2.7

2,9

93

.6

69

4.3

O P E R A T I N G P R O F I T


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Figure 3: Asian Airlines – Net Profit (MYR million), 2007–2011


42

6.0

-49

6.0

50

6.0 1,0

61

.4

55

5.3

85

2.7

27

1.8

52

2.9

23

7.3

-2,5

21

.3

4,6

59

.5

2,4

92

.8

52

1.4

2,5

71

.4

86

4.3

2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1

N E T P R O F I T


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2.2 Operating Performance

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 Passenger yield

Passenger 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 passengers pay the

lowest for each kilometre travelled, reaffirming its low cost strategy, passenger 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 passenger 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 passengers are paying for flying the same

distance.

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Table 5: Operating Statistics Peer Review, 2011

Operating Indicators AirAsia Malaysian

Airlines

Singapore

Airlines

Five Year Trend vs. 2011

Average

Passengers carried

(million) 29.86 17.05 20.18

Revenue passenger-km

(millions) 35,091 39,731 87,824

Available seat-km

(millions) 43,940 52,998 113,410

Passenger load factor 80.7% 74.5% 76.5%

Passenger yield (MYR) 0.17 0.24 0.30

Cost per available seat

kilometer (CASK) 0.13 0.29 0.30

Legend AirAsia Malaysian Airlines Singapore Airlines


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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%

2010 8.6% 2.2% 4.5%

2011 4.1% -20.2% 1.4%

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.

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2007 2008 2009 2010 2011


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3.1.2 Return on Equity

Table 7: Return on Equity Peer Analysis (FY2011)


Airlines

Singapore

Airlines

2007 34.5% 29.3% 13.6%

2008 -30.4% 6.0% 7.3%

2009 24.0% 19.9% 1.6%

2010 33.9% 11.1% 7.9%

2011 14.5% -110.5% 2.5%


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 account 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.

-120.0%

-100.0%

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

2007 2008 2009 2010 2011


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3.1.1 Operating Margin

Table 8: Operating Margin Peer Analysis (FY2011)


Airlines

Singapore

Airlines

2007 17.4% 5.6% 13.3%

2008 -13.4% 1.8% 5.6%

2009 29.1% -6.0% 0.5%

2010 27.0% 0.8% 8.8%

2011 25.9% -18.9% 1.9%


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%.

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2007 2008 2009 2010 2011


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3.1.1 Net Margin

Table 9: Net Margin Peer Analysis (FY2011)


Airlines

Singapore

Airlines

2007 31.1% 5.8% 12.8%

2008 -18.8% 1.8% 6.6%

2009 16.2% 4.6% 1.7%

2010 26.9% 1.8% 7.5%

2011 12.4% -18.5% 2.4%


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.

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2007 2008 2009 2010 2011


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3.2 Liquidity Ratios

Table 10: Current Ratio Peer Analysis (FY2011)


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


Table 11: Quick Ratio Peer Analysis (FY2011)


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

2011 1.01 0.25 1.27


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 premium

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

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2007 2008 2009 2010 2011


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2007 2008 2009 2010 2011


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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)


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

2011 1.92 5.36 0.08


Table 13: Long Term Debt to Equity(FY2011)


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


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2007 2008 2009 2010 2011


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

2007 2008 2009 2010 2011


22

Ratio

An

aly

sis

Table 14: Debt to Assets (FY2011)


Airlines

Singapore

Airlines

2007 53% 9% 6%

2008 70% 14% 7%

2009 67% 27% 7%

2010 59% 30% 8%

2011 56% 45% 5%


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 account 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.”

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2007 2008 2009 2010 2011


23

Div

ide

nd

Po

licy

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.


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.

24

Div

ide

nd

Po

licy

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) SGD10.87

Price-Book Value 0.98

Last Total Dividend Paid 20.0 cents

P/E Ratio 38.06

Dividend Yield 1.8%


25

Cap

ital S

truc

ture

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


40%

78% 78%

59%48%

60%

22% 22%

41%52%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011

Borrowings Shareholders Equity Preference Shares

26

Cap

ital S

truc

ture


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


27% 24%

76%

51%

84%

73% 75%

23%

49%

16%

0.4% 0.3% 0.4% 0.2% 0.2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011


27

Cap

ital S

truc

ture


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 account 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


11%18%

10%18%

12%

86%77%

89%79%

85%

3.2% 5.5% 1.8% 2.7% 3.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011


28

Co

st o

f Cap

ital

6. Cost of Capital

6.1.1 Cost of Capital Computation

Table 16: Cost of Capital Peer Analysis(FY2011)

Company

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%

AirAsia 15.50% 48.1% 4.30% 51.9% 9.67% 1.34 25%

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 premium, 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.

29

Co

st o

f Cap

ital

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

30

Co

st o

f Cap

ital

receivables totalled 1.4B MYR, which, at the current sales rate provides a Days Receivables Outstanding

of 88.22.

31

Fa

ir Pric

e V

alu

atio

n 7. Fair Price Valuation

7.1.1 AirAsia

Closing price as of April 1, 2013 – MYR2.77

Figure 7: AirAsia Stock Price, 2007–2011


EPS: 20 cents

Discount Rate: 7.47% (Bloomberg Country Premium)

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 passengers will help the airline expand

rapidly. The firm has a strong cash flow position, which allays fears arising from the high gearing ratio.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

32

Fa

ir Pric

e V

alu

atio

n

Though fuel price volatility might possibly deter its expansion plans, the airline definitely has high growth

prospects.


Closing price as of April 1, 2013 – MYR0.755

Figure 8: Malaysian Airlines Stock Price, 2007–2011


EPS: -75.5 cents


Assumptions:



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 premium full service segment. The airline will no doubt face stiff competition in this

0

1

2

3

4

5

6

7

1-Jan-07 1-Jan-08 1-Jan-09 1-Jan-10 1-Jan-11

33

Fa

ir Pric

e V

alu

atio

n

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.


Closing price as of April 1, 2013 – SGD10.88

Figure 9: Singapore Airlines Stock Price, 2007–2011


EPS: 28.3 cents


Assumptions:



Estimated Fair Price: MYR9.06

0

5

10

15

20

25

2-Apr-07 2-Apr-08 2-Apr-09 2-Apr-10 2-Apr-11

34

Fa

ir Pric

e V

alu

atio

n

The airline with a young fleet and premium 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 premium 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.

35

Glo

ssary

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 Passenger: A revenue passenger is someone who has paid for the trip. This excludes non-

paying passengers such as airline employees, infant and children, etc.

Revenues Passenger Kilometer (RPK): Is a measure of airline passenger traffic. It reflects how many

of an airline's available seats were actually sold. It is calculated by multiplying the number revenue

passengers 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 passenger seats, flown a distance of 100 km,

generates 10,000 available seat km.

Load Factor: Revenue Passenger Kilometer (RPKs) expressed as a percentage of ASKs. Load factor

represents the proportion of airline output that is actually consumed.

Passenger Yield: Measure of average fare paid per mile, per passenger, calculated by dividing

passenger revenue by revenue passenger miles. Passenger 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.

http://web.mit.edu/airlinedata/www/default.html

36

Bib

liog

rap

hy

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/about-

us/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

analysis of airasia, malaysian airlines and singapore airlines

Documents

fair price valuation

retaining financial flexibility

selangor darul ehsan

global financial crisis

caterham f1 team

pursue business opportunities

groups business comprises

asset peer analysis