AirAsia in talks on state-backed funding

$1 = 4.083 ringgit.

AirAsia is in talks with the Malaysian government over potential support for its fundraising, according to three people with knowledge of the matter cited by Reuters, even as co-founder Tony Fernandes denies that financial aid is on the table. The airline's shares traded 5 per cent lower on Monday afternoon and are down more than 70 per cent this year.

Fernandes met finance ministry officials during the week beginning September 28, joined, according to two of the sources, by representatives of Alton Aviation Consultancy, which the ministry has hired to assess the airline's funding needs. Two of the sources said the discussions covered government backing for AirAsia's fundraising, subject to conditions that were still being worked out and that Reuters could not establish.

Fernandes told Reuters the meetings, which also involved transport ministry officials, concerned aviation costs such as airport charges and fuel rather than financial assistance. He said he was "100%" confident AirAsia could manage without state aid, adding of any support offered: "We will never say no to it."

Transport minister Anthony Loke said he had held no meetings with AirAsia in the past two to three weeks, and the finance ministry declined to comment.

The government's concern follows a fuel shock. Jet fuel averaged $183 a barrel in the second quarter, up 66 per cent on the first, and AirAsia reported a net loss of $203mn (RM830.5mn) that included $81mn (RM331mn) of foreign exchange losses.

Cash and bank balances stood at $234mn (RM954mn) on June 30 against current liabilities of $4.51bn (RM18.4bn), although current liabilities at airlines also include items such as ticket sales received in advance and lease payments, so the figure is not a measure of debt alone.

Fernandes said in September that cash had since passed $245mn (RM1bn). AirAsia is seeking up to $1bn from international debt markets plus $171mn (RM700mn) in local credit facilities, mainly to refinance existing debt, and he expects the dollar raise to close between December and February.

The airline says higher fares, which rose more than 20 per cent year on year in May and June, together with lower non-fuel costs recovered about 70 per cent of the extra fuel burden. Capacity fell 11 per cent year on year in the second quarter, and AirAsia plans a reduction of 20 to 25 per cent in the third.

The latest report contrasts with Fernandes's position last month. After the government had asked Malaysia Airlines and Batik Air whether they could absorb AirAsia's domestic market share, AirAsia shares fell as much as 21 per cent, and on September 18 he told a press conference that the airline did not need a rescue or a bailout.

The stakes extend beyond one airline. AirAsia carries about 60 per cent of Malaysia's domestic aviation market and employs 26,000 people, and the government is concerned about the effect on air connectivity, tourism and state-linked Malaysia Airports Holdings.

What to watch: whether the finance ministry confirms any conditions attached to backing for the fundraising, and whether the $1bn raise closes between December and February as Fernandes expects.