Malaysia’s AirAsia X Offers Creditors To Pay Just 0.5% Of Their $8.1 Billion Debt

Air Asia X, the Malaysian medium-longhaul subsidiary of Air Asia that was started by the companies founder Tony Fernandes has amassed a total of US$8.1 Billion in debt and is looking for a large scale debt relief.

According to media reports Air Asia X has offered creditors a settlement payment in exchange for a 99.95% haircut on all debt or in other words 0.5% payment of the outstanding amount.

The airlines fate will largely depend on a creditors meeting in November where those owed money by Air Asia X have to decide if they want to take up the offer or let the airline go down the path of bankruptcy and see what (if anything) will be left over to distribute to make them whole.

The task is massive as the company is seeking to “restructure” 33.65 billion ringgit ($8.1 billion) of liabilities which in their idea means to eliminate almost all of it and only pay half a penny on each dollar owed.

According to Reuters roughly half of this liability stems from 108 cancelled Airbus orders.

AirAsia X Bhd is proposing to pay just 0.5% of debt owed to each of its creditors and to terminate all existing contracts so that it can restructure 33.65 billion ringgit ($8.1 billion) of liabilities, a document seen by Reuters shows.

The Malaysian low-cost long-haul airline, a sister carrier to cash-strapped AirAsia Group Bhd, said in a stock exchange filing on Monday it had set a date of Nov. 12 for creditor meetings to vote on the restructuring proposal.

“To avoid a liquidation and to allow the airline to fly again, the only option is for AAX to undertake the proposed debt restructuring,” the airline said in a 127-page explanatory statement for the creditors meeting seen by Reuters.

Half of the total liability is the cost of terminating airplane orders from its largest creditor Airbus SE  for 78 A330neo widebodies and 30 A321neo narrowbodies, the document said.

AAX also proposed that if it were to garner more than 300 million ringgit ($72 million) in annual earnings before interest, tax, depreciation and amortisation, lease rentals and restructuring costs during its 2023-2026 financial years, all creditors except Airbus would be entitled to 20% of those earnings. …

The 0.5% of debt owed to each creditor will be paid from operating cash flow one year after the debt restructuring goes into effect, the airline said in the document.

AAX also said it is in negotiations with lessors of 29 planes and certain other creditors on commercial terms for continued or future business relationships. …

To gain approval for its proposal, AAX needs agreement from creditors holding at least 75% of the total debt value in each of three classes of creditors.

Airbus, which on its own forms one creditor class, declined to comment, citing the ongoing restructuring process. …

AirAsia this month reached a deal with Airbus to restructure an order for 362 narrowbody planes. It has also received approval from Malaysia’s only financial guarantee issuer for a loan of up to 500 million ringgit with an 80% government guarantee.

Debt stemming from cancelled orders of aircraft per contractual obligation is one thing but Airbus really didn’t delivery anything yet. Sure for them it’s lost business but Air Asia won’t be the only carrier who called them up to cancel orders. An airline that’s on the brink of bankruptcy doesn’t have the funds to pay for new planes. In that case a reduction of the obligations as proposed would make sense.

It’s unrealistic to expect that Airbus would get anywhere near the money owed through an ordinary bankruptcy process and subsequent liquidation which all parties involved know full well. Whatever happens here, Airbus will remain in business.

It’s bit different with creditors who already provided goods and services to the company such as medium and small businesses but the majority of creditors are big players. They know there is a risk getting themselves involved in the aviation industry and that there is an economic downturn that affects the industry every decade or so.

While Air Asia has been a pioneer and very successful in the short haul market in Asia, the long haul model of Air Asia X never really took off. Fares in Asia are pretty competitive even on full service airlines.

Even pre-Covid, Air Asia’s direct competitors Malaysia Airlines desolate financial situation and their constant bargain fares have put further pressure on the market ex Kuala Lumpur which is already a very low priced origin.

Who would want to book a ticket on a low cost carrier with lots of extra costs on the side when you can just book with a full service carrier that offers everything from a proper frequent flier program, elite benefits and for common passengers seat reservations and baggage allowance without a fee?

This begs the question if the business model and purpose of Air Asia X is still there. It makes very little sense to go through an extensive restructuring process for which other will have to pay. It’s probably better to spin off the X brand and let it go into liquidation while being able to concentrate on Air Asia, salvaging the main brand.

Conclusion

Air Asia X is in a rather hopeless financial position and unless most creditors agree to the carriers proposal of just 0.5% debt repayment the airline is heading for the big chopping block in the skies. It would be in good company with other carriers who succumbed to the economic impact of the pandemic but most of these who have ceased to fly already had years, if not decades of financial problems.

Air Asia has been riding high for a long time but then they started to open their own subsidiaries left and right in various South East Asian countries, many of which didn’t bring the expected results. The entry into the medium-long haul market was not the right fit for an airline that operates on a low cost, no frills principle. One can only hope they keep the main Air Asia brand going with an eye on what’ll happen to Malaysia Airlines in the long run.