AirAsia X Berhad (AAX) Earnings Call Transcript & Summary

Good evening, and welcome to all to today's conference. You are now participating in AirAsia X Berhad's First Quarter 2020 Financial Results Briefing. [Operator Instructions] I will now hand over this session to Mr. Benyamin Ismail, the CEO of AirAsia X. Thank you, and over to you, sir.

Good evening, everybody. Thanks again for joining for the first quarter '20 results release. I think as you know, this is long overdue. I think for the last few months, most of the -- we've requested for a delay in terms of the release of the results because of COVID and the fact that a lot of the capability to finalize our final accounts was tough especially with the MCO for the first 2 months [ and see ] and with -- also EY and the auditors not being able to -- able to deliver some of the stuff. I think we have come to a landing at our Board meeting today. And today, again as usual, AirAsia's style of finishing with a bang with the first quarter results. So again thank you again for joining us on the -- just hours before your long weekend. Sorry about that. For first quarter '20, our revenue was down by 21%, mainly due to passenger carried, a total of 1.1 million passengers carried was 25% lower against last year. RASK was largely unchanged due to the reduced ASK capacity and scheduled flights revenue declined by 21% year-on-year, while ancillary including freight service shrunk 18% year-on-year MYR 221.9 million -- MYR 221 million. So the key point in that is I think these numbers, as you can see, a lot of the impact of COVID started happening towards the end of January. The load started to drop already from Jan, especially China was the first hit for us, especially in the 11 routes of AirAsia X was China. We started to reduce capacity quite a bit. But a lot of the capacity and impact of flying started to kick in slowly in Feb. And I think we made a coordinated decision in March to pretty much cease all operations and go into hibernation. And I thought we wanted earlier than I think that was a good decision on our side to do that. So again, these numbers, as you can see in first Q, I would say generally half of it will be impacted by COVID. ASK capacity down 21%, routes maintained where they are at 28%. We also terminated a few rationalization of routes towards the tail end of -- when the COVID was going to start. We canceled Tianjin, Lanzhou and Jaipur. On top of that, as I mentioned, passenger carried was a decline of 25% due to the slow demand, due to COVID. And of course, historically it is a low load factor for us was 74%. Usually, we're hovering about 80s to 81s so this is generally very low for us. In terms of RASK versus CASK. RASK was flat at year-on-year MYR 0.1344, lower revenue on the back of reduced capacity ASK. That has also, I think, contributed a lot from the first month in January where we were actually profitable. We were trending towards the right direction coming from a very tough 2019. 2019, January, we were probably making profit for Jan. And of course, COVID has happened. CASK, we remain fairly, fairly, fairly strong, increased by 16%, really mainly driven by maintenance costs, where the aircraft is going for servicing. But other than that, ex-fuel went up by about 25% to MYR 0.1018. But cost was slightly offset by lower staff costs, fuel expense and user charges at the back of lower flight frequency. But for Thailand, they also were also impacted quite a bit by COVID and also intense competition. Revenue, they recorded at USD 89.6 million, a decline of 29% year-on-year against USD 126.9 million versus first Q '19. ASK capacity was down 22% year-on-year. And load factor also was down fairly low at 77% as a lot of the demand, especially from Japan and China was quite impacted for them into this market due to COVID. Ancillary revenue, again, this is driven really by passengers moving forward, down again 18% just due to the reduction of passengers by 25%. But freight services revenue up 14%, especially during this period towards the tail end of March where we had a lot of humanitarian flights for freight, that has helped us quite a bit. In terms of priorities for 2020, is really, I think, it's been a tough hibernation for us. It's -- I think for -- as you can see in the U.S., a lot of the AirAsia X routes are pretty much still, still slow to open up. But I think the good side of AirAsia X is a lot of the routes that we fly to are considering the green kind of routes. Taipei is considered in the green. Korea is considered in the green. Japan is considered in the green. Australia is considered in the green, for now then. Everything else in China pretty much -- is pretty much back to pre-COVID days, but they just want to be more conservative in terms of how they grow. But really, I think we -- once these markets open, I think we will benefit quite a bit from it. But I think at the moment, what's been holding out is that, that's, I guess, is the SOPs in terms of different countries of bilateral SOPs. And we want to make sure that once leisure market has returned is only when we start. I think in terms of travel bubble where the business end is a bit tough for us, I think, as you know, business travel was -- it's fairly small and then we are on top of that. We're operating a larger fleet. So I think for us, we need to rely a lot on leisure market moving forward. So really, again, the priorities for 2020 is really trying to manage our cash flows, moving forward, where we're rescheduling a lot of and restructuring a lot of our payments with business partners and vendors, where discussions are going on. We're negotiating with the lease rates across all the entire fleet and also released maintenance reserves. I think the lessors as well have been very supportive as I think this is not just an airline-specific, it's a global pandemic in terms of the airline impact. A lot of the airlines are impacted at the moment, and generally, everybody, you can see from the results are impacted by COVID. We're trying to negotiate in terms of lessors to push for pay by the hour, user arrangement. Currently only pay when we fly instead of paying monthly lease rates and also renegotiations of all the airport charges across all stations as we go on. But I think life goes on as well during COVID. We've pretty much maintained all the station connectivity and we continued to supply medical supplies across the market, especially China. We are still operating cargo flights for key markets where we believe that's been a key contributor to Malaysia, which is examples like India, Australia, China, Japan. There are cargo flights are happening. We got an approval as well from CAAM to even put boxes on the seats just recently. So we're doing full-blown cargo, very [indiscernible]. We also have been doing a lot of repatriation flights fully paid by the government and also individuals, the likes of Iran, Italy, Vietnam, Laos and such and continue to go on as we speak. So that's really a business for us for the next few months for us. At the moment, I think in terms of the 24 aircrafts that we have, I would say about 20 aircraft are in long-term parking and only 4 is on standby for flying. But the good side of things is we started semi scheduled flights just recently for Hangzhou, but that's pretty much taken up by charters with where they pretty much covered our costs. But the good thing is scheduled flight into Hangzhou once a week, which is great. I think that -- to show that I think we were slowly -- flights going into Hangzhou is full, coming back is empty, but I think the key focus is that the cost of that flight is covered by their charterers as well. Network plan, I think for this year -- for next year, we will announce a few route rationalization. Here, AirAsia announced cancellations of Ahmedabad, but it's really not -- it's just temporary suspensions. But really, I think what we want to focus is not to grow too much of the fleet going forward and operate [indiscernible]. We want to gradually grow the market. So routes like Narita, Okinawa, Gold Coast, Ahmedabad, we will temporarily suspend until the market improves. But I think the focus is to go back to cities, where it's the capital cities, where profit-making like your Hanedas and your Osakas and your Melbournes and your Perths, your Sydneys and all that. The only 2 markets that potentially will be a bit slow start, I would see probably Jeddah and India, where I think COVID is firing up pretty quickly over there and pretty much that. So again, moving forward, we are still continuing our engagement with all the different embassies, I've been busy as well meeting the ambassadors to see how we can move forward in terms of assisting MOH, Department of Health in trying to find a common platform where we both can benefit from travel. I think the SOPs now is very tight. But I guess, the rationale for that is to ensure that there's no infections and further infections. But I think to move forward, we need to really make sure that traveling is easy for people and not a hindrance in terms of doing 7 swab tests before you fly and 7 swab tests before you come back. So this kind of, kind of things that we have to really have to keep continuing and that also -- and I think the good thing is the airlines are involved in those dialogues together with the government. And I think in terms of fuel hedging, we're hedged at $61.4 versus 2020. And basically, 70% of our Brent fuel hedging contracts have been restructured, in one form or the other, basically being pushed towards the back end moving forward. So really, I think for AirAsia X, we will continue to hibernate for the meantime. And if there are markets that are opening anytime soon, the decision by the management and the Board is to ensure that those routes will not be a burden to the cash flows and cash impact. It has to be ensured that those routes will be back to pre-COVID days and ensure that people will fly. Again, we will not -- again, any frequency as well will be based on a gradual increase once we start. And that's pretty much what's going to happen. And I think for us is, for the meantime, we're working with all the local banks as well in terms of fundraising, together with Danajamin, and really I see pretty much that process is ongoing as we speak. So that's pretty much all my thoughts for AirAsia X. Let's just open it up for questions.

[Operator Instructions] Your first question is from Mr. Raymond Yap from CIMB.

I just have a couple of questions. I'll just start off with the most mundane ones. So if you look at Page 6 and Note 17 of the quarter release, it says that the [ AAX ] reported a net loss of MYR 804,000. I just wanted to double confirm that number because if we go to Note 9 on Page 11, the number doesn't look quite the same. It says there that [indiscernible] result of MYR 188 million. So just wanted to double-check on that. Let's report that out first.

Raymond, yes, it's Andrew here. We'll check that point, why don't they correlate.

Yes. Okay. So it's the numbers on Note 9, Page 11.

Yes, I know. I know what you're referring to, actually. Yes. Let me look at it and I'll let you know.

Okay. Because the losses on Note 9 look tremendously large for Indonesia, given that it only has a handful of aircraft, 2 aircraft to be precise. So there might be something wrong on Note #9. Okay. So I just move on to the next question -- it's the -- I know you mentioned in the slide deck your plan for bank loans. What's the progress there and did you manage to get Danajamin to agree to guarantee your borrowings as well?

Well, I think in terms of the Danajamin basically, is subject to us securing local bankers. So that discussion is pretty much ongoing. So I think we are confident that, that will proceed. And once that is confirmed, then we will present that deal to Danajamin and go ahead. So I think that's similar to where AirAsia is as well. So -- yes.

So then, you're negotiating with the bank loan now. And once you get the bank provision then you'll go to Danajamin and then submit the guarantee. Is that correct?

Yes. Yes. Correct. Correct.

Okay. But has Danajamin agreed in principle to guarantee 80% of the loan or have they not?

The government has agreed, so Danajamin is basically -- we're still [indiscernible] on the back end on the terms and conditions, similar but that one has been discussed as a group, not just AirAsia X but also AirAsia and also as the industry-wide thing in terms of determining conditions of the Danajamin loan. But on the side of that, I'm just focused on making sure that we secure that financing on the local side of things.

Okay. I think for AirAsia, the -- to say publicly that they're looking potentially to raise about MYR 1 billion from the debt markets. Are you able to confirm or give us some guidance as to the amount that you are looking to raise?

No. I mean, we have -- we -- so what's going to happen is we have an amount up to, which is not as big as that. We don't need that much. But what we're doing is we're doing a lot of reorganization within the business in terms of our cost structure, renegotiation with the lessors and all that. So that process is going. And basically, that will shape down quite a bit of our cost structure in the -- once we finalize that. The one that is finalized, that really will kind of depict how much cash we need moving forward because at the end of the day, the market is where the market is valued. Your current lease rates are very low. When in terms of the market, there's overplus of supply. So we're trying to renegotiate all that with the lessor. So once that has happened, the cost comes down. Potentially, then the funding requirements towards the banks may not be as much and really that bank or the line that we'll have is more as a secure net for us to grow in the next 2 to 3 years. So that for sure, it's not MYR 1 billion for us. So for sure, it's about half of that. So -- but I think for us, that's the key focus for us.

Okay. So, I noticed that your share [indiscernible] has turned to negative territory. What are the implications of that to your listing status?

Raymond, I'm sure you'll probably see it as well. But there's PN17 announcement that has gone out. So the company is now -- has made that PN17 announcement. But of course, there are release measures which have been announced by closer relation to that PN 17. And actually, to be honest with you, if you look at the negative equity in Q1, the vast majority of it, and if you look at the balance sheet, we have a negative equity of MYR 864 million. But within that, you can see MYR 427 million of that relates to the fair value of the derivatives. And actually as well, you can see from the state of the income statement that between the end of December and the end of Q1, there is an unrealized FX loss of MYR 392 million. So of that negative or the deficit of MYR 864 million, MYR 819 million of that relates to fair value of fuel hedges and unrealized FX. So that is like a significant chunk of the deficit on the reserve. Unfortunately now, because we have MFRS 16, we will have a lot of unrealized FX cycling through the income statement every quarter.