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
Source: Annual report, company website
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)
Number of Aircraft 129
Average Fleet Age 12 years 3 months
Passengers Carried 17.05 million
Source: Annual report, company website
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)
Number of Aircraft 133
Average Fleet Age 6 years 2 months
Passengers Carried 20.18 million
Source: Annual report, company website
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
Source: Annual Reports
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
21
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
AirAsia Malaysian Airlines Singapore Airlines
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Figure 3: Asian Airlines – Net Profit (MYR million), 2007–2011
Source: Annual Reports
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
AirAsia Malaysian Airlines Singapore Airlines
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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
Source: Annual report, company website
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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
AirAsia Malaysian Airlines Singapore Airlines
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3.1.2 Return on Equity
Table 7: Return on Equity Peer Analysis (FY2011)
Year AirAsia Malaysian
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%
Source: Annual report
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
AirAsia Malaysian Airlines Singapore Airlines
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3.1.1 Operating Margin
Table 8: Operating Margin Peer Analysis (FY2011)
Year AirAsia Malaysian
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%
Source: Annual report
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
AirAsia Malaysian Airlines Singapore Airlines
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3.1.1 Net Margin
Table 9: Net Margin Peer Analysis (FY2011)
Year AirAsia Malaysian
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%
Source: Annual report
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
AirAsia Malaysian Airlines Singapore Airlines
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3.2 Liquidity Ratios
Table 10: Current Ratio Peer Analysis (FY2011)
Year AirAsia Malaysian
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
Source: Annual report
Table 11: Quick Ratio Peer Analysis (FY2011)
Year AirAsia Malaysian
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
Source: Annual report
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
AirAsia Malaysian Airlines Singapore Airlines
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2007 2008 2009 2010 2011
AirAsia Malaysian Airlines Singapore Airlines
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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)
Year AirAsia Malaysian
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
Source: Annual report
Table 13: Long Term Debt to Equity(FY2011)
Year AirAsia Malaysian
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
Source: Annual report
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
2007 2008 2009 2010 2011
AirAsia Malaysian Airlines Singapore Airlines
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
AirAsia Malaysian Airlines Singapore Airlines
22
Ratio
An
aly
sis
Table 14: Debt to Assets (FY2011)
Year AirAsia Malaysian
Airlines
Singapore
Airlines
2007 53% 9% 6%
2008 70% 14% 7%
2009 67% 27% 7%
2010 59% 30% 8%
2011 56% 45% 5%
Source: Annual report
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
AirAsia Malaysian Airlines Singapore Airlines
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.
4.1.1 Singapore Airlines
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%
Source: Annual report
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
Source: Annual Reports
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
5.1.2 Malaysian Airlines
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
Source: Annual Reports
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
Borrowings Shareholders Equity Preference Shares
27
Cap
ital S
truc
ture
5.1.3 Singapore Airlines
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
Source: Annual Reports
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
Borrowings Shareholders Equity Preference Shares
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
Source: Annual Reports
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.
7.1.2 Malaysian Airlines
Closing price as of April 1, 2013 – MYR0.755
Figure 8: Malaysian Airlines Stock Price, 2007–2011
Source: Annual Reports
EPS: -75.5 cents
Discount Rate: 7.48% (Bloomberg Country Premium)
Assumptions:
Expected annual growth: 195.745% (Bloomberg)
Growth Years: 3 years
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.
7.1.1 Singapore Airlines
Closing price as of April 1, 2013 – SGD10.88
Figure 9: Singapore Airlines Stock Price, 2007–2011
Source: Annual Reports
EPS: 28.3 cents
Discount Rate: 8.16% (Bloomberg Country Premium)
Assumptions:
Expected annual growth: 14.25% (Bloomberg)
Growth Years: 9 years
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.
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
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