What Is Next For AirAsia Berhad?

2015 was a tough year for Malaysia-based low-cost carrier AirAsia Berhad (KLSE: 5099.KL).

In the middle of that year, a negative report on the company surfaced, sending its share price to less than RM1.00 from a high of over RM3.00.

To help address some of the issues raised in the report, the company had recently completed a private placement to its main shareholders, Tan Sri Tony Fernandes and Datuk Kamarudin Meranun. The placement reinforces the commitment that the main shareholders have toward AirAsia and also helped improve the airline’s balance sheet.

The placement raised RM1.0 billion for AirAsia. Before the placement, the company had RM13.0 billion in total debt and a net debt to equity ratio of around 250%. In contrast, Singapore Airlines Ltd (SGX: C6L) was in a net cash position in its most recent quarter.

The worst seems to be over for Air Asia.

The expectations for an improvement in AirAsia’s operations – mainly due to the low oil price environment – are high. There are also talks of AirAsia planning to consolidate all of its myriad business interests in Southeast Asia.

Currently, apart from its operations in Malaysia, AirAsia only owns minority stakes in the operations outside its home country. What does it all mean for the company if all these plans are to come to fruition?

More and more

If the company can indeed consolidate its business, it would mean that AirAsia can better control its operations and steer every entity under its banner in the direction that it wants. But, given that the airlines industry has political-links, a consolidation may not come easy.

It is also no secret that AirAsia has a mountain of debt on its balance sheet. If it wants to bring all its Southeast Asian businesses together, AirAsia would require capital to pay off its partners. Does it mean there will be more debt to come and/or the issuance of yet more shares? Each would have different implications for shareholders.

Foolish Summary

AirAsia has changed the landscape of air travel here in Southeast Asia. Since its rebirth in 2001 with just two aircraft, the company has helped boost the airline and tourism industry over the past 15 years.

Yet, that growth has not come cheap – the company has been borrowing heavily. In order for AirAsia to continue its second leg of growth in the region, must it stretch its balance sheet even more?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns shares in AirAsia Berhad.