Financial Analysis of

AirAsia, Malaysian Airlines and Singapore Airlines

Course:
Corporate Finance
Course Code:
FIN6257
Lecturer:

Asrul Dahari
International Islamic University Malaysia
Graduate School of Management

www.canadean-winesandspirits.com
April 2013

Authors:

Athar Mazhar

G1126319
Mirza Zia

G1213229
Naeem Nasser

G1139591

Yang Yan Li
G1211126

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.
5.
6.
7.
8.
9.

Dividend Policy..........................................................................................23
Capital Structure .......................................................................................25
Cost of Capital ...........................................................................................28
Fair Price Valuation ...................................................................................31
Glossary .....................................................................................................35
Bibliography ..............................................................................................36

Contents

Table of Contents

Figure 1: Asian Airlines Revenues (MYR billion), 20072011 ...................................................................................... 12

Figure 2: Asian Airlines Operating Profit (MYR million), 20072011 ............................................................................ 12
Figure 3: Asian Airlines Net Profit (MYR million), 20072011 ...................................................................................... 13
Figure 4: AirAsia, Capital Structure, 20072011 ............................................................................................................. 25
Figure 5: Malaysian Airlines, Capital Structure, 20072011 ........................................................................................... 26
Figure 6: Singapore Airlines, Capital Structure, 20072011 ........................................................................................... 27
Figure 7: AirAsia Stock Price, 20072011 ...................................................................................................................... 31
Figure 8: Malaysian Airlines Stock Price, 20072011 ..................................................................................................... 32
Figure 9: Singapore Airlines Stock Price, 20072011 ..................................................................................................... 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

Contents

List of Figures

Introduction

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

Introduction

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

Introduction

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 nations 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.

Introduction

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

AirAsia Japan

AirAsia Philippines

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 Worlds 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

Introduction

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.

Introduction

1.2.2

Malaysian Airlines

Table 3: Malaysian Airlines, Key Facts (FY2011)

Key Facts
Headquarters

Employees
Founded
Total Revenues

Administration Building 1 , 3rd Floor, MAS

Complex A, Sultan Abdul Aziz Shah
Airport,47200 Subang, Selangor Darul
Ehsan, Malaysia
20,477
1937
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 groups 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.

Introduction

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:

Smaller yet profitable network

Win back customers

Relentless cost focus

Keep it simple

Bridge the funding gap

Game Changers: Beyond the recovery, the airline plans to pursue a series of game changers
that will overhaul the airlines business model and sustain performance. These strategic
initiatives include:
o

Launch of a new regional premium airline

Introduction

Alliances and partnerships

Collaboration with AirAsia

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

Continuous operational improvement

Winning organization

Introduction

1.2.3

Singapore Airlines

Table 4: Singapore Airlines, Key Facts (FY2011)

Key Facts
Headquarters

Employees
Founded
Total Revenues

Airline House, 25 Airline Road, Singapore

819829
13,893
1937
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 groups 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

Introduction

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 worlds 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 worlds 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.

10

2.1

Performance Review

2. Performance Review
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 20072011, 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 20072011 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.

11

Performance Review

Figure 1: Asian Airlines Revenues (MYR billion), 20072011

AirAsia

36.1
13.7

34.2

4.5

13.0
3.9

11.3

3.1

1.6

2.6

14.7

15.0

30.7

36.3

37.6

REVENUES, 2011

Malaysian Airlines

Singapore Airlines

Source: Annual Reports

Figure 2: Asian Airlines Operating Profit (MYR million), 20072011

694.3

1,162.5

100.2

1,067.0

152.7

913.0

Malaysian Airlines

Singapore Airlines

-2,584.3

AirAsia

-682.9

-352.0

270.9

828.3

219.0

2,122.0

2,993.6

4,830.3

OPERATING PROFIT

Source: Annual Reports

12

Performance Review

Figure 3: Asian Airlines Net Profit (MYR million), 20072011

2008

AirAsia

Malaysian Airlines

2010

Singapore Airlines

864.3

555.3

237.3

1,061.4

521.4

522.9

506.0

2009

2011

-2,521.3

-496.0

2007

271.8

852.7

426.0

2,492.8

2,571.4

4,659.5

NET PROFIT

Source: Annual Reports

13

Operating Performance

Performance Review

2.2

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 20072011 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.

14

Performance Review

Table 5: Operating Statistics Peer Review, 2011

AirAsia

Malaysian
Airlines

Singapore
Airlines

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

Operating Indicators

Passengers carried
(million)

Legend

AirAsia

Malaysian Airlines

Five Year Trend vs. 2011

Average

Singapore Airlines

Source: Annual report, company website

15

Ratio Analysis

3. Ratio Analysis
3.1

Profitability Ratios

Profitability ratios measure a companys 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%

20.0%

15.0%
10.0%
5.0%

0.0%
-5.0%

2007

2008

2009

2010

2011

-10.0%
-15.0%

2010

8.6%

2.2%

4.5%

2011

4.1%

-20.2%

1.4%

-20.0%
-25.0%
AirAsia

Malaysian Airlines

Singapore Airlines

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 ROAs, standing at 2.4% and 4.1% respectively. Singapore Airlines
has been able to maintain a positive ROA for the entire 20072011 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.

16

Ratio Analysis

3.1.2

Return on Equity

Table 7: Return on Equity Peer Analysis (FY2011)

Year

AirAsia

Malaysian
Airlines

Singapore
Airlines

60.0%

40.0%
20.0%

2007

34.5%

29.3%

13.6%

2008

-30.4%

6.0%

7.3%

2009

24.0%

19.9%

1.6%

-60.0%

7.9%

-100.0%

0.0%

-20.0%

2007

2008

2009

2010

2011

-40.0%

-80.0%

2010

33.9%

11.1%

-120.0%

2011

14.5%

-110.5%

2.5%

AirAsia

Malaysian Airlines

Singapore Airlines

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 AirAsias 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.

17

Ratio Analysis

3.1.1

Operating Margin

Table 8: Operating Margin Peer Analysis (FY2011)

Year
2007

AirAsia
17.4%

Malaysian
Airlines

Singapore
Airlines

5.6%

13.3%

40.0%
30.0%
20.0%

2008

-13.4%

1.8%

5.6%

2009

29.1%

-6.0%

0.5%

2010

27.0%

0.8%

8.8%

10.0%
0.0%

-10.0%

2007

2008

2009

2010

2011

-20.0%
-30.0%

2011

25.9%

-18.9%

1.9%

AirAsia

Malaysian Airlines

Singapore Airlines

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 firms 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 20072011 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%.

18

Ratio Analysis

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%

40.0%
30.0%

2008

-18.8%

1.8%

6.6%

20.0%
10.0%

2009

16.2%

4.6%

1.7%

0.0%

-10.0%

2010

26.9%

1.8%

7.5%

2007

2008

2009

2010

2011

-20.0%
-30.0%

2011

12.4%

-18.5%

2.4%

AirAsia

Malaysian Airlines

Singapore Airlines

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.

19

Ratio Analysis

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

2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0

2007

2008
AirAsia

2009

Malaysian Airlines

2010

2011

Singapore Airlines

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

1.6
1.4
1.2
1.0
0.8

2011

1.01

0.25

1.27

0.6
0.4
0.2
0.0

2007

2008
AirAsia

2009

Malaysian Airlines

2010

2011

Singapore Airlines

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 firms cash position
during times of economic downturns becomes extremely risky. The firm, in 2008, held an extremely

20

Ratio Analysis

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

16.0
14.0
12.0

2011

1.92

5.36

10.0
8.0
6.0
4.0

2.0
0.0

2007
AirAsia

0.08

2008

2009

Malaysian Airlines

2010

2011

Singapore Airlines

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

4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00

2007
AirAsia

2008

2009

Malaysian Airlines

2010

2011

Singapore Airlines

Source: Annual report

21

Ratio Analysis

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%

0.80
0.70
0.60

2011

56%

45%

5%

0.50
0.40
0.30
0.20

0.10
0.00

2007
AirAsia

2008

2009

Malaysian Airlines

2010

2011

Singapore Airlines

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.

22

Dividend Policy

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
20072011 period.

4.1.1

Singapore Airlines

Singapore Airlines bucked the trend again, and has announced dividends every year since 2008. For
the fiscal year 201112, the firm announced an ordinary dividend per share of 20 cents.

23

Dividend Policy

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)

Price-Book Value
Last Total Dividend Paid

SGD10.87
0.98
20.0 cents

P/E Ratio

38.06

Dividend Yield

1.8%

Source: Annual report

24

Capital Structure

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, 20072011
100%

90%

22%

22%

80%

70%

41%
52%

60%

60%
50%
40%

78%

78%

30%
20%

59%
48%

40%

10%

0%
2007

2008
Borrowings

2009

Shareholders Equity

2010

2011

Preference Shares

Source: Annual Reports

25

Capital Structure

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, 20072011
100%

0.4%

0.3%

0.4%

0.2%

0.2%
16%

90%

23%

80%
49%

70%
60%

73%

75%

50%
84%

40%

76%

30%
51%
20%
10%

27%

24%

2007

2008

0%

Borrowings

2009
Shareholders Equity

2010

2011

Preference Shares

Source: Annual Reports

26

Capital Structure

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, 20072011
100%

3.2%

5.5%

1.8%

2.7%

3.3%

90%
80%

70%
60%
50%

86%

77%

79%
89%

85%

40%

30%
20%
10%
11%

18%

18%
10%

12%

0%
2007

2008
Borrowings

2009
Shareholders Equity

2010

2011

Preference Shares

Source: Annual Reports

27

Cost of Capital

6. Cost of Capital
6.1.1

Cost of Capital Computation

Table 16: Cost of Capital Peer Analysis(FY2011)

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%

15.50%

48.1%

4.30%

51.9%

9.67%

1.34

25%

Company

AirAsia
Note:

Of the three airlines in the peer group, Malaysian Airlines has not paid dividend during the 20072011, 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
5065% debt and rest is equity.

28

Cost of Capital

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 AirAsias 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 AirAsias capital structure 51.9% debt, and 48.1% equity, we can say financial
leverage is close to the industry average of 5065% 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

29

Cost of Capital

receivables totalled 1.4B MYR, which, at the current sales rate provides a Days Receivables Outstanding
of 88.22.

30

7.1.1

Fair Price Valuation

7. Fair Price Valuation

AirAsia

Closing price as of April 1, 2013 MYR2.77

Figure 7: AirAsia Stock Price, 20072011

4.5
4
3.5
3
2.5
2
1.5
1
0.5
0

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.

31

Fair Price Valuation

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, 20072011
7
6

5
4
3
2

1
0
1-Jan-07

1-Jan-08

1-Jan-09

1-Jan-10

1-Jan-11

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

32

Fair Price Valuation

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, 20072011
25

20

15

10

0
2-Apr-07

2-Apr-08

2-Apr-09

2-Apr-10

2-Apr-11

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

33

Fair Price Valuation

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.

34

Glossary

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 nonpaying 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.

35

Bibliography

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/aboutus/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

36