News Flash: AirAsia received Receives Approval from Danajamin for RM500 million Facility. Is this a positive news for AirAsia?
Background on AirAsia New Business Development
AirAsia is building Super apps.
A super app is an app that allows users to have access to several services in only one single app. Because of the high traffic in AirAsia Apps, AirAsia decided to utilise all the traffic by turning a low-cost airline booking app into a one-stop solution for many services, from travel bookings to ride hailing, food delivery, and etc. Besides, AirAsia is also developing its fintech unit, which is also known as BigPay that is focusing on becoming a digital bank in Malaysia. BigPay is very well known for its remittance services and also for its good currency exchanges rates.
We can see that instead of focusing on becoming an aviation company, AirAsia is trying to rebrand itself as a technology company. The story of AirAsia sounds great and it excited a lot of investors, including myself. However, I do believe AirAsia has a big challenge lying ahead if it wants to aggressively expand its ride-hailing and food delivery business.
Ride-Hailing and Food Delivery is a Cash Burning Business
If we look at the Ride-Hailing and Food Delivery businesses around the world, none of them are profitable, with the exception of MeiTuan, which was once profitable in its Food Delivery business.
AirAsia needs to raise more capital if they want to achieve success in Food Delivery and Ride-Hailing Business.
AirAsia required a lot of funding in order to continue expanding its market share in both ride-hailing companies and food delivery companies. Because none of these companies were able to grow without new funding, as they are unable to achieve profitability during their early days. Thus, shareholders of AirAsia who expect them to grow their food delivery and ride-hailing businesses should be prepared for shareholder dilution as they need to issue more shares in order to raise cash to grow.
When we look at the number one ride-hailing and food delivery company in Southeast Asia, they have raised a total of $12.5 Billion dollars in all their funding rounds to be able to grow to today’s size.
So how things will end up if AirAsia still decided to compete in this industry and will it exhaust out the Guaranteed Danajamin worth RM500 million
This addition Danajamin will add more liability to AirAsia.
The biggest Challenge for AirAsia currently, its Balance Sheets
The biggest challenge for AirAsia currently is that they have to face many competitors in the industry, but they also do not have the right balance sheets to expand aggressively in this market. We can see that in the latest quarter of AirAsia Q2 results, the company currently has only RM 253,612 thousand in cash and has a total of RM 14,038,299 debt on its balance sheets. To make it worse, they have RM 5,165,554 of short-term debt that they have to repay in a one-year time frame. Lease Liabilities have to be accounted as debt in AirAsia’s case because they have sold most of their aircraft and decided to lease back the aeroplanes so that they can have a light asset business model which they can leverage and expand more aggressively in the aviation market. However, this comes with a cost which they have to pay their lease to the leaser on a monthly or yearly basis, even during hard times like a pandemic.