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The Edge Financial Daily recently reported that AirAsia X Bhd (AAX:MK) might be facing some financial problem. According to the report it seems that AirAsia X staff were informed that payment of their wages and allowances would be on a staggered basis for the month of October.

 

The circular stated that basic salary, fixed allowance, productivity allowance and overtime would be paid on Oct 24, while variable allowances such as flying allowance, sector allowance, night stop allowance and commission would be paid on Oct 31.”

The circular spread panic across shareholders of the company, the share price of the company fell 6.04% to RM0.70 per share on Tuesday. The stock is down more than 65% from its IPO price of RM 1.25 per share. Is this issue only the surface of more problem to come? Or is it a possible buying opportunity for investors?

 

The Problems

AirAsia X has been losing money in operationally and its cash position has also reduced significantly since the end of 2013 to RM 144.7 million last quarter. The weaken balance sheet might make it hard for the company to raise debt or equity to finance its purchase of new aircrafts and opening new routes. If the company is not able to solve this fundamental issue of financing, then it might fall into a vicious cycle of self-destruction. This might happen when it could not improve its balance sheet, leading to failure to raise more debt, leading to failure to expand, leading to failure to grow cash flow, leading to worse balance sheet and the problem escalate.

 

The Good

In view of the situation, Airasia Group CEO, Tan Sri Tony Fernandes will be taking on a more prominent role in the management of AirAsia X. Given his reputation, he might have a greater chance of turning the company around. Furthermore, AirAsia X is the pioneer of opening up the long-haul budget carrier model. Such new innovation is risky, but will be highly rewarding if successful. Therefore, investors looking at this company should understand the situation and not view the company as a safe and stable growth company but rather one with huge growth potential but also with multiple risk factors.

 

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All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and does not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned above.

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