Sting is in the air?

We will let the boss of Khazanah say anything at the moment and have his 5 minutes of fame. Everyone would be forgiven to think; this is the last word on the issue because the boss of Khazanah says the whatever you called it of the deal between Mas-Air Asia is defensible. Among other things he says, this is not a bail out of MAS.

We will take him on these issues.

The first questions we want to ask, why is this deal worked out in the first place? Why AA? It’s operating at how many times its PE? 40 times? Looking at its numbers, the high PE could mean its stocks are overpriced. That  may mean some boys are cooking up the number to set up the market and make killings. Maybe. 

If the reason as Dr Mahathir says, MAS can learn from Air Asia on ways to cut costs, you mean those damn exercise carried out by Idris “al Dunlap” Jala wasn’t enough? Why don’t we learn from Singapore Airlines or Qatar Airlines? oh… we want to learn from our home grown talent will be the likely answer.

I know this is a bad deal because Dr Mahathir said so. Dr Mahathir always say something when he actually mean the reverse.

Yeah baby, what can we learn from AA?

How about the home grown talent’s records then?  Well, let’s see. As of the 1st Quarter of 2011, Air Asia (AA) debts amounted to 7.7 billion with cash balances amounting to 1.7 billion. This part doesn’t require teaching for MAS. Its executives are renowned masters.

Let’s see further. Hmm, in August 2010. AA announced a deferment of their proposed aircraft purchases but sometime in June 2011 they reversed their decision and proceeded to place an order for an additional 200 new aircrafts at the Paris Air Show. No big deal, we can order as many as we want. Possibly the commissions earned from the purchases dwarf the one earned from the Scorpene submarines which are not submersible.

As of 31 March 2011, we can see from its 1st Quarter report, AA’s capital commitments stood at RM 19 billion. With the above announcement, an additional RM 54 billion will be added as Capital Commitments. The proposed Capital Commitments of roughly 74 billion will be spread over a 15 year period ending 2026.

In other words, AA has to increase its earnings to an average of 5 billion per annum to meet its future dues. From 2006 to 2010. AA’s revenue grew by 10 fold from 110 million to roughly 1.1 billion, an average growth of RM 200 million per annum.   How will its reach 5 billion? We will see in the coming months when they rationalize all the routes and what not.

Its cash reserves rose 6 fold from approximately 300 million to 1.7 billion but its debts skyrocketed from 1.05 billion in 2006 to 7.7 billion in 2010, an increase of 700%.

Surely this looks like a debt burden that is spiraling out of control. Spend baby spend.

This deal is signed, sealed and delivered at an onerous time. The world economy including Asia’s will be into another maelstrom and air travel will invariably be hit. So what can be done?

One, AA can cancel orders but contract penalties will be onerous. That option is no go and why does anyone want to forfeit commissions my man. Also, Tony is probably thinking along what Keynes said- when you are a big borrower, the banks are scared of you. So as a big borrower Tony feels that size does matter after all- it will shield him from foreclosure as banks will be leery of bearing heavy losses!

But also, a sizeable chunk of those loans are being held by Malaysian banks and in the worst case scenario, the government and the taxpayer will have to pick the tab to avert a financial meltdown cascading down the AA slope. So maybe what a blogger said about enriching AA on taxpayer’s money is true after all.

Let me speak to some financial whizz kids to see the deal from a different perspective. No, I am not going to dignify one commentator stating that I am a racist for writing this article. If it were that Meranun chap inking this deal, I will wallop him the same. Who cares what race Tony is?