How AirAsia Bhd cashed in even as JV with Tatas flew into the red

AirAsia India is struggling to achieve a turnaround, having posted profits only for a single quarter since it began operations six years ago.

However, AirAsia Berhad, a joint venture partner in the airline, seems to have recovered its entire investment in it through higher leasing charges and royalty payments. On the other hand, Tata Sons, the other JV partner with a 51 per cent stake, has so far made no money out of it. Each of the two partners had invested ₹750 crore as equity. The total equity injection into the airline is ₹1,500 crore while the authorised capital of the JV is ₹2,500 crore.

AirAsia Berhad has received cash flows of about ₹1,055 crore from the Indian venture as lease rentals paid to one of its associate companies and for a host of other services and charges such as brand royalty. Sources said AirAsia India is learnt to have paid a higher rent than prevailing market rates.

A questionnaire sent to AirAsia Berhad remained unanswered.

Lease rentals

The lease rentals were being paid to an associate of AirAsia Berhad, leasing firm Asia Aviation Capital, till 2018-19, after which the subsidiary was sold off. The aircraft were leased to AirAsia’s ventures by the leasing firm and the revenue recorded by AirAsia Berhad.

For the quarter ended March 2020, AirAsia India posted a total loss of ₹334.6 crore, against ₹152.17 crore loss for the same period the previous year.

The company attributed the widening of losses to higher operating expenses after the induction of 10 more aircraft.

AirAsia Berhad itself has been going through a turbulent time, with its CEO, Tony Fernandes, stating that there is always a possibility of the Indian venture being let go as India is a peripheral market for the airline. In a call with analysts, Fernandes said while the market is currently growing and committed, “we would never say that we would never exit India.”

Under probe

According to a Reuters report, Hong-Kong-based analyst firm GMT Research had, in a recent note, questioned AirAsia Berhad’s accounting practices, accusing it of using transactions with associate companies to boost its earnings.

AirAsia India, meanwhile, is under probe for playing a part in not adhering to the 5/20 rule, which prohibits domestic airlines from flying international routes if they have not been operational for a minimum of five years and do not have at least 20 aircraft in their fleet.

Aviation consultancy firm CAPA, in a July 14 report, quoted AirAsia’s auditor EY as saying it had raised “significant uncertainties with respect to the company’s ability to continue as a going concern”.

Carrying a relatively large debt burden when the year began, the grounding of a large part of its fleet (in early April, almost the entire fleet was grounded) and the closure of international boundaries for what is largely a global low-cost carrier, Air Asia has been left with a high cost burden and reduced opportunity to generate revenues, CAPA said.

AirAsia India, meanwhile, has not made any plans to replace its A320s with the more fuel-efficient A320-neos, as it believes that oil prices will stay low for a while and, hence, there would be limited gains from a 15 per cent fuel saving in a low oil price environment.