Joining the dots

AirAsia's minority structure clouds crash impact

AirAsia is sharing the pain of its minority investments. The Malaysian budget carrier owns just 49 per cent of the Indonesian unit that was struck by tragedy when one of its planes crashed into the Java Sea on December 28. AirAsia shares have since lost more than 15 per cent of their value. It's a reminder that the group's particular business model can't entirely contain the financial pain.

Apart from Indonesia, AirAsia operates a series of minority-owned affiliates in Thailand, the Philippines and India. This allows it to get around foreign ownership rules. Accounting rules also partly insulate the parent from profit fluctuations in Indonesia. Although the unit has recently returned to the black, AirAsia won't book its share of any gains until earnings exceed the division's accumulated losses.

Yet AirAsia isn't completely protected. Leasing aircraft to its Indonesian unit accounted for more than 6 per cent of the Malaysian group's revenue in the quarter that ended September 30. The carrier also lends money to its offshoots. AirAsia's associates owed it 2.1 billion Malaysian ringgit ($600 million) at the end of the third quarter - equivalent to more than 30 per cent of the listed parent's post-crash market value.

The shared brand also means the disaster may affect ticket sales for all AirAsia entities in the coming quarters. Last year, twin tragedies just months apart dented passenger numbers for Malaysia Airlines and accelerated a radical restructuring of the already loss-making carrier. Though AirAsia is profitable its Thai unit and its budget long haul affiliate AirAsia X are not.

Local authorities have suspended AirAsia's Indonesian unit on the affected Surabaya-Singapore route, saying it did not have permission to fly on the day the ill-fated flight took off. The company could even lose its local licence. Though such an extreme sanction seems unlikely, it's a reminder of the risks facing the unit that AirAsia CEO Tony Fernandes last year described as the company's "main growth story".

AirAsia's woes come at a time when cheaper oil is improving operating conditions for carriers in South East Asia's overcrowded skies. On a multiple of 8.5 times analysts' consensus earnings forecasts for the next twelve months, AirAsia shares look cheap compared with peers that trade on an average of 15.8 times. Nevertheless, the tragedy is a reminder that investors must first get comfortable with the airline's less than straightforward structure.