KUALA LUMPUR • AirAsia is raising RM1 billion (S$348 million) by selling stock to a company controlled by its founders as the continent's biggest budget airline raises cash to finance aircraft purchase and pare down debt.

The airline will issue 559 million new shares at RM1.84 apiece to Tune Live, equally owned by chief executive officer Tony Fernandes and chairman Kamarudin Meranun, AirAsia said in a statement to the Kuala Lumpur Stock Exchange yesterday. The sale represents 16.7 per cent of the enlarged capital of the Malaysia-based carrier.

Mr Fernandes and Mr Kamarudin control another company Tune Air, which is the largest shareholder of the airline at 18.9 per cent. That holding company's stake in AirAsia will decline to 15.7 per cent after the share sale.

AirAsia is the second-best-performing stock on the MSCI Asia Pacific Index this year amid speculation that its key shareholders could step in to strengthen its finances or take the company private.

Mounting competition from Malaysia Airlines and low-cost carriers led to a drop in ticket prices in the region and AirAsia's stock fell to its lowest in August last year.

South-east Asian airlines, particularly budget carriers, have suffered from a price war as they jostle for market share.

Short-haul yields at regional carriers will continue to be squeezed this year as airlines add capacity, Bloomberg Intelligence said last month.

Mr Fernandes assumed RM40 million of debt when he bought AirAsia for RM1 in December 2001, according to the airline's website. The carrier had two old aircraft when he took charge. Prior to running AirAsia, he was an employee at the Virgin Group.

AirAsia now has more than 100 planes, with operations spanning India, the Philippines, Indonesia and Thailand. The company, which plans to start flights at its Japan venture this year, is one of the biggest customers for Airbus Group's narrow-body aircraft.

BLOOMBERG