AirAsia shares tumble after auditor warns future of airline in 'significant doubt'

AirAsia is in talks for joint ventures and collaborations that may result in additional investment. PHOTO: REUTERS

KUALA LUMPUR (BLOOMBERG, REUTERS) - AirAsia Group Bhd shares sank on Wednesday (July 8) after its auditor Ernst & Young said the carrier's ability to continue as a going concern may be in "significant doubt."

The budget airline lost 15 sen or 17.5 per cent to 70 sen at the close. Trading was halted on Wednesday until 2:30pm.

In a statement to the Kuala Lumpur stock exchange on Wednesday, Ernst & Young said AirAsia's current liabilities already exceeded its current assets by RM1.84 billion (S$600 million) at the end of 2019, a year when it posted a RM283 million net loss. That was before the coronavirus crisis, which has further hit the carrier's financial performance and cash flow.

The slump in air travel and poor financial performance "indicate existence of material uncertainties that may cast significant doubt on the Group's and the Company's ability to continue as a going concern," Ernst & Young said in its unqualified audit opinion statement.

In response, AirAsia said in an exchange filing on Wednesday that Ernst & Young's statement and a decline in shareholder equity triggered the criteria for a so-called Practice Note 17, which applies to financially distressed companies. However, the airline won't be classified as PN17 as the Malaysian exchange suspended application of the status from April through June next year as part of relief measures in light of the coronavirus pandemic.

Covid-19 plunged the aviation industry globally into crisis as border controls and health concerns vaporized demand for air travel. AirAsia on Monday reported a record quarterly loss of RM803.8 million. It wasn't until late March and the end of the quarter that the budget airline suspended flights.

"This is by far the biggest challenge we have faced since we began in 2001," AirAsia's chief executive officer Tony Fernandes said in a statement on Monday.

He said the carrier is in talks for joint-ventures and collaborations that may result in additional investment, and it has also applied for bank loans and is weighing proposals to raise capital.

Last month, South Korean conglomerate SK Group said it was reviewing a proposal to buy a small stake in the airline. In May, AirAsia sent a memo to Malaysian banks seeking to borrow RM1 billion, people familiar with the matter said at the time.

AirAsia needs at least RM2 billion this year to stay afloat, according to K. Ajith, an aviation analyst at UOB Kay Hian in Singapore.

"There's not a lot of options, and the best one could be the government stepping in but seeking a rights offering by the company in exchange," he said.

Finance Minister Tengku Zafrul Aziz told Reuters in June that the ministry had not provided financial aid to any of the country's airlines and that the airlines have said they "can do okay, on their own."

Despite the warnings, there are signs of improvement with the gradual lifting of restrictions on interstate travel and domestic tourism activities in the countries where AirAsia and its units operate, Ernst & Young said.

The airline's recovery depends on government policies on travel, discussions with financial institutions and investors and its ability to address concerns of its liabilities, the auditor said.

Elsewhere in the region, Thai Airways International and Virgin Australia Holdings have entered bankruptcy protection due to their inability to pay creditors.

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