KUALA LUMPUR (Oct 25): AirAsia X Bhd’s (AAX) bid to lift itself out of Practice Note 17 (PN17) status was rejected by Bursa Securities, as the regulator set out additional requirements for the medium-haul, low-cost airline, according to sources.

Sources said for one, the regulator wants the airline to define what is — or what isn’t — a one-off item following differences of opinion.

“Aside from ticket sales, buying and selling of aircraft, for instance, is a normal income stream for airlines. They are not extraordinary items.

“Likewise, provisions for travel vouchers that are distributed to passengers and travel agents are considered normal business from an airline perspective, such that there will be a write back if they are not redeemed before the expiry date in the next quarter, effectively reversing the provisions that have been made in the prior periods. Travel vouchers are accounted for as ancillary income to the main business of selling tickets,” a source told The Edge.

But Bursa Securities didn’t see it that way. The regulator has requested that AAX’s external auditor Messrs Ernst & Young PLT (EY) provide a certificate to state that there are no one-off items on AAX’s income statements and therefore considered part of ongoing operations, said the sources.

Sources said AAX is crying foul over Bursa Securities’ additional requirement, as there currently isn’t any definition of what items can be one-off or what can be recurring for the airline industry. “There is no accounting definition detailing an airline’s one-off items. Different industries have different one-off items,” said a source.

In the fourth quarter of 2022, AAX made a write-back in provision of RM600 million for travel vouchers to passengers and travel agents, which had resulted in a sharp increase in net profit of RM153.48 million for the December 2022 quarter, from RM25.09 million in the September 2022 quarter.

Meanwhile, analysts said Bursa Securities has also imposed an additional requirement on AAX amid increased scrutiny of airlines, following the collapse of low-cost peer MYAirline Sdn Bhd recently. AAX will now have to show four consecutive quarters of net profit to exit the stock exchange’s PN17 financially distressed category.

“Under Bursa Malaysia’s guidelines, a company can apply to exit [the] PN17 status, following two consecutive quarters of net profit after completion of its financial regularisation scheme. However, AAX is now required to show four consecutive quarters of net profit due to concerns about the sustainability of its business,” an analyst pointed out.

Still, the analyst does not expect the requirement to be much of a problem for AAX, as it has managed to turn around its financial position from 12 quarters of losses since the quarter ended June 30, 2019, to register four consecutive quarters of net profit. The airline posted a net profit of RM25.09 million in 3Q2022, RM153.48 million in 4Q2022, RM328 million in 1QFY2023 and  RM5.54 million in 2QFY2023.

At end-June 2023, AAX recorded a positive shareholders’ equity of RM96.13 million, which exceeded its share capital of RM51.03 million, while it had a cash balance of RM268.96 million. However, the latest balance sheet data shows that AAX’s net current liabilities for 2Q2023 were RM65.2 million. It is worth noting that its independent auditor had highlighted that the airline's net current liabilities position as at end-June 2021 as the basis for disclaimer of opinion report.

The Edge has reached out to Bursa Securities for comments and is awaiting the regulator's response.

The debt restructuring of AAX was completed in March 2022, which had resulted in a write back of provisions and forgiveness of liabilities in the period, amounting to RM33.6 billion. In July this year, AAX had applied to seek a waiver from Bursa Securities to submit a regularisation plan and a removal from the financially distressed category. However, the airline announced last Thursday (Oct 19) that the regulator had rejected its application.

Critics also questioned the “threat” to suspend and delist AAX, if it fails to submit a regularisation plan to lift its PN17 status before Jan 17, 2024. Bursa Securities may suspend the trading of AAX on the sixth market day after the date of notification of suspension and may delist the company, subject to the company’s right to appeal against the delisting.

“The issue is AAX doesn’t have a regularisation plan because it is making money. It is not going to submit a plan because there is no other plan other than to run its airline business,” said a source.

“Will Bursa Securities follow through on threats to suspend and delist AAX if no regularisation plan is submitted by Jan 17, 2024? Is it an empty threat? If it is an empty threat, then why are they being so difficult when the airline is making money and is able to pay its debts? Whose interest does it serve with the suspension?"

The source believes that it is unlikely for Capital A Bhd to be able to exit the financially distressed status if AAX doesn’t get uplifted from PN17. Capital A had recently asked for a further three-month extension until Dec 31 this year to submit its regularisation plan to the regulatory authorities. “So will they delist Capital A too? Bursa Securities’ job is to help companies get out of PN17. By interpreting regulations differently at different times, and in many ways arbitrarily, they are opening the doors for Malaysian companies to list elsewhere. Already, Malaysia is not the best capital market by way of valuation,” the source said.

Critics also questioned the flight of high profile companies such as Grab Holdings Ltd to the US, due to the lure of higher valuations and a deeper pool of investors. “What are the benefits of listing on Bursa Malaysia as opposed to listing in other regional markets such as Singapore, Thailand and Indonesia, and the US Nasdaq stock market? For instance, why would companies like Grab Holdings Ltd go public in the US?” a source asked, adding that Bursa Malaysia’s strict rules and regulations for listing applicants, some of them quite arbitrary or unexpected, are driving companies to other markets, where Southeast Asia is increasingly becoming attractive to foreign investors.

Given AAX’s recent setback and the risks of suspension, it remains to be seen if Capital A and AAX would progress with plans to list in other markets. Capital A chief executive officer Tan Sri Tony Fernandes had in the past been quoted as saying that he plans for the listing of AirAsia Aviation Group Ltd (AAAGL) and airasia Super App in the US. AAAGL comprises AirAsia Malaysia, AirAsia Philippines, AirAsia Thailand and AirAsia Indonesia.

According to sources, the proposed disposal of Capital A’s aviation assets to AAX will proceed, despite recent events.

In November last year, AAX revealed that it will buy up Capital A's aviation arm, held through AirAsia Bhd and AAAGL, in a share swap deal. Following the acquisition, AAB, AAAGL and AAX will form a consolidated group, which will be named AirAsia Aviation Group. The consolidated group will comprise six airlines — four short-haul airlines and two medium-haul airlines: Malaysia AirAsia, AirAsia Thailand, AirAsia Indonesia, AirAsia Philippines, Malaysia AAX and Thai AirAsia X.

“Commercially and operationally, it makes sense for both airlines to consolidate and operate as one, as they share the same infrastructure, engineering group and sales group. The reasons for it to operate as two separate airlines are no longer there. When they first started, the traditional Airbus A320 narrow bodies could only fly up to four hours. These days, the A321XLRs are capable of flying longer ranges,” said an analyst.

“Secondly, commercially, the two airlines should fly interchangeably. For example, Kuala Lumpur-Singapore and KL-Hong Kong are what are called thick routes, where slots are hardest to get. So, it makes sense to use the wide body aircraft with a bigger passenger load. But Capital A is currently not able to as it only has the A320s in its fleet. Likewise, from here to Adelaide and Perth are thin routes, so why use a wide body when an A320 is enough. It is not profitable to fly to Adelaide with a wide body aircraft,” the analyst added.

AAX’s share price rebounded 27 sen or 14.7% to close at RM2.11, with 13.6 million shares traded on Wednesday, after it hit a low of RM1.83 on Monday (Oct 23). Capital A shares climbed 7.5 sen or 9.15% to settle at 89.5 sen, with 32.2 million shares changing hands.