This article first appeared in The Edge Malaysia Weekly on August 12, 2024 - August 18, 2024

THE competition in the skies is weighing more heavily on analysts than last month’s major technology outage that disrupted various sectors across the world, including airlines and airports. Even though some Malaysia-based airlines like Capital A Bhd (KL:CAPITALA) were impacted operationally, most analysts are not expecting the July 19 IT outage to be material enough to affect the budget carrier’s profitability as the disruption was short-lived.

The outage was blamed on a software update by cybersecurity firm CrowdStrike that reportedly crashed more than eight million computers worldwide and affected many Microsoft customers.

According to Brendan Sobie, analyst and founder of Singapore-based aviation consultancy Sobie Aviation, the outage had a massive financial impact on the airline industry globally but the impact varied significantly, depending on the airline.

“In Malaysia, this was also the case,” he says, noting that Capital A appears to have been hit harder than other Malaysia-based airlines, while Batik Air Malaysia was not affected at all.

“The impact on AirAsia/Capital A was significant and came at a difficult time, given its financial position. Not being able to sell for a day will certainly impact quarterly revenues and there could be some additional costs as well,” he tells The Edge.

“However, globally, it is hardly alone as many airlines throughout the world were significantly impacted,” Sobie says.

Pointing to the Practice Note 17 (PN17) company’s heavy debt load, which stood at RM4.78 billion as at end-March 2024, he says there is an urgent need for Capital A to raise funds to pay down the debt.

“It seems they are making progress on this but I think the big question is will this be a Band-Aid or a more permanent solution to addressing the liquidity and debt issues facing Capital A, which have become even more severe recently due in part to the CrowdStrike IT outage,” he adds.

In an Aug 1 statement, Capital A says it has made substantial progress in equity and debt-raising efforts, which is expected to be announced in due course. In a May 30 report, Nomura Global Markets Research writes that the budget carrier aims to restructure existing loans, renegotiate expensive US dollar-denominated debt and reduce its finance cost. It is also in the midst of closing a revenue bond of US$200 million (RM884 million).

Maybank Investment Bank (Maybank IB) aviation analyst Samuel Yin Shao Yang believes the outage is not expected to have a material impact on the profitability of Capital A.

He cites the massive technical outage that had affected both Terminal 1 and Terminal 2 of the Kuala Lumpur International Airport (KLIA) for four days back in 2019. “The incident had also disrupted flight operations at KLIA but it didn’t really have a major impact on airlines.”

Likewise, an analyst with a foreign research firm does not expect the July 19 IT outage to put a major dent in Capital A’s third-quarter earnings. “Its operations were hit for two or three days only. Compared with, say, oil prices surging by US$10 per barrel, this is nothing,” remarks the analyst who declined to be named. “What determine the earnings of Capital A are ultimately fuel price and airfares.”

The analyst does not see CrowdStrike and Microsoft paying compensatory and punitive damages to airlines over the IT outage that had disrupted thousands of flights. It was reported that CrowdStrike had sent out US$10 food vouchers to its employees and partners as a form of apology.

Capital A declined to comment on questions posed by The Edge.

Following the outage, Capital A CEO Tan Sri Tony Fernandes was reported as saying that it had affected AirAsia’s operations at Terminal 2 of KLIA but that the situation had stabilised on the second day. However, the airline is “100%” asking for compensation from Microsoft. “We and other airlines lost a lot,” he had said.

Delta Air Lines CEO Ed Bastian said on July 31 that the outage will cost the airline about US$500 million and is seeking compensation from Microsoft and CrowdStrike. Delta Air Lines passengers are also suing the carrier after delaying or cancelling their flights in the wake of the outage.

Malaysia Aviation Group Bhd CEO of airlines Ahmad Luqman Mohd Azmi says while national carrier Malaysia Airlines was unaffected by the outage as its operations do not run on the Microsoft platform, its low-cost arm Firefly had faced disruptions.

“Only Firefly’s services were affected, but we recovered after one day. We see no financial impact from the outage because we didn’t have to cancel any flights. The only hassle was that we had to do everything manually,” he adds.

Maybank IB’s Yin says while Capital A’s debt remains a concern, the carrier’s outlook has improved as it had returned to core profitability in the first quarter of this year after more than four years of continuous core losses.

While Capital A reported a headline net loss of RM91.55 million for the first quarter ended March 31, 2024 (1QFY2024), stripping out one-off items such as foreign exchange losses, its core net profit was RM66.5 million, he comments.

Bloomberg consensus is projecting Capital A’s headline net profit to come in at RM528.4 million for full-year 2024, compared with the RM837 million posted in FY2023.

“The thing is that last year the concerns were both its debt and losses, whereas now it’s the debt only. The airline is profitable. The debt is not something it can clear tomorrow. That will take years. But at least the airline is now in a position to generate enough cash to pay up the debt slowly,” says Yin, whose main concern is when airlines start to think that these are good times and lease more planes.

“Then, quickly, the market is flooded with excess capacity again. So far, everybody is doing well and making profits because everybody is curtailing supply. They have not been very aggressive in leasing more planes.

“But the situation can easily turn turtle if everybody starts to lease more planes again, and if they cannot get passengers, they have to cut fares to fill the seats. That is keeping me up at night. But so far, with the exit of MYAirline Sdn Bhd [in October last year], things are a bit more controlled,” he adds.

Yin believes the immediate key hurdle for Capital A and its medium-haul affiliate AirAsia X Bhd (KL:AAX) is to convince their shareholders of the merits of the merger between Capital A’s short-haul airlines — AirAsia Malaysia, AirAsia Thailand, AirAsia Indonesia, AirAsia Philippines and AirAsia Cambodia — and AAX. “Thus, both airlines need to continue delivering profits to convince their shareholders that the deal is worth it.”

Capital A is aiming to complete the sale of its aviation assets to AAX by December. Based on the pro forma effect of the proposed disposals, the shareholders’ fund of Capital A is expected to turn to a gain of RM10.76 billion from a negative position of RM8.8 billion as at Dec 31, 2023, bringing the airline closer to lifting itself out of PN17 status.

Sobie notes that AirAsia has been rapidly rebuilding and expanding its network this year. “There has been a steady stream of new and resumed routes in recent months with many more to come in the remainder of 2024. AirAsia Group now has 272 routes, based on OAG data. This compares with 332 routes in July 2019,” he says.

On Aug 1, AirAsia Group took delivery of four new Airbus A321neo aircraft, bringing its total fleet to 221. “AirAsia Group’s fleet expansion is actually modest rather than aggressive,” says Sobie.

“It is natural for AirAsia to expand because they don’t want to lose market share. I am pretty much neutral on that. I think they are not being too aggressive when it comes to expansion of their network and fleet, unlike five years ago when they over-expanded,” observes the analyst with a foreign research firm.

“This time, there is more discipline when it comes to capacity management. That discipline is not just AirAsia but across the board. Generally, airlines have been conservative when it comes to expansion compared with where they were five years ago,” he adds.

Of the 11 analysts covering Capital A, six have a “buy” rating, three a “sell” and two a “hold”, with an average price target of RM1.05, which indicates a potential upside of 41% from last Wednesday’s closing price of 74.5 sen. Shares in Capital A have risen 6% since it unveiled the corporate exercise on April 25, but are down 10% so far this year. At the close of trading last Wednesday, the stock was valued at RM3.2 billion at a forward 12-month price-earnings ratio of 6.59 times. 

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