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AirAsia looks to snap losing streak with IPO of Philippine unit

Local tycoon now affiliate's single largest shareholder with 45% stake

AirAsia Group CEO Tony Fernandes is banking on a successful IPO in the Philippines after failing in Vietnam.   © Reuters

MANILA -- AirAsia Group CEO Tony Fernandes has endured a bumpy ride of late.

He failed at his third attempt to crack the lucrative Vietnamese market in April while rising fuel prices and increased competition have hit the Malaysian budget carrier's balance sheet particularly hard.

Brighter skies beckon in the Philippines though, with AirAsia's local affiliate finally set to go public by the end of this year after postponing an earlier attempt at an initial public offering in 2018.

Philippines AirAsia's largest shareholder, Michael Romero, announced the revised timetable on June 3, telling reporters that the airline was first gearing up for a $350 million capital infusion from shareholders, which will be followed by a $200 million IPO by "November or December."

Romero, a wealthy businessman whose seat in the Philippine congress keeps him close to the country's political elite, also revealed that he is now the local carrier's largest shareholder, having upped his stake from 15.7% to 45%.

The capital injection, which will come in the form of $17 million of common shares and 17 billion pesos ($327 million) of preferred shares, is expected to shore up the company's balance sheet before the IPO, which will help fund expansion of its fleet to 50 aircraft from the current 24, most of which are Airbus 320 jets.

"It's a booming industry," Romero told reporters. "We need more planes. We all need more planes."

A successful IPO is especially important for CEO Fernandes as AirAsia aims to cement its place as the dominant Asian low-cost carrier, with a network of independently owned affiliates that can raise money on their own a sure way to ease the group's overall financial burden.

While AirAsia's Indonesian and Thai affiliates both had relatively little trouble going public, listing Philippines AirAsia -- a plan that was first announced by Fernandez in 2016 -- has not been so easy.

After turning a profit for the first time in 2017, AirAsia Philippines was forced to defer last year's planned IPO amid a market rout, rising fuel prices and the six-month closure of the Philippine resort island of Boracay, one of its best-selling destinations.

Despite passenger traffic growing 30% to 6.87 million persons last year, the airline ended 2018 with 2.9 billion pesos in losses.

Still, the airline expects to bounce back into the black this year. It booked record revenues of 6.7 billion pesos in the first quarter, reporting 424.5 million pesos in net income. AirAsia Philippines' passenger traffic grew 30% to 6.9 million last year.

Romero told reporters on June 3 that if oil prices hold steady, the company expects to make around 2 billion pesos in profit this year on revenues of 30 billion pesos.

In three years, revenue is expected to grow to 50 billion pesos on the back of new regional routes, including to Japan.

Meanwhile, its domestic market share grew to 16.8% in 2018 from 9.7% in 2014, putting pressure on budget airline Cebu Pacific, the market leader, according to data from the Philippine Civil Aeronautics Board.

"In general, I am positive on the Philippines," said Nomura aviation analyst Ahmad Maghfur Usman. "Demand is very encouraging, but the problem is really infrastructure." Usman was referring to congested Manila airport, which airlines say is limiting their expansion.

Cebu Pacific was forced to cancel dozens of flights last month partly due to congestion while Philippine Airlines admitted it could miss its target of obtaining a five-star rating from Skytrax by 2020 because it could not expand its premium lounge area.

Romero, who enjoys close ties with the Duterte administration, said he will work to secure more slots for airplanes in Manila.

The businessman-politician upped his holdings in Philippines AirAsia by acquiring the stakes of other local shareholders Alfredo Yao, owner of Zest Airway with which AirAsia merged in 2013, and media industry veteran Marianne Hontiveros.

Businessman Antonio Cojuangco, a cousin of former President Benigno Aquino, owns 15%, while AirAsia still owns 40% in the Philippine unit under foreign ownership limits set by the Philippine constitution.

Some analysts are skeptical that AirAsia Philippines will push through with the IPO later this year. But if it waits until next year, it could face stiff competition from Philippine Airlines. The national carrier is much larger than AirAsia and is planning to sell shares in 2020 to fund expansion, after bringing in Japan's ANA Holdings as a strategic investor.

"They will be compared, but it will really depend on the overall market sentiment," said Luis Limlingan, managing director at Regina Capital Development, a local brokerage. "If the market is good, AirAsia Philippines should do it this year."

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