The Impact of the Lehman Brothers bankruptcy

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Despite of the good profit earned in the year 2007, AirAsia reported a net loss of RM 465.5 million in third quarter of year 2008. The economic recession is the main culprit for this loss, whereas the bankruptcy of Lehman Brothers and the reducing Malaysian currency values are the major reasons causing the huge loss for the AirAsia.

Bankruptcy of Lehman Brother

According to AirAsia (Aviation Correspondent 2008), the unexpected bankruptcy of Lehman Brothers forced AirAsia to liquidate its fuel hedging contracts and write off derivatives held by Lehman Brothers, at a cost of RM 215 million - this is the first main cause of the huge loss for AirAsia's 3rd quarter, 2008.

Reducing Malaysian Currency Values

According to Tony Fernandes (Aviation Correpondent 2008), as result of economic recession, AirAsia made a loss of RM 213 million due to the dropping value of Malaysian currency, and it significantly rose up the overseas loans that AirAsia borrowed to buy Airbus SAS planes - this is the second main cause of the huge loss for AirAsia's 3rd quarter, 2008.

To bring back investors' confidence, AirAsia successfully reported a RM 506 million net profit in the end of year 2009. To have an easier review on how the AirAsia did it, the following part of the assignment focuses its analysis on the cash flows statement of the AirAsia on year 2009.

Introduction of Cash Flow Statement

According to Wild and Subramanyam (2003), cash flows statement is a simpler interpretation and reconstruction of business transactions - it is simple to be understood due to its directly showing of the cash inflows and outflows in the business. Since cash is high in its liquidity, cash flows statement is always taken as a way for the investors to analyse the liquidity of the business. Normally, a cash flows statement shows three major activities take place in the business, namely Operating activities, Investing activities, and Financing activities.

(i) Operating Activities of AirAsia

On year 2009, AirAsia did a good job, successfully converted its net cash used in operating activities (for the group) which valued with nearly RM 416,000,000 to net cash from operating activities (for the group) which valued at RM 783,619,000. This approximate RM1,199,000,000 increased in the net cash from operating activities was mostly contributed by the following activities:

Increased property, plant and equipment depreciation. From the following cash flow statement, the readers may notice that there is a significant increase in property, plant and equipment depreciation, whereas an approximate 29% increased (from year 2008, RM 346,954,000 to year 2009, RM 447,644,000) in year 2009, compared to year 2008.

Increased property, plant and equipment write off. From the following cash flow statement, the readers may notice that there is a significant increase in property, plant and equipment write off, whereas an approximate 1238% increased (from year 2008, RM 29,000 to year 2009, RM 388,000) in year 2009, compared to year 2008.

Increased interest expense. From the following cash flow statement, the readers may notice that there is a significant increase in the interest expense, whereas an approximate 25% increased (from year 2008, RM 297,533,000 to year 2009, RM 371,153,000) in year 2009, compared to year 2008.

(ii) Investing Activities of AirAsia

To reduce cash outflows, AirAsia reduced a lot in its investment activities - there is a nearly 31% decreased in AirAsia's 2009 investment, whereas the net cash used in investing activities was dropped from year 2008, RM 2,601,928,000 to year 2009, RM 1,777,468,000. This approximate RM824, 000,000 decreased in the net cash used in investing activities was mostly contributed by the following activities:

Reducing investment in additional property, plant and equipment. From the following cash flow statement, the readers may notice that there is a significant decrease in the investment in additional property, plant, and equipment, whereas an approximate 26% reduced (from year 2008, RM 2,623,001,000 to year 2009, RM 1,947,763,000) in year 2009, compared to year 2008.

Increasing in proceeds from disposal of property, plant and equipment. From the following cash flow statement, the readers may notice that there is a significant increase in the proceeds from disposals of property, plant, and equipment, whereas an approximate 265% increased (from year 2008, RM 50,043,000 to year 2009, RM 182,538,000) in year 2009, compared to year 2008.

Significant cut off in long term repayment. From the following cash flow statement, the readers may notice that there is a significant cut off in long term repayment in year 2009, whereas the long term repayment for the previous year was RM 48,197,000.

(iii) Financing Activities of AirAsia

Lastly, there is also a significant changes in AirAsia's financing activities, namely there is a nearly 42% reduced financial activities in year 2009, compared to year 2008. The following are the major changes in financing activities:

Increasing proceeds from allotment of shares. From the following cash flow statement, the readers may notice that there is a significant increase in the proceeds from allotment of shares, whereas an approximate 175 times increased (from year 2008, RM 2,882,000 to year 2009, RM 509,217,000) in year 2009, compared to year 2008.

Reducing proceeds from borrowings. From the following cash flow statement, the readers may notice that there is a significant decrease in the proceeds from borrowings, whereas an approximate 45% decreased (from year 2008, RM 3,044,531,000 to year 2009, RM 1,670,390,000) in year 2009, compared to year 2008.

Increasing repayment of borrowings. From the following cash flow statement, the readers may notice that there is a significant increase in the repayment of borrowings, whereas an approximate 97% increased (from year 2008, RM 300,780,000 to year 2009, RM 593,131,000) in year 2009, compared to year 2008.

Increasing deposits pledged as securities. From the following cash flow statement, the readers may notice that there is a significant increase in the deposits pledged as securities, whereas an approximate 1.5 times increased (from year 2008, RM 2,019,000 to year 2009, RM 5,112,000) in year 2009, compared to year 2008.

Question 2(b). Based on your commentary about, explain based on your analysis of the cash flow statement whether you would consider investing in the company or not.

Answer for Question 2 (b): Investor's opinions on AirAsia Berhad.

From the analysis above, the writer is very convinced with AirAsia's profitable future, and thus the writer would consider investing in the company. The following part highlights the success activities in AirAsia which attracting the writer's confidence:

(i) Operating Activities of AirAsia

Within a short period - approximate one year, AirAsia successfully converted its loss to profit, through the significant revenue increased from the increasing passenger seat sales, aircraft operating lease income, travel and tour operations, and other revenue such as extra charge for excess baggage, baggage handling fees, freight and cancellation, documentation fees reducing inventories on-hand.

As a low-cost airline with the slogan of Now Everyone Can Fly, AirAsia is trying best to provide lower and lower price air tickets with best services to airline passengers. The increasing passenger seat sales proved that the huge investment spent on Airbus SAS planes is worthy and thus the investors are more confidence on the decisions made by the directors, even thought there was crisis in the previous year.

(ii) Investing Activities of AirAsia

Besides, due to the bad experiences in the previous year, AirAsia becomes more careful in its investing activities. It started reducing the investment in additional property, plant and equipment at the same time fully utilise the current assets on-hand. Furthermore, there is also a significant cut-off in long term repayment, where save AirAsia for approximate RM 48,000,000 investment expenses.

Although there is an excess cash flow from operating activities, AirAsia is becoming more caution on every investing activity it involves.

(iii) Financing Activities of AirAsia

Regarding the financing activities of AirAsia, the writer would like to highlight about the significant decrease in the proceeds from borrowings. Since AirAsia is gaining quiet a lot in its operating activities, reducing in borrowings can be considered as a good decision due to it reduce the risks faced by the business.

Currently, AirAsia's borrowings are secured by Assignment of rights under contract with Airbus over each aircraft, Assignment of insurance of each aircraft, Assignment of airframe and engine warranties of each aircraft. Therefore, reducing the dependences on borrowings is a good decision for AirAsia to retain the confidence of the investors.

Instead of depending on borrowing from outsiders, AirAsia is now more depending on the financial source from allotment of shares. Through this change, AirAsia may reduce the risks it face and makes its shareholders become more committed with the decisions made by the business.

In conclusion, the writer will consider investing in AirAsia due to its smart decisions on its operating, investing and financing activities. Besides, as promised by AirAsia, the writer believes that the reducing price provided by AirAsia will successfully bring in more and more revenue for the business.

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