-  AirAsia (AA) is terminating its joint venture (AirAsia Japan) with ANA Holdings via the sale of AA’s 49% stake in AAJ for RM80.5mil. AAJ currently operates four A320s, with one more expected to be delivered in 2Q13.

-  As a recap, AAJ was formed in July 2011 whereby AA invested an initial capital of RM18mil for its 49% stake in the JV. This eventually rose to c. 80mil with subsequent capital injections. AA’s stake comprised of 33% voting shares and 16% non-voting shares. Operations started in August 2012 and have been loss-making thus far. All of AA’s A320s leased to AAJ will be returned and ANA will cease the usage of the AirAsia brand by Nov 2013.

-  While from a macro perspective, the venture into Japan looked very favourable given very low LCC penetration (9% vs. South East Asia average of 32%), high yields (Skymark’s yields were triple that of AA’s markets outside Japan) and high income per capita, issues apparently stemmed from a fundamental difference of opinion between AAJ’s shareholders on how their business should be managed - from cost management to where the domestic business operations should be based.

-  Japanese media had previously reported that AAJ has the lowest load factor among the three new LCC entrants in Japan; Peach Aviation (also owned by ANA) and Starflyer being the other two. Among reasons cited for AAJ’s slow take-off include: (1) An online booking system which was not fully translated into Japanese which frustrated domestic consumers; (2) Failure to use travel agents for ticket distribution, since travel agents still account for a major portion of domestic airline ticket sales; (3) Inconvenience of AAJ’s main hub in Narita, which is expensive and that applied severe restrictions on early morning and late night flights.

-  AA’s investments into AAJ have been written down by the ensuing losses since AAJ’s launch, and as such, the RM80mil proceed from sales of A’s stake in AAJ might be accounted for as gains. Essentially, the stake sale allows AA to recoup its investment in AAJ. From a profit accounting perspective (even without the stake sale), AA would have no longer equity accounted for the losses in AAJ since its investments have already been fully written down.

-  Maintain HOLD on AA at unchanged fair value of RM2.80/share. While we are disappointed with the development as Japan looked like an attractive market, the exit will plug further cash outflow into the loss making unit.

Source: AmeSecurities