1 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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IntroductionThe purpose of this paper is to examine the financial health of and Air Asia.

This paper is outlined as follows:• First, a brief discussion of the history of commercial aviation in Malaysia• Second, a presentation of the financial ratios comparing MAS and Air Asia• Third, a discussion and comments of the financial ratios for MAS and Air Asia • Strengths and weakness of Air Asia

The Airline Industry

The airline industry exists in an intensely competitive market. In recent years, there has been an industry-wide shakedown, which will have far-reaching effects on the industry's trend towards expanding domestic and international services. In the past, the airline industry was at least partly government owned.The airline industry can be separated into four categories:

• International - 130+ seat planes that have the ability to take passengers just about anywhere in the world. Companies in this category typically have annual revenue of $1 billion or more.

• National - Usually these airlines seat 100-150 people and have revenues between $100 million and $1 billion.

• Regional - Companies with revenues less than $100 million that focus on short-haul flights.

• Cargo - These are airlines generally transport goods.

2 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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The Air Asia Establishment

Low cost carriers (LCC) have been regarded as a new business model in airline industry recently. Southwest Airlines, which is deemed as one of the largest LCC in the world, exhibits a successful story to all the airlines across the globe since 70s. Its successful business model stimulated the start-up of LCC in Europe. Ryanair and easyJet, for example, has demonstrated itself as a profitable LCC in intra-Europe market since 1985.

Air Asia one of the earliest LCC in Asia was established initially by DRB-Hicom Bhd in late 1996, Asian financial crisis in 1997. Malaysian Government studied Tony’s proposal to start a LCC carrier and refused to issue a new licence and had requested Tony to buy over an existing airline. Tune Air, set up by Tony and his investors bought Air Asia over from DRB-Hicom on 8th Dec 2001 for a token sum of RM1, with its 2 x Boeing 737-300s, a tiny route network and nearly RM 40 million in debts.

Tony Fernandez (VP, Times Warner Music, SEA), had RM 1 million in hand (mortgaged house and sold off Times Warner Share Options) to pump into Air Asia. Air Asia’s LCC runs short-haul (less than 3 hours) and is low-cost, no-frills carrier serving routes within Asia. Air Asia was re-launched in January 2002, with fares lower than bus ticket for local destinations and even gave away free tickets. First day of operations started with RM 1 promotional price. Air Asia started with routes from KL, and then from Senai Airport in Johor in 2003.

Financial PerformanceThe airline business is very typical in the term of investing capital. It has been used heavy capital over the past century and people still invest the money on this extraordinary business.

The accounting review of AirAsia is going to be conducted based on its financial statement for the year 2009 and 2010.

Presentation of the RatiosBalance Sheet

In millions of MYR

Fiscal Year Ending Dec 31 2010 2010 2009

ASSETS

Cash And Short Term Investments 1,476 718

Total Recivables, Net 777 872

Total Inventory 18 21

Prepaid expenses 326 251

3 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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Fiscal Year Ending Dec 31 2010 2010 2009

Other current assets, total 277 359

Total current assets 2,874 2,221

Property, plant & equipment, net 9,318 7,942

Goodwill, net 8.74 8.74

Intangibles, net -- --

Long term investments 153 27

Note receivable - long term 142 449

Other long term assets 26 0

Total assets 13,240 11,398

LIABILITIES

Accounts payable 100 94

Accrued expenses 376 376

Notes payable/short-term debt 0 48

Current portion long-term debt/capital leases 554 492

Other current liabilities, total 814 699

Total current liabilities 1,844 1,710

Total long term debt 7,303 7,068

Total debt 7,857 7,608

Deferred income tax -- --

Minority interest -- --

Other liabilities, total 453 0

Total liabilities 9,599 8,777

SHAREHOLDERS EQUITY

Common stock 277 276

Additional paid-in capital 1,222 1,206

Retained earnings (accumulated deficit) 2,142 1,138

Treasury stock - common -- --

Unrealized gain (loss) -- --

Other equity, total 0.49 0.59

Total equity 3,641 2,621

Total liabilities & shareholders' equity 13,240 11,398

Total common shares outstanding 2,773 2,758

Treasury shares - common primary issue -- --

4 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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INCOME STATEMENTFiscal Year Ending Dec 31 2010 2010 2009

REVENUE AND GROSS PROFIT

Total revenue 3,948 3,133

OPERATING EXPENSES

Cost of revenue total 2,113 1,752

Selling, general and admin. expenses, total 70 54

Depreciation/amortization 520 448

Unusual expense(income) 5.69 (30)

Other operating expenses, total 99 71

Total operating expense 2,881 2,220

Operating income 1,067 913

Other, net -- --

INCOME TAXES, MINORITY INTEREST AND EXTRA ITEMS

Net income before taxes 1,099 622

Provision for income taxes 37 116

Net income after taxes 1,061 506

Minority interest -- --

Net income before extra. Items 1,061 506

Total extraordinary items -- --

Net income 1,061 506

Inc.avail. to common excl. extra. Items 1,061 506

Inc.avail. to common incl. extra. Items 1,061 506

Basic/primary weighted average shares 2,762 2,456

Basic/primary eps excl. extra items 0.38 0.21

Basic/primary eps incl. extra items 0.38 0.21

Dilution adjustment 0 0

Diluted weighted average shares 2,770 2,456

Diluted eps excl. extra items 0.38 0.21

Diluted eps incl. extra items 0.38 0.21

DPS - common stock primary issue 0.03 0

5 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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Fiscal Year Ending Dec 31 2010 2010 2009

Gross dividend - common stock 77 0

Pro forma net income -- --

Interest expense, supplemental 382 371

SUPPLEMENTAL INCOME

Depreciation, supplemental 520 448

Total special items 5.69 (30)

NORMALIZED INCOME

Normalized income before taxes 1,105 592

Effect of special items on income taxes 0.19 (5.65)

Income tax excluding impact of special items 38 110

Normalized income after tax 1,067 482

Normalized income avail. to common 1,067 482

Basic normalized EPS 0.39 0.20

Diluted normalized EPS 0.39 0.20

A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Security analysts use financial ratios to compare the strengths and weaknesses in various companies.[1] If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.

Liquidity Measurement Ratios: IntroductionLiquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. This is done by comparing a company's most liquid assets (or, those that can be easily converted to cash), its short-term liabilities.

In general, the greater the coverage of liquid assets to short-term liabilities the better as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. On the other hand, a company with a low coverage rate should raise a red flag for investors as it may be a sign that the company will have difficulty meeting running its operations, as well as meeting its obligations.

Current Ratios

The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities.

6 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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Formula:

Components:

58.11844

28742010 ≡≡ioCurrentRat

3.11710

22212009 ≡≡ioCurrentRat

As of December 31, 2010, with amounts expressed in millions, Air Asia Berhad current assets amounted to RM2,874 million (balance sheet), which is the numerator; while current liabilities amounted to RM1,844 million(balance sheet), which is the denominator. By dividing, the equation gives us a current ratio of 1.58.

Commentary:

Generally, current ratios greater than one indicate a measure of liquidity; this indicates that the company has enough short-term assets (defined as cash, short term investments, accounts receivable, prepaid expenses, and inventory) to meet its short-term financial obligations. In the case of airlines, short-term obligations (liabilities) include bank debt, accounts payable, advanced ticket sales, non-refundable passenger credits, and the current portion of long-term debt or leases. In theory, the higher the current ratio, the better.

In the case of Air Asia, the current ratio increased in 2010 to 1.58 from 1.3 in 1009. These ratios are lower than average current ratio for industry which is 1.12. Air Asia looks like an easy winner in a liquidity contest. It has an ample margin of current assets over current liabilities, a seemingly good current ratio.

Liquidity Measurement Ratios: Quick Ratio

The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.

Formula:

bilitiesCurrentLia

sinventorieetCurrentAssQuickRatio

−≡

Components:

7 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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55.11844

1828742010 ≡−≡QuickRatio

29.11710

2122212009 ≡−≡QuickRatio

As of December 31, 2010, with amounts expressed in millions, Air Asia quick assets amounted to RM2,856 million (balance sheet); while current liabilities amounted to RM1844 million (balance sheet).By dividing, the equation gives us a quick ratio of 1.55.

Commentary:

As previously mentioned, the quick ratio is a more conservative measure of liquidity than the current ratio as it removes inventory from the current assets used in the ratio's formula. By excluding inventory, the quick ratio focuses on the more-liquid assets of a company.

The basics and use of this ratio are similar to the current ratio in that it gives users an idea of the ability of a company to meet its short-term liabilities with its short-term assets. Another beneficial use is to compare the quick ratio with the current ratio. If the current ratio is significantly higher, it is a clear indication that the company's current assets are dependent on inventory.

Acid test ratio for the year of 2010 is better than year 2009. The industry average of 1.04 is lower than Air Asia Ratio, which indicates that Air Asia may not have trouble meeting short term needs.

Average collection period ratioThe average collection period is the number of days, on average, that it takes a company to

collection its credit accounts or its accounts receivables. In other words, the average collection period of accounts receivable is the average number of days required to convert receivables into cash.

Formula:

tSaleDailyCredi

veivableAccountiodlectionPerAverageCol

Re≡

Components:

daysiodlectionPerAverageCol 723653948

7772010 ≡×≡

daysiodlectionPerAverageCol 6.1013653133

8722009 ≡×≡

8 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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Commentary:The Air Asia average collection period 2010 is more efficient than 2009, but both are is still under 45 days debt.

Operating Efficiency Ratios: IntroductionThese ratios look at how well a company turns its assets into revenue as well as how efficiently a company converts its sales into cash. Basically, these ratios look at how efficiently and effectively a company is using its resources to generate sales and increase shareholder value. In general, the better these ratios are, the better it is for shareholders.

Operating Income on investment (OIROI)

Operating income return on investment (OIROI) is another measure of ROI; the attention is only to the operating profits of the firm. This metric is used while evaluating whether the management is generating adequate operating profits on the firm’s assets or not. OIROI is a pure measure of the efficiency of a company while generating the returns from its assets, without being affected by management financing decisions.

Formula:

sTotalAsset

ncomeOperatingIOIROI ≡

Components:

%1.813240

10672010 ≡≡OIROI

%01.811398

9132009 ≡≡OIROI

Commentary:

After finding OIROI of a firm, this ratio is compared with the operating return on investment of the peer group. If this ratio is higher than that of the peer group, it means that management is generating significantly more income on $1 of assets than similar firms. The Industry average is 3.25. OIROI Air Asia shows that in 2010 and 2009 for RM1 total asset invested the operating income 8¢ , which above industry average.

Operating Profit Margin

Operating income, or operating profit as it is sometimes called, is the total pre-tax profit a business generated from its operations. It is what is available to the owners before a few other items need to be paid such as preferred stock dividends and income taxes.

Formula:

9 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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Sales

ncomeOperatingIinofitMOperating ≡argPr

Components:

%273948

10672010argPr ≡≡inofitMOperating

%293113

9132009argPr ≡≡inofitMOperating

Commentary:

Operating Profit Margin of Air Asia for the year of 2010 is lower than 2009. It shows that in 2010 every RM1 sales Air Asia operating income is 27¢ while in 2009 Air Asia is 29¢.

Total Asset Turnover

This ratio, which is simply sales divided by assets, can show both how capital intensive a business is, and how well it uses assets to produce revenue. Some businesses – for example software makers – can generate tremendous sales per dollar of assets. Electric utilities and cable TV firms, airlines, and steel makers, on the other hand, require a huge asset base to generate sales. Simply put, the higher the yearly turnover rate, the better.

Formula:

sTotalAsset

SalesTurnoverTotalAsset ≡

Components:

timesTurnoverTotalAsset 3.013240

39482010 ≡≡

timesTurnoverTotalAsset 27.011398

31332009 ≡≡

Commentary:The industry average is 0.66. For Air Asia, this figure is 0.3 in both 1999 and 2000, This indicates that Air Asia needs to figure out how to squeeze more sales ringgits out of its assets. With Total Asset of RM13,240 million in 2010, Air Asia has can only generate sales of 0.3 times worth of the asset .

Account receivable Turnover

Accounts receivable turnover ratio is a measure of the liquidity of a company's account receivable asset. Typically, the higher the turnover is, the more favorable it is. An interesting counter argument to the preceding statement is that a too high an account receivable turnover ratio may point to an overly restrictive credit policy and that good sales may be lost impacting the overall health and organic growth of the company.

10 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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Formula:

ceivableAccount

sCreditSalernoverceivableTuAccount

ReRe ≡

Components:

timesrnoverceivableTuAccount 08.5777

39482010Re ≡≡

timesrnoverceivableTuAccount 6.3872

31332009Re ≡≡

Commentary:The industry average is 12.96. Air Asia Account Receivable in 2010 is more efficient than 2009, but both are is still under 45 days debt collection.

Inventory turnover In accounting, the Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. The equation for inventory turnover equals the cost of goods sold divided by the average inventory. Inventory turnover is also known as inventory turns, stock turn, stock turns, turns, and stock turnover.

Formula:

Inventory

sSoldCostofGoodurnOverInventoryT ≡

Components:

timesurnOverInventoryT 11718

21132010 ≡≡

timesurnOverInventoryT 8321

17522009 ≡≡

Commentary:The industry average is 48.25. Air Asia Inventory Turnover for the year of 2010 is very much efficient compared to the year of 2009 which is managed the Inventory Turnover for 83 times only.

Fixed Asset TurnoverThis ratio is a rough measure of the productivity of a company's fixed assets (property, plant and equipment or PP&E) with respect to generating sales. For most companies, their investment in fixed assets represents the single largest component of their total assets. This annual turnover ratio is designed to reflect a company's efficiency in managing these significant assets. Simply put, the higher the yearly turnover rate, the better.

Formula:

11 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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FixedAsset

SalesTurnoverFixedAsset ≡

Components:

timesTurnoverFixedAsset 38.010366

39482010 ≡≡

timesTurnoverFixedAsset 34.09117

31332009 ≡≡

Commentary:Fixed Asset Turnover for Air Asia for the year 2010 is a bit higher compared to 2009.

Leverage Ratio: IntroductionA general term describing a financial ratio that compares some form of owner's equity (or capital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds.

Debt RatiosThe debt ratio compares a company's total debt to its total assets, which is used to gain a general idea as to the amount of leverage being used by a company. A low percentage means that the company is less dependent on leverage, i.e., money borrowed from and/or owed to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. In general, the higher the ratio, the more risk that company is considered to have taken on.

Formula:

TotalAsset

litiesTotalLiabiTotalDebtDebtRatio

/≡

Components:

%7.7213204

95992010 ≡≡DebtRatio

%7711398

87772009 ≡≡DebtRatio

Commentary:Air Asia Debt Ratio is very high for the both year . On the other hand, the airline industry, and air travel in particular, is not a very stable industry. Specifically, travel, both from business and leisure passengers, is one of the first items to decline in times of economic contraction. Therefore, the ratios for other airline are certainly more risky than Air Asia.

Times Interest Earned Ratio

The times interest earned ratio is an Indicator of a company’s ability to meet the interest payments on its debt. The times interest earned calculation is a corporation’s income before interest and income tax expense, divided by interest expense.

12 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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The higher the times interest earned ratio, the more likely it is that the corporation will be able to meet its interest payments.

Formula:

penseInterestEx

ncomeOperatingIatioestEarnedRTimesInter ≡

Components:

timesatioestEarnedRTimesInter 79.2382

10672010 ≡≡

timesatioestEarnedRTimesInter 39.2382

9132009 ≡≡

Commentary:

Air Asia Times Interest Earned Ratio is quite high. This is the evidence that this Group uses less debt financing, especially in the year of 2010.

Profitability Indicator Ratios: IntroductionThese ratios, much like the operational performance ratios, give users a good understanding of how well the company utilized its resources in generating profit and shareholder value.

The long-term profitability of a company is vital for both the survivability of the company as well as the benefit received by shareholders. It is these ratios that can give insight into the all important "profit". In this section, we will look at four important profit margins, which display the amount of profit a company generates on its sales at the different stages of an income statement.

Profitability Indicator Ratios: Return on EquityThis ratio indicates how profitable a company is by comparing its net income to its average shareholders' equity. The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors.This ratio represents the return on the owner’s investment. Return on equity is probably the most widely used measure of how well a company is performing for its shareholders.It is a relatively straightforward benchmark that is easy to calculate, works for the great majority of industries, and allows investors to compare the company's use of its equity with other investments.

Formula:

Components:

13 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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%293641

10612010 ≡≡ROE

%192621

5062009 ≡≡ROE

Commentary:

As of December 31, 2010, with amounts expressed in millions, Air Asia had net income of rm1,061 million (income statement), and average shareholders' equity of $3,641 million (balance sheet). By dividing, the equation gives us an ROE of 29% for FY 2010.This means that for RM1 of equity invested in the company, 29 cents was returned in 2010 alone.Return on equity, for most companies, certainly should be in the double digits, and value investors often look for 15 percent or higher. A return of more than 20 percent is considered excellent.

References

Internet Sources/Websitehttp://www.investopedia.com/features/industryhandbook/airline.asp#ixzz1a3lXbYIXhttp://www.centreforaviation.com/analysis/airasias-unique-franchise-of-jvs-drive-profits-and- http://beginnersinvest.about.com/od/incomestatementanalysis/a/operating-income-http://www.infinancials.com/Eurofin/control/company?view=snapshot&type=0&companyhttp://essaysforstudent.com/Business/Porter-five-forces-AirAsia/83826.htmlhttp://www.oppapers.com/essays/The-Air-Asia-Establishment/191387http://www.reuters.com/finance/stocks/companyProfile?symbol=AIRA.KLhttp://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=AIRA:MKhttp://www.investopedia.com/university/ratios/#axzz1Z8pXpb7qhttp://www.airasia.com/my/en/corporate/corporateprofile.page?http://www.ecomaxmc.com/blog/?p=12http://en.wikipedia.org/wiki/Air_Asiahttp://www.airbus.com/newsevents/news-events-single/detail/airasia-orders-200-a320neo http://www.zacks.com/stock/news/46361/Airline+Industry+Outlook+-+Jan.+2011http://www.icmr.icfai.org/casestudies/catalogue/business strategy / airasia.htmlhttp://en.wikipedia.org/wiki/Financial_ratiohttp://bizfinance.about.com/od/financialratios/f/Avg_Collection_Period.htmhttp://www.answers.com/topic/leverage-finance#ixzz1aSGlc1mNhttp://blog.accountingcoach.com/times-interest-earned/

14 You are required to evaluate the financial performance or Air Asia Berhad over its recent two years operation.

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http://www.marketdiary.asia/2011/07/air-asia-airamk-taken-off-but-still.htmlhttp://bataviase.co.id/node/237257

Books/Journals1. Francis, G., Humphreys, I. and Ison, S. (2003) "Airports' perspectives on the

growth of low-cost airlines and the remodeling of airport-airline relationship". Tourism Management.

2. Kho, C., S. H. Aruan, et al. (2005). AirAsia- Strategic IT Initiative. Faculty of Economics and Commerce University of Melbourne: 3.

3. Porter, M.E. (1985). “Competitive Strategy: Creating and Sustaining Superior Performance.” New York: The Free Press.

4. Johnston, H. (1996), “Partnership Up in the Air”, Asian Business, August, p.535. Phillip Kotler and Gary Armstrong, Principles of Marketing, 9th ed. (Upper Saddle

River, NJ:Prentice Hall, 2001), p.245

6. Mok Kim Man, Jainurin Bin Justine, International Business & Economics Research Journal – December 2005 Universiti Malaysia - Sabah, Malaysia

7. Tengku Akbar Tengku Abdullah, Competition in the airline industry: The case of price war between Malaysia Airlines and AirAsia. Central Asia Business Journal, 3, November 2010.

8. Foundations of Airline Finance: Methodology and Practice By Bijan Vasigh, Ken Fleming, Liam Mackay