AirAsia shares tumble on fears Indonesia affiliate could be grounded

By Al-Zaquan Amer Hamzah and Eveline Danubrata

KUALA LUMPUR/JAKARTA (Reuters) - A move by Indonesia to enforce rules on airlines' finances pushed shares in Malaysian budget carrier AirAsia Bhd <AIRA.KL> to their biggest single-day fall as investors feared its Jakarta-based affiliate could be grounded for a lack of funds.

Indonesia's transport ministry said PT Indonesia AirAsia was one of 13 carriers that must repair stretched balance sheets by July 31 - or face shutdown. Already hit in recent weeks by questions over accounting that the airline rejected, AirAsia shares tumbled more than 15 percent on Wednesday at one stage.

The ministry's directive means Indonesia AirAsia, 49 percent-owned by Asia's biggest low-cost carrier, has just over three weeks to raise at least $230 million to reverse its shareholder funds deficit, analysts said. The parent company's stock fell by nearly $140 million on Wednesday, giving it a market value of $952 million.

The tighter scrutiny on finance is part of a concerted drive by Indonesia, a loss-making but key market for AirAsia, to bolster its aviation safety credentials. Last week's crash of a military transport plane, killing more than 140 people, followed last December's crash of an Indonesia AirAsia jet with the loss of all 162 people on board.

"If they don't meet the requirement, we will suspend them," ministry spokesman J.A. Barata told Reuters. "We have to consider the safety of society at large."

In a statement, Sunu Widyatmoko, President Director of Indonesia AirAsia, said there is no risk to its license to operate in Southeast Asia's biggest economy. Its level of equity has "never been an issue", Widyatmoko said, and the carrier will seek active discussions with the transport ministry.

AirAsia stock closed 12.8 percent lower while its long-haul arm, AirAsia X <AIRX.KL>, ended down 2.4 percent. The benchmark index eased 1 percent.

ON EDGE

The focus on the Indonesia affiliate comes at an awkward moment for AirAsia, led by Tony Fernandes, one of Asia's best-known chief executives.

While its operational performance has improved since stiff competition squeezed it into a loss at the end of last year, investors' nerves are still jangled by a June 10 report by Hong Kong-based GMT Research that said AirAsia uses transactions with loss-making associate carriers to boost its earnings. Shares have fallen by more than a third since then.

On Wednesday, AirAsia's long-haul arm, AirAsia X Bhd <AIRX.KL>, said it had filed an official complaint with the country's Securities Commission against GMT Research over its "untrue, misleading and inaccurate" report. AirAsia X said the GMT Research report said profits were shifted between the two carriers by way of transfer pricing of service fees and costs charged by AirAsia.

Asked to comment on the AirAsia X filing, GMT Research founder Gillem Tulloch told Reuters by telephone, "We only do research, we don't force people to sell (shares). Investors make their own decisions."

According to a person familiar with AirAsia's strategy, speaking on condition of anonymity, AirAsia has known "for a while" that there is a need for its Indonesia affiliate to raise funds. The company has been exploring options including a stock market listing for the affiliate, tapping the debt market or getting existing investors to inject more cash, he said.

Despite the sharp market reaction, some analysts were skeptical on whether Jakarta can realistically enforce such a tight deadline on raising equity.

"This ruling is so onerous, chances are all 13 airlines will be suspended so thousands of jobs will be lost (if the ruling is enforced)," Mohshin Aziz, an analyst with Maybank Kim Eng. "No government in the world wants that," he said, predicting wrangling between the airlines and the Indonesian government to resolve the matter.

If Indonesia AirAsia were to lose its permit to fly in Indonesia, some speculate it might force a major rethink for Fernandes.

"If local capital is not forthcoming," Credit Suisse analysts wrote in a recent note, "and Indonesia AirAsia's operating permit is suspended, this may be the catalyst that forces management to wind down Indonesia AirAsia."

(Additional reporting by Emily Chow in KUALA LUMPUR and Anshuman Daga and Siva Govindasamy in SINGAPORE; Editing by Stephen Coates and Kenneth Maxwell)