AirAsia rethinks Islamic bond issue

AirAsia rethinks Islamic bond issue

M. Jegathesan, Agence France-Presse, Kuala Lumpur

Higher bond yields have forced AirAsia, Malaysia's no-frills
airline, to rethink the issue of a 160-million-ringgit (US$42
million) Islamic bond issue to purchase and lease 11 Boeing
aircraft, an official said.

Kamarudin Meranun, AirAsia's executive director told AFP on
Saturday the carrier would make a final decision at the end of
August on how to fund the purchase of the new 737-300 aircraft.

"When we first looked at the seven-year bond, yields were low.
But it has gone up now. So we are reevaluating the actual cost
effectiveness of using the Islamic bond route," he said.

An Islamic bond is a debt instrument that adheres to Sharia
principles which prohibit the payment of interest.

Kamarudin said the first two new aircraft are expected to
arrive in October.

In July, AirAsia said it was looking at a seven-year bond to
fund the purchase and hoped it would secure the lowest yield. The
carrier was hopeful that the bond could be floated by September
or October.

The yield then was about four percent, Kamarudin said.

But now bond yields have risen to five to 6.5 percent, he
added.

Kamarudin said two other options AirAsia was currently
evaluating were using internal funds or raising the money through
conventional bank funding as an interim measure while evaluating
the bond issue.

Being a low-fare carrier, cost was of the utmost importance
for AirAsia to ensure its success, he said.

"We are in the final stage of deciding what kind of financial
structure we will put in place," he said.

Kamarudin said the review in funding strategy would not result
in any delay in the delivery of the aircraft.

Recently, AirAsia's three new foreign partners injected 26
million dollars into the carrier.

The investors are the Bahrain-based Islamic Development Bank,
Gulf-linked Crescent Venture Partners and Deucalion Capital, a
Frankfurt-based global private equity fund.

Azrul Azwar, an economist with MIDF Sisma Holdings Sdn Bhd
told AFP that AirAsia's best option in terms of cost, would be to
use internal funds.

"This is their best choice. AirAsia could take on a new
partner to inject additional funds into the company," he told
AFP.

Azrul said in hindsight, AirAsia should have made a decision
to issue the Islamic bond earlier when rates were low. "They
missed out when yields were down."

AirAsia has placed fixed orders for 11 aircraft. It is buying
four aircraft and will lease seven. By end of 2004, AirAsia will
have 18 aircraft.

AirAsia has flown two million passengers within its first 18
months of operation. It currently has seven aircraft.

The fleet expansion is needed to serve new destinations, such
as southern Johor state, which neighbors Singapore, Sarawak's oil
rich town of Bintulu on Borneo island and neighboring Thailand's
Phuket in January.

AirAsia has also set its sights on flying to Indonesia and the
southern coastal states of India, as potential regional
destinations, due to the close ties Malaysia's ethnic Indians
have with their ancestral homeland.

The airline, which began domestic flights in December 2001,
has been described as a "vibrant and profitable low cost airline"
after early criticism that it would fail within three months.