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Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Wed Jul 08, 2020 2:05 pm

Ernst & Young highlighted its doubts of Air Asia's future leading to the share price of Air Asia to fall 10%.
According to EY, AirAsia's liabilities exceed their current assets by $430 million.
On Monday, AirAsia has reported a quarterly loss of almost $200 million.


source: https://www.bbc.com/news/business-53331387
 
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lightsaber
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Wed Jul 08, 2020 2:24 pm

In a different link:

https://www.channelnewsasia.com/news/bu ... t-12912720

"EY is waving a red flag, which signals to investors and creditors serious risks to AirAsia if the current crisis doesn't end soon or if the airline doesn't get a cash injection," said Shukor Yusof, head of aviation consultancy Endau Analytics.

This is a tough environment to raise cash. Many airlines will fail, I do not know the certainty on AirAsia.

I would say orders will be cleaved off, including AirAsiaX's A330 NEOs.

More from the link (Hattip AngMoh for the link):
The airline's liabilities exceeded its assets by RM1.84 billion at the end of 2019, Ernst & Young said in its unqualified opinion. An unqualified opinion indicates the auditor believes a company has prepared its statements fairly.

A very bad time for an airline to have negative equity. That negative equity was in the good times. Now for 3 to 5 years of bad times. :cry2:

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behramjee
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Wed Jul 08, 2020 4:19 pm

I foresee Air Asia X fully closing down but not mainline Air Asia KUL.
 
MIflyer12
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Wed Jul 08, 2020 4:48 pm

Do auditors' 'going concern' letters mean more in Malaysia than they do in the U.S.?
 
jumpjets
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Wed Jul 08, 2020 5:02 pm

I anticipate that many companies issuing their financial statements in the near future will find their auditors adding an emphasis of matter on going concern to their audit report as companies struggle to generate cash flows. This may be a particularly bad case to merit being mentioned on the BBC website, but one thing to note is that the auditors did not go so far to say the company isnt a going concern, so there is uncertainty not an immediate death knell.
 
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Wed Jul 08, 2020 5:19 pm

I hope at least the assets exist. Ernst & Young are the auditors who discovered that EUR 1.9 bn (USD 2.1 bn ) they have cheerfully certified in Wirecard AG's accounts for the last 2 years do not exist. One report suggested that they never did.
 
davidjohnson6
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Wed Jul 08, 2020 5:42 pm

Auditors hate having to say things like "material uncertainty about going concern". If a company pulls through the crisis and most of the directors remain on the board for the next 12 months, there is a significant chance that a new auditor will be appointed for the following year's audit. E&Y have pretty much said they don't really want the business of auditing Air Asia in future because they consider they legal liability to be too high
 
2eng2efficient
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Wed Jul 08, 2020 5:48 pm

MIflyer12 wrote:
Do auditors' 'going concern' letters mean more in Malaysia than they do in the U.S.?


As a U.S. based CPA, I must ask what you mean by this... an audit opinion that includes a qualification or emphasis-of-matter paragraph regarding going concern is usually considered a serious matter (especially by creditors!)

Also, keep in mind that while International audit standards require more detail in their opinions, the U.S. is converging on this.
 
Exeiowa
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Wed Jul 08, 2020 6:02 pm

Various changes went into auditing after Enron and Anderson. There is a requirement in many places to change auditors every few years to prevent cozy relationships developing. From my friend who was an auditor tells me auditing is not very profitable it is mostly used as a way to capture more lucrative work for accounting firms.
 
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F737NG
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Wed Jul 08, 2020 6:20 pm

davidjohnson6 wrote:
Auditors hate having to say things like "material uncertainty about going concern". If a company pulls through the crisis and most of the directors remain on the board for the next 12 months, there is a significant chance that a new auditor will be appointed for the following year's audit. E&Y have pretty much said they don't really want the business of auditing Air Asia in future because they consider they legal liability to be too high


Given the current economic environment and the backlash in certain jurisdictions regarding 'Big 4' audits failing to foresee and forewarn against high-profile corporate failures, I think we'll see a lot more going concern issues being expressed in audit reports.

The fees actually earned from audits pale into comparison to other assurance services, management consultancy, transaction advice and tax advice fees.
The upsides for auditors declaring firms to be in financial jeopardy compared to taking the usual, 'everything looks fine at the end of the reporting period' are now considerable.
If a firm continues to survive after an auditor raises a going concern issue, the auditor can always caveat by stating that it was just a risk, not a certainty.


AirAsia does not look in good shape, but then not many airlines do right now.
 
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Wed Jul 08, 2020 6:27 pm

I predict a couple of their affiliates closing down and the other shrinking to cut cash flow and boost routes that are doing well. Maybe India operations will be shut down since it never really received any love from them anyway. AirAsia X may also shrink significantly and may close its other non-KUL based offshoots. Maybe just 2 AirAsia airlines and 1 X branded airline.
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lightsaber
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Sat Jul 11, 2020 1:17 pm

Hattip to qf789 for the link. Another A320 NTU from AirAsia:
https://mobile.twitter.com/Tobias_Gudat ... 09570?s=20

As to auditors using "going concern," that is huge. No company want to hire an auditor who uses that expression. So they are incredibly hesitant to use the term. It makes it tough for the client to borrow, so likely the client will fire the auditor in the future post crisis. Unless it was a fair call.

I have family and friends in accounting and they take it very seriously. I have friends in banking who are involved in such calls. The accounting auditor would talk with the bank's auditor. If the bank wasn't concerned, the accountants wouldn't be either.

In effect the accountants have two customers, the company and the bank. If another Enron happens, no bank will take that auditor seriously, so the company would have to find another auditor in order to borrow money (including for aircraft purchases).

As noted, the system was changed to prevent problems from happening again.

AirAsia is in trouble. I'm surprised more airlines haven't received that flag.

The fact Airbus is doing NTUs instead of vendor financing shows how serious the conditions are. Airbus is losing millions per month on AirAsia and that us rapidly growing as the undelivered backlog grows

As well accepted as the A320NEO is, they will be tough to place for a year or so. The A330NEO has lost the #1 customer; widebodies are tough to place now.

In fact, we now get the first stress test if the 788 resale market, but that is for another thread. But this impact AirAsia as competitors might pick up cheap planes to compete:
https://leehamnews.com/2020/07/10/hotr/

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MIflyer12
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Sat Jul 11, 2020 1:22 pm

2eng2efficient wrote:
MIflyer12 wrote:
Do auditors' 'going concern' letters mean more in Malaysia than they do in the U.S.?


As a U.S. based CPA, I must ask what you mean by this... an audit opinion that includes a qualification or emphasis-of-matter paragraph regarding going concern is usually considered a serious matter (especially by creditors!)

Also, keep in mind that while International audit standards require more detail in their opinions, the U.S. is converging on this.


There are academic studies that show issuance of a going concern letter (in the U.S.) has no value to investors. On average, issuance of a letter doesn't point to a greater probability of significant earnings surprise, nor bankruptcy, within twelve months. Like actively managed equity funds, it's just a bunch of highly-paid people doing worthless work.
 
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Sat Jul 11, 2020 2:25 pm

MIflyer12 wrote:
2eng2efficient wrote:
MIflyer12 wrote:
Do auditors' 'going concern' letters mean more in Malaysia than they do in the U.S.?


As a U.S. based CPA, I must ask what you mean by this... an audit opinion that includes a qualification or emphasis-of-matter paragraph regarding going concern is usually considered a serious matter (especially by creditors!)

Also, keep in mind that while International audit standards require more detail in their opinions, the U.S. is converging on this.


There are academic studies that show issuance of a going concern letter (in the U.S.) has no value to investors. On average, issuance of a letter doesn't point to a greater probability of significant earnings surprise, nor bankruptcy, within twelve months. Like actively managed equity funds, it's just a bunch of highly-paid people doing worthless work.

It might not effect bankruptcy, but it certainly effects access to credit.

For many companies, this breaches bond covenants: https://www.ft.com/content/7f099e34-f8f ... 4f9e0162e5

As bonds are a cheaper way to borrow, this locks the company out of that market.

On the plus side, AirAsia depends more on individuals deciding to fly instead of premium corporate travel. With premium corporate travel, more people will say "no" to a trip.

Auditors are required to flag if there us question of a business viability in the next 12 months. As an investor, one should only invest in those companies if you have access to a sophisticated amount of information. There is obviously more risk with AirAsia now.

What studies do you refer to?
Now, a huge fraction of companies with "going concern" flags are bought out by a competitor. Since buyouts are at a premium, that helps investors and creditors.

What we know us AirAsia is NTU on their aircraft orders and likely to shrink. This will increase the number if available aircraft which, thanks to supply and demand, decreases aircraft values.

AirAsia is one if the airlines that really benefitted from negotiating low aircraft purchase pricing and then doing favorable sale/leaseback terms. There is now an end to favorable sale/leaseback terms.

I would like to know how AirAsia will raise enough money to remove the going concern caution.

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LG777
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Sat Jul 11, 2020 2:43 pm

Most companies in the travel and hospitality will have or already included in their last accounts a going concern note. The reason is that account are made a on going concern basis ie: clients will pay, assets will keep their values, charges are known and accrued accordingly,... The problem is that the covid situation give us no clue about the near or mid term future. Will clients comme back and not cancel ? Will the one that did not cancel their tickets will just postpone their travel plan in the future or not eventually cancel ? Will the company's reserves or remaining activities generate a sufficient cash flow to cover loans payments and other financial obligations ? We don't know and this is what EY communicated.

They valided AirAsia accounts as at year end but warn that since the end of the year a major event occured and that the situation of the company is different that the one they audited.

Most companies in the travel and hospitality industry will have this kind of note in their accounts or audit letter for 2019 even the most succesful ones.
Accountants arround the world invested a lot of time and "fun" to write these notes (and negociate the excact wording) and make our auditors happy.
 
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Sat Jul 11, 2020 4:02 pm

jumpjets wrote:
but one thing to note is that the auditors did not go so far to say the company isnt a going concern, so there is uncertainty not an immediate death knell.


Auditors don't generally say that a company isn't a going concern unless that company is already in administration and/or shutting down. The phrase "substantial doubt about its ability to continue as a going concern" is pretty much boilerplate -- I pulled that quote from a nearly-20-year-old annual report and it's virtually identical to what EY said about Air Asia -- the possessive pronoun is just replaced by specific references to Air Asia and Air Asia Group. And the company which filed that annual report was already in Chapter 11 bankruptcy reorganization and very nearly shut down.

MIflyer12 wrote:
Do auditors' 'going concern' letters mean more in Malaysia than they do in the U.S.?


I think that if you're an investor in a company's common stock, a "going-concern" letter is like shutting the barn door after the horse is out. JC Penney is in Chapter 11 but their most recent earnings report still had no going-concern warning. It was fairly common knowledge months ago that Frontier Communications was going to file for Chapter 11 this spring -- but the going-concern warning only showed up in their SEC filings after they filed for reorganization.
 
bfitzflyer
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Sat Aug 01, 2020 1:04 pm

No reservations on AirAsia now until 2021. Sounds grim.

https://www.routesonline.com/news/38/ai ... t-01aug20/
 
Blerg
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Sat Aug 01, 2020 1:22 pm

If they fold, who will profit the most?
 
fcogafa
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Sat Aug 01, 2020 1:35 pm

It mentions Air Asia X, not Air Asia. Not good news for the 75 A330NEO's
 
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Sat Aug 01, 2020 1:39 pm

bfitzflyer wrote:
No reservations on AirAsia now until 2021. Sounds grim.

https://www.routesonline.com/news/38/ai ... t-01aug20/

In effect they are declaring they are only planning a short time frame in the future.

With their financial health and few (if any) fully owned aircraft, they must be using up their cash reserves.

I cannot predict if the parent company survives. I am quite bearish on AirAsiaX.

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tphuang
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Sat Aug 01, 2020 4:26 pm

Blerg wrote:
If they fold, who will profit the most?

It should help all of their competitors.

So
Malaysian air
Tiger air
Silk air
Jetstar
Bangkok airway
Air Garuda.

Out of those, I would guess probably Malaysian air the most.
 
b747400erf
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Re: Future of AirAsia in "Significant Doubt" - auditor Ernst & Young

Sat Aug 01, 2020 6:41 pm

MIflyer12 wrote:
Do auditors' 'going concern' letters mean more in Malaysia than they do in the U.S.?

Hope they do after that big scandal in Malaysia

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