Fight between Cyrus Mistry and Tata: AirAsia and Singapore Airlines are mentioned (2)

Andy Mukherjee from Bloomberg has written about the controversy:

Ratan Tata Has a Case to Answer

Some snippets:


Cyrus Mistry's letter to the board that fired him as the chairman of Tata Sons Ltd. without so much as a thank-you note for his service is such a big hit on WhatsApp message groups that some publishers might already be dreaming of a tell-all book by the jilted Indian executive.

They'll have to wait. For now, the five-page missive, obtained by Bloomberg News Wednesday, contains all the clues there are for investors to try and unravel the mystery behind Mistry's sacking, a dismissal so summary that it must be "unique in the annals of corporate history," he says.

A few such hints of disappointment aside, Mistry's is not a whining memo. If anything, the parts where he shines a light on the sorry shape of some of the operating companies in the $100 billion empire -- not to mention the alleged lack of professionalism in the group's Bombay House headquarters (the dean of Harvard Business School acting as postman) -- should be an eyeopener.

Most investors have long believed that the conglomerate adheres to a stronger code of governance than other Indian family-run businesses. Now it's up to Ratan Tata to reassert that exceptionalism. The founding-family scion carried out the coup against Mistry, and has returned as interim chairman. But if he can't convince public shareholders and bondholders that the Tata group is more than the mere sum of his personal ambitions and idiosyncrasies, then a lasting discount could creep into valuations.


Related to Air Asia's Indian subsidiary, there has been criticism before, for instance here:

"Who really runs AirAsia India?"

One accusation (of several) is regarding the leasing of airplanes:


Other mails indicate that AirAsia India may have a received a raw deal while leasing aircraft from AirAsia Bhd. For instance, old Airbus A320s were priced almost the same as new ones. One A320, made in 2009, and registered as VT-BLR, was leased for $320,000 per month; another, VT-ATF, manufactured in 2014, was leased out for $315,788. The prices do not match the prevailing rates provided by an independent consultant. The leased cost of an Airbus A320 aircraft (February 2010 make) is about $235,000 per month. A 2013 make costs about $280,000, according to data from aviation consulting firm CAPA. Expensive aircraft can mar the costs of a start-up airline and Bhatia seems to have raised this in an email last April.


If the above is true, then the beneficiary would be the leasing unit of Air Asia, exactly the one they plan to spin off.

CLSA wrote about the issue of revenue recognition in their CG Watch 2016 report:

Air Asia is one of the rare home grown regional success stories. It really should start improving its corporate governance though. Being allegedly linked (in Cyrus Mistry's email) to "fraudulent transactions" and "ethical concerns" is embarrassing.

AirAsia: why not a rights issue instead of a PP?

AirAisa announced that its founders Tony Fernandes and Kamarudin propose to increase their shareholding in the company by buying 559 million new shares in the company through a private placement.

The Star wrote an article about the issues at hand: "Who is bigger – Tony or AirAsia?"

First of all, I have never been a fan of private placements, rights issues are so much more fair, giving all shareholders a chance to participate. And if they don't want to participate (for instance because they don't have money at that moment), they can still sell the rights in the open market.

The rationale given in the prospectus is as follows (first paragraph):

I don't think the reasons given are strong: both the underwriting and the successful completion should be no issue since the 559 million shares to the founders are apparently already underwritten.

Secondly, it is stated that the issuance "indicates the continued commitment" of the founders "by making further substantial investments".

This would suggest that the founders have been doing this for a long time, increasing their stake in AirAsia by investing in new shares.

However, exactly the opposite has been the case, the founders have been disposing shares for a long, long time, and in huge quantities, more than 600,000,000 shares in total.

At the IPO Tune Air sold 86 million existing shares:

After the IPO in their 2005 annual year report they owned 1,045 million shares (44.8%), which they sold down in the open market to 529 million shares (18.9%) currently. Large disposals were made in 2005 and 2006, 2011 and 2014. There is not a single year in which the founders actually increased their shareholding.

That bags the question, why after twelve years of heavy selling do the founders now suddenly  want to increase their shareholding in AirAsia? Surely the minority investors, who will get strongly diluted by the proposed private placement, deserve a proper explanation.

Lastly, there is the following, rather remarkable issue:


"..... why Tune Air, which is their holding company, is disposing its stake in the market at about RM2 prior to the AGM? It does not look good for them to get placement shares at RM1.84 when Tune Air is reducing its stake at RM2. To be fair, in announcements to Bursa Malaysia, Tune Air has stated that the shares disposed were in favour of Datuk Abdul Aziz Abu Bakar, who is one of the founders of AirAsia. "


I would suggest to replace the private placement by a rights issue of comparable size, to shore up the balance sheet.

And if the founders of AirAsia want to increase their stake, well, they can go ahead and buy the shares in the open market. If they can sell hundreds of millions of shares in the open market then surely they can also buy those quantities at the same venue.

Tony's Top Ten Tips

I have often been critical about AirAsia (and even more so regarding AirAsia X) in this blog, especially regarding the aggressive accounting and the convoluted corporate structure.

But I did like the entrepreneurial spirit and "can do" attitude of Tony Fernandez and his staff.

Tony was invited to speak at an event organised by Digital News Asia and didn't disappoint with his speech "What’s Next: Tony’s Top 10 Tips for Entrepreneurs".

I think they are great tips, so I will copy them here from the above link:


1) You don’t need to know everything
 
I came from the music business. I knew nothing about planes. To all the entrepreneurs out there, you don’t need to know everything about what you want to do. It’s all about the idea, it’s about passion, it’s about implementing it.
 
2) Just do it!
 
Don’t let anyone tell you that you can’t do it. You’ve got one life, so you can’t press the rewind button and say ‘I wished I had done that.’

So I recommend to all of you out there, just do it. Live your life to the utmost, be positive. If you fail, at least you have tried.
 
I have failed miserably at Formula One, but I have no regrets because I got to stand with the greats from Ferrari, McLaren, and others.
 
3) Passion is a key problem-solver
 
Dreams do come true. Don’t worry about failure. You have one life, make the most out of it. Nine times out of 10, if you have the passion, you will find a way to work through it.
 
4) Invest in marketing
 
If you have the greatest idea in the world, please, please, please put some money on marketing. This is because if you don’t put money on marketing, nobody is going to hear about your great idea.
 
There are so many great ideas that never took off because of a lack of marketing.
 
Marketing is not about the dollars, it is also about public relations (PR). In AirAsia, we had no money. So I ran around with a red cap on and said controversial things so that the press would always take a picture of me. That was our marketing in AirAsia’s early days.
 
We have been through so many issues, and marketing played a key role in overcoming them.
 
Remember SARS (severe acute respiratory syndrome)? At that time, nobody wanted to fly; we all thought we are going to die.
 
Everyone cut their advertising, but I told my guys not to cut because this was the best time to build our brand. In fact, we tripled our advertising and everyone looked at me and said, “Are you on drugs?” I said, no, it is the best time because no one else is advertising.
 
When the first Bali bomb attack happened, everyone cancelled their flights. I said to the guys, we cannot let the Bali route die. We must continue to fly.
 
So we came up with ‘Love Bali’ campaign, giving away 10,000 free seats, and it worked. All 10,000 seats were snapped up in like under one minute. And all those who got those seats told all their friends about it on social media. Your best advertisement is your customers.
 
5) Leverage social media
 
When Malaysians get a good deal, they will tell the whole world about it. So the 10,000 people who went and had a good time in Bali, told 10,000 people that they had a good time. That was the early gestation of AirAsia’s social media.
 
We realised the power of social media very early on, so when Facebook and Twitter came up, we latched onto them. We were early adopters. We now have 32 million people on our various social media platforms, and 7% of our business comes directly from social media.
 
The Bali campaign taught us that our best advertisements are our customers.
 
6) Don’t be scared of complaints
 
Complaints are actually free market research. Someone took the effort to write to you to tell you where things went wrong and how they should be improved. These are things that companies pay a lot of money for consultants to tell them that same thing.
 
So we treat every email preciously.
 
7) Focus on one image when it comes to branding
 
During the early days, there was the word ‘AirAsia’ and a logo of a bird in our branding.
 
If you look at the top brands in the world, there’s only one image that comes to your mind. When I say “Shell,” you think of the Shell logo. When I say “Coca-Cola,” you think of the word ‘Coke’ in italics, and when I say “Nike,” you think of the swoosh.
 
So, back to our earlier AirAsia brand, we said drop the bird – we felt it was facing the wrong way anyway – and we used ‘AirAsia’ as our logo. Just one image. Why spend double the money to promote two images?
 
We also dropped the blue and the green colours. I tried very hard not to go with red, because everyone thinks that I want to be Richard Branson [the Virgin Group founder and Fernandes’ former boss] ... but it was the best colour, so we picked red.
 
So yes, the colour does make a big difference!
 
8) Go on the ground
 
What I used to do – although I don’t do this anymore – was that once a month, I would carry bags, I would be a cabin crew [member], and also at the check-in counter.
 
 I did this for two reasons: The first is that you can’t be an effective CEO (chief executive officer) unless you go on the ground to experience the real situation.
 
Here’s a true story. The baggage handling team told me that they needed belt loaders. I told them, “No, we can’t buy that as it’s too expensive.”

So one day when I was tasked to carry bags, they put me on one of the Indonesia flights. People who fly with us generally bring their house with them, but people who fly to Indonesia bring their neighbour’s house as well!
 
So there was a lot of bags. I broke my back in the process, and I told my team that they were right and I was wrong, and let’s buy the belt loaders.
 
If I didn’t do that [go on the ground] and just sat comfortably in the office, I would have made a wrong decision, damaged a lot of bags, and probably started a union.
 
The second reason [for going on the ground] is that I wanted to look for talent. I wasn’t looking for the talents from Oxford or Cambridge, I was looking for the Grade 3 SPM [O Levels equivalent] kind of guys who needed a second chance.
 
9) Never underestimate the potential of your staff
 
I broke all the rules in terms of hiring people. To me, as long as you have a dream, you can do anything.
 
There was an ex-cabin crew member – she came up to me one day and told me that her dream was to become a pilot. I told her to go for it.
 
Then she called me up one day and asked if she could take part in the Miss Thailand [beauty pageant], and I told her okay, as long as I get to use her photographs in our marketing materials.
 
She won the [Miss Universe Thailand] pageant and recently became a captain – so we are the only airline in the world with a Miss Thailand flying with us.
 
The moral of the story is that we have such a flat structure that she was able to tell me what her dreams were, and we were able to make a raw diamond into a diamond.
 
Another one of my boys, a baggage handler in Kuching, told me he wanted to become a pilot. I told him to go for it. He passed all the exams ... he had the top marks in the flying academy. Today, he is a captain.
 
We have many of such stories at AirAsia.
 
Your biggest assets, besides your ideas, are your people – because at the end of the day, it is the people who will deliver your ideas.
 
10) Data is king
 
We have a huge amount of data that we don’t know what to do with it, but everyone else wants our data ... so we figured it must be something very valuable and there must be an opportunity there.
 
We are investing in a few ventures. We plan to launch our own version of TripAdvisor, a travel dongle, a new YouTube-type of channel and more – data will be playing an essential role in these ventures. Data will be king.


Where is Ze Moola (the excellent, but inactive blog) often complained about the articles written about AirAsia. I guess Tony spilled the beans how those articles were conceived:

"Marketing is not about the dollars, it is also about public relations (PR). In AirAsia, we had no money. So I ran around with a red cap on and said controversial things so that the press would always take a picture of me. That was our marketing in AirAsia’s early days."

Journalists probably should have taken some distance there, but might have fallen too easily for the juicy story.

GMT on AirAsia: "New Dog, Old Tricks"

On Vimeo a video is released giving some (but not all) of the issues that GMT Research has raised on AirAsia.

The video can be found here.

It is reasonably detailed and I recommend the viewer to pause the image when numbers are being shown.

Tony Fernandes has immediately described the report as "rubbish", and that he will proof the writers of the report wrong. Not an unexpected reaction.

However, what is needed is a more sophisticated reaction, not the kind of reaction from Nobel (listed in Singapore).

Airasia has announced a pretty decent reply a few days ago, however, there are some shortcomings.

First of all it prides it self on transparency, but good transparency is something else than good governance or good accounting.

For good governance for instance a neat corporate structure is needed, something AirAsia (and its mother company) doesn't have. The amount of related party transaction between the many parties (each with different shareholders) is simply overwhelming.

Regarding the good accounting: AirAsia has always accounted very aggressively, in my opinion much too aggressively, and in AirAsia X's case to an extent that is doesn't make sense at all (deferred tax when it continues to make losses).

Regarding the first part (the consolidation has just not been possible), surely it could have been presented in some form or shape in the year report, what the consequences would be of consolidating.

Good however that from the second quarter onwards the company will include the numbers.

For me, AirAsia has always relied much too much on a combination of financial engineering and marketing hyphe, something I don't like at all.

This report by GMT is a refreshing, different approach from the usual stuff we normally read in the Malaysian media.

Who will be right at the end of the day? I guess we have to wait and see.

AirAsia is however warned, and could thus take appropriate actions, for instance by raising more capital.

Another unrelated but interesting video by GMT can be found here, some of its contents:

• WorldCom & Enron explained
• Goodwill & impairments
• CP ALL: A very over-leveraged buyout
• Youku: Growth through acquisitions
• Curious Assets
• Wilmar: Leveraged Chinese carry trade
• Reliance Infrastructure: Capitalising expenses?
• Chinese Concessionaires: Paper profits
• P&G H&H: Corporate governance
• Larsen & Toubro: Cutting off the lifeline

Alibaba and AirAsia, two tantrums

Alibaba is going for an IPO, the question is: where? The most logical choice is Hong Kong or NASDAQ.

There is a lot at stake, the size of the IPO could be huge, the company could be valued at USD 75 Billion, about RM 242,000,000,000.00.

Some background information about the company can be found here:

"Alibaba has established itself as a behemoth in the business of buying and selling products online. The company is itself made up of several businesses, including Alibaba.com, a Web site for business-to-business sales; Taobao Marketplace, a giant eBay-like platform; and Alipay, an online payment service."

Alibaba wanted a dual class of stock, which is not possible on the HKEX:

"The Internet giant and its executive chairman, Jack Ma, have sought to keep control of the company firmly with its founders, following in the footsteps of Facebook and Google. But the rules of the Hong Kong Stock Exchange prohibit dual classes of stock and other types of corporate structures that let minority shareholders preserve control of companies."

Negotiations with the Hong Kong Stock Exchange were on-going, and who could better comment on this then Hong Kongs "Mr Corporate Governance", David Webb.

Here is an interview with Webb, done by Eric Jackson from Forbes.

David wrote three articles about this matter on his website:

Alibaba's spotlight on HK regulation
We had a dream too!
Aligaga


The last article is in response to a "corporate tantrum" thrown by Joe Tsai, which can be found here.

Webb's response to that:

"Alibaba, you see, has come up with an entirely new and better way to govern companies, and if HK or the USA does not embrace it then we will all be left behind. Alibaba "never made any proposal" that involved a second-class shareholding structure, he says. So presumably, they won't be proposing that in the USA either. They want US regulators or investors to get their heads around something that even America has never seen before, where a self-selecting perpetual pool of managers gets to nominate more than half the board of directors.

You have to marvel at the breathtaking arrogance and hubris that comes from being a successful e-commerce firm in a sheltered market where foreigners cannot directly own telecommunications companies or payment systems. Mr Tsai tells the world that this "innovation" in corporate governance is to "protect the long-term interests of... all shareholders". This, of course, is because management knows what is best for shareholders, and shareholders don't. If this has a familiar ring to it, then the back of your mind is making the analogy with the Party and the people of China.

Then he gets to the nub of the 28-member Politburo (sorry, Partnership) proposal: "Partners are not just managers but they are owners of the business", he says. Um no, Joe. The shareholders are the owners of the business. Get it right. You are either a partnership where the partners provide all the equity, or a company, where the shareholders do. You can't be both."


Luckily, prudence has prevailed, the HKEX did stuck to its guns, despite the inherent conflict of interest (commercially the IPO would be great for the HKEX). Once you cross the line, there is no going back anymore, more and more companies would have asked for exceptions to the rules.


Regarding corporate tantrums, does Malaysia have any? Yes, they do, and, no surprises here, Tony Fernandes is involved (hat tip to the tipster who commented on this):

Is the above tweet rather childish? Yes, I think so. But I do appreciate the fighting spirit and the heart that Tony puts into it. Not sticking to much formality, which one would expect on that corporate level.

I can't find the exact research note by Paul Dewberry, but this comes probably close to it:


Bank of America Merill Lynch’s analyst Paul Dewberry also had concerns on AirAsia’s ability to manage and grow its JVs in a note written in March. “It is noted that Philippines is still making losses and its proposed joint venture in India is likely to consume significant time,” Dewberry wrote.

“While Indonesia had a good Q4 results aided by seasonality, Thai AirAsia remains the star performer among associates due to a lack of domestic competition.” More recently, aviation consultancy firm Centre for Asia Pacific Aviation said on August 27 that intense competition in south-east Asia has already begun to hurt AirAsia’s affiliates in the region.

“While AirAsia still reaps the benefits of first-mover advantage in several of its markets and continues to outperform nearly all of its peers, competition is intensifying,” CAPA wrote in a research report on AirAsia. “Indonesia AirAsia reported both a yield and operating profit improvement for 2Q2013, but it remains by far the least profitable of the group’s original three affiliates. Meanwhile, the group’s newest surviving affiliate, Philippines AirAsia has struggled almost as much as the failed affiliate AirAsia Japan. Even in Thai AirAsia, profits increased in second quarter of 2013, but there was a 3% drop in yields.”

“While AirAsia is well positioned and has the cash to fight back, inevitably profits and yields will come under pressure as competition continues to intensify,” the CAPA report added.