AAV-MINT: The Difference in Sale and Leaseback Strategy

The “Sale and Leaseback” is a common business strategy, used worldwide for a company with high-cost fixed asset. The company would receive a huge amount of funds to use in other investments while setting aside some of the funds to leaseback those assets for operations.

 

Asia Aviation Public Company Limited (AAV) has sold 10 aircraft to the buyer which is an aircraft leasing company for an approximately of 12,891.46 million baht and lease 9 of the selling aircraft back for operation, which would cost around 8,612.23 million baht, making a difference of about 4,300 million baht, booked by AAV. 

AAV states that after the repayment of the loans which were secured from the financial institutions for the finance lease of the Selling Aircraft, TAA will have net cash of approximately 2,700 million baht which can be used as working capital and/or for business expansion in the future.

 

The phenomenal of Sale and Leaseback is similar to what Minor International Public Company Limited (MINT) had done not long ago. The company made a sale and leaseback for three Tivoli hotels in Portugal, which resulted in booking a one-time earning of 3,500 million baht.

 

However, there are some key differences between the Sale and Leaseback of AAV and MINT.      

MINT initiated the strategy when its business is on the right track and growing fast which is the opposite from AAV. AAV decided to use this strategy to escape from the slow down in aviation business.

Putting MINT’s other businesses aside and looking at its core business only, the business of hotel and related services contributed 63,601 million baht of revenue to MINT, increased 200% from 21,182 million baht in the same period of last year. 

On the other hand, AAV’s flight and services,which reflected in sales and services revenue, posted a revenue of 30,183 million baht, increased 3% from 29,249 million baht in 9M18 due to an increase of passengers by 4%. 

 

If MINT did not sell its three hotels, it would still be able to grow at an incredible rate due to its success in hotel business, especially the contribution from NH Hotel that deliver more than half of MINT’s revenue in the hotel business. Meanwhile AAV, without any game changing in its strategy, would going nowhere and possibly faces a net loss in 2019. 

 

On the bright side, the sale and leaseback would relieve AAV from the cost of maintenance and depreciation of these 10 aircraft. With 62 aircraft as of 9M19, AAV reported the cost of repair and maintenance at 1,682 million baht, increased 4.5% from 1,609 million baht in 9M18 in which the company had 62 aircraft. Meanwhile, the depreciation in 9M19 was at 1,286 million baht, increased 4.9% from 1,226 million baht in 9M18.

 

How much would AAV save is unknown since each series of aircraft should require different maintenance, while the depreciation should reduce as well, though how much is not known. However, it is better than doing nothing, and the fact that AAV initiated this plan had shown that the company had other plans up its sleeve.

The company states that it would use the remaining 2,700 million baht as working capital and/or for business expansion in the future. Well, the company says that the funds will accommodate the procurement of Airbus A321 Neo, an aircraft that include new and efficient technologies in terms of fuel efficiency, long-haul flight capacity, increased number of passengers, sound insulation, etc.

Maybe this is just a starting point for AAV’s turnaround plan.