By P Gunasegaram
AIRASIA Group Bhd and AirAsia X Bhd minorities should call for EGMs to establish a forensic audit and to protect their interests and ensure investigations are done independently following reports that directors had approved sponsorships of over RM1 bil.
An easy way to check if directors gave approval for AirAsia group CEO Tan Sri Tony Fernandes to get up to US$250 mil in sponsorships is to examine the annual report of the relevant year for related party transactions which have to be reported. We did and could not find anything about this sponsorship approval in the AirAsia annual report for 2010.
On Feb 19, The Star reported that directors of AirAsia Group had approved efforts by Fernandes to build the AirAsia brand through sponsorships, according to sources, with the board of AirAsia X (then unlisted) approving amounts of up to US$250 mil (RM1,025 mil) for a “sponsorship strategy via a Formula 1 racing team”.
The sponsorship was a way to lift the AirAsia brand and allow it to be a globally recognisable brand, The Star said, quoting sources.
At the time, AirAsia X was not listed but it was definitely a related company to AirAsia group CEO Fernandes and then deputy Datuk Kamarudin Meranun who had substantial stakes in both companies.
If any of the plane purchases for both AirAsia and AirAsia X were tied to sponsorship agreements, and if indeed approval was given to get sponsorships for AirAsia X amounting to over RM1 bil, then such arrangements should have been disclosed as related party transactions for 2010.
But they were not. The 2010 annual report for AirAsia had this to say on page 137: “Material contracts involving directors and major shareholders: There were no material contracts entered into by the company and its subsidiaries involving directors and major shareholders’ interests still subsisting at the financial year ended 31 December 2010.”
And on page 141: “Since the end of the previous financial year, no director has received or become entitled to receive a benefit (other than directors’ remuneration as disclosed in Note 5 to the financial statements) by reason of a contract made by the company or a related corporation with the director or with a firm of which he is a member, or with a company in which he has a substantial financial interest, except as disclosed in Note 37 to the financial statements.”
On page 205, note 37 disclosed no related party transaction involving approval for US$250 mil in sponsorships that might involve Airbus planes bought by both AirAsia and AirAsia X.
Note 37 says: “Related party transactions also include transactions with entities that are controlled, jointly controlled or significantly influenced directly or indirectly by any key management personnel or their close family members, where applicable.”
However, a good indication that a sponsorship agreement was indeed sealed is this item on pg 22 of the annual report which said that on Sept 24, 2010, “AirAsia and Lotus Racing unveil an AirAsia Airbus A320 aircraft adorned in the legendary classic colours of Lotus Racing.”
Meantime, AirAsia had taken steps to distance itself from AirAsia X. On page 66, the annual report for 2010 reveals that “… in 2010 (AirAsia decided) to let our sister airline AirAsia X, which has grown its own very successful model for long-haul travel, leave the nest. While we will still share the same website and branding, and feed off each other’s routes for the benefit of our guests, AirAsia X will operate its own fleet, with its own crew, under its own management who are now based in their own corporate premises.”
Both Fernandes and Kamarudin have been implicated in a US$50 mil (RM204 mil) bribery scandal involving Airbus planes. Airbus paid €3.6 bil in settlements. Documents in the settlement agreement between Airbus and the UK’s Serious Fraud Office or SFO indicate that these amounts were paid for plane purchases to F1 team Caterham, owned by the duo. A further US$66 mil (RM271 mil) was promised but not paid.
The Star report went on to say: “Another question that would be asked surrounds the pricing for the planes secured by AirAsia and AirAsia X from Airbus. An independent audit commissioned by the board would examine those transactions to ascertain if they were fair or overpriced.
“Perhaps Airbus should allow Fernandes to disclose the price of the planes he acquired for the AirAsia group, and compare it to the price Airbus sold its aircraft to other airlines at that time,” said the source. The suggestion is that AirAsia paid below the average price other airlines had paid when ordering its planes from Airbus.
However, this would be an exercise in futility. The same The Star report said that in June 2011, AirAsia and Airbus announced a US$18.2 bil (RM54.8 bil) deal for 200 planes at the Paris air show.
Just 1% of that is RM548 mil – because of the large size of the order, minuscule percentage differences can amount to hundreds of millions of dollars. And since it is a large sale, there would be a discount which can easily show a price advantage to AirAsia when compared with other airlines.
What is required now of directors is a forensic audit which should be commissioned by AirAsia to investigate the whole issue of possible sponsorship abuse which may even be criminal in nature involving both AirAsia and AirAsia X.
But considering that most directors of both companies are not exactly independent, minority shareholders should step forward to protect their interests at an extraordinary general meeting to require such a forensic audit to be done and to elect new directors to represent and protect their interests and to dismiss others.
Afterall, Fernandes and Kamarudin own only some 32% of AirAsia with the rest being quite widely dispersed except for two stakes of about 4.8% each owned by the Employees Provident Fund and Sekim Amanah Saham Bumiputera. It would be a cinch to get a minimum of 10% of shareholders for an EGM.
Similarly, Fernandes and Kamarudin effectively control some 32% of AirAsia X through Tune Group, AirAsia and their personal holdings which means it should be easy for minority shareholders to get a 10% stake to call for an EGM.
Also, if indeed Fernandes and Kamarudin are found guilty of bribery by Airbus, then both AirAsia and AirAsia X can sue Airbus for reputational and other damages which can run into hundreds of millions of US dollars. Which makes it all the more important for independent investigations to be conducted and the interests of all shareholders to be protected.
Currently, although Fernandes and Kamarudin have relinquished their executive roles, they remain on the boards of both companies.
One more thing, The Star report says: The SFO too has a chequered track record as there have been a number of high-profile cases that it has lost in the courts.
But in this case, which involved Airbus bribing officials across the world, surely Airbus would not make a settlement of €3.6 bil if there was no truth to it. In fact, Airbus admits that it bribed officials, including those from AirAsia.
Meantime, Bursa Malaysia should ask both AirAsia and AirAsia X for clarifications on these reports and confirm or deny the directors’ approvals to provide more clarity on the issue. If indeed the directors gave such approval, they themselves may need to be investigated. – Feb 20, 2020
