AirAsia shares tumble on fears Indonesia affiliate could be grounded

Shares in Asia's biggest low-cost airline, hit in recent weeks by questions over its accounting, tumbled more than 13 percent to a five-year low. Jakarta's transport ministry said PT Indonesia AirAsia was one of 13 carriers that must repair stretched balance sheets by July 31, by raising hundreds of millions of dollars, or face an operational freeze.

AirAsia said late on Tuesday it would seek a meeting with Indonesia's transport ministry, and didn't immediately respond to Reuters requests for comment on Wednesday.

The tighter scrutiny on finance is part of a concerted drive by Indonesia, a loss-making but key market for AirAsia, to bolster its aviation safety credentials. Last week's crash of a military transport plane, killing more than 140 people, followed last December's crash of an Indonesia AirAsia jet with the loss of all 162 people on board.

"If they don't meet the requirement, we will suspend them," transport ministry spokesman J.A. Barata told Reuters by telephone on Tuesday. "If they don't have enough capital, how will they ensure the safety of passengers?"

The focus on the Indonesia affiliate comes at an awkward moment for AirAsia, led by Tony Fernandes, one of Asia's best-known chief executives.

While its operational performance has improved since stiff competition squeezed it into a loss at the end of last year, investors' nerves are still jangled by a report last month by a Hong Kong-based research firm that said AirAsia uses transactions with loss-making associate carriers to boost its earnings. Shares have fallen around 28 percent since the report's publication.

AirAsia has known "for a while" that there is a need for its Indonesia affiliate to raise funds, according to a person familiar with AirAsia's strategy. The company has been exploring options including a stock market listing for the affiliate, tapping the debt market or getting existing investors to inject more cash, he said, speaking on condition of anonymity.

By 0553 GMT, AirAsia stock had fallen as much as 13.4 percent to 1.29 ringgit, its lowest intraday level since July 6, 2010, while shares in its long-haul arm, AirAsia X, fell as much as 4.9 percent. The benchmark index was down 0.8 percent.

While analysts were skeptical on whether Jakarta can realistically enforce such a tight deadline, they estimated the loss-making Indonesia AirAsia, 49 percent-owned by AirAsia, would need at least $230 million in new funds to reverse its shareholder funds deficit.

"This ruling is so onerous, chances are all 13 airlines will be suspended so thousands of jobs will be lost (if the ruling is enforced)," Mohshin Aziz, an analyst with Maybank Kim Eng. "No government in the world wants that," he said, predicting wrangling between the airlines and the Indonesian government to resolve the matter.

If Indonesia AirAsia were to lose its permit to fly in Southeast Asia's biggest economy, some speculate it might force a major rethink for Fernandes. "If local capital is not forthcoming," Credit Suisse analysts wrote in a recent note, "and Indonesia AirAsia's operating permit is suspended, this may be the catalyst that forces management to wind down Indonesia AirAsia."

(Reporting by Al-Zaquan Amer Hamzah and Emily Chow in KUALA LUMPUR and Eveline Danubrata in JAKARTA; Additional reporting by Anshuman Daga and Siva Govindasamy in SINGAPORE; Editing by Stephen Coates and Kenneth Maxwell)