Contents :

1.Introduction

 

Further to the Memorandum of Understanding (“MOU”) between AirAsia Berhad ("AirAsia" or "the Company") and Fly Asian Xpress Sdn. Bhd. ("FAX") dated 5th January 2007, the Company is pleased to announce that it has today entered into a Brand Licence Agreement (“the Agreement”) with FAX, for FAX to license from the Company the right to operate scheduled air services under the trade name and livery of AirAsia in respect of its budget long haul air services (“the Budget Long Haul Services”).

FAX is proposing that in respect of the Budget Long Haul Services, the brand name to be employed shall be AIRASIA X.

2. Details of the contracting parties

(a) FAX

FAX was incorporated on 19th May 2006 and its name was changed to Fly Asian Xpress Sdn Bhd on 1st June 2006.

FAX was incorporated to provide rural air services for the interiors of Sabah and Sarawak (“RAS”) pursuant to the Government of Malaysia’s domestic route rationalization exercise.

FAX commenced the operations of the RAS on 1st August 2006 by operating 12 turbo prop aircraft which are leased from Penerbangan Malaysia Berhad (“PMB”) through AirAsia Berhad.

Following the Government’s Cabinet decision (in April 2007) to hand over the operations of the RAS to a Malaysian Airlines Berhad entity, FAX had undertaken steps to wind down and hand over the RAS operations on a date to be determined by the Government which is not expected to be later than 30th September 2007. The steps taken include terminating ground handling contracts and the lease agreement with the Company. The Company has also issued a termination of the aircraft leases to PMB.

FAX is fully owned by Aero Ventures Sdn Bhd (formerly known as Mangkin Masyhur Sdn Bhd), a company which both Dato’ Anthony Francis Fernandes and Dato’ Kamarudin Bin Meranun are the substantial shareholders.

(b) AirAsia

AirAsia was incorporated in Malaysia as a private limited company under the Companies Act, 1965, on 20 December 1993. AirAsia provides low-cost air carrier services in Southeast Asia. The Company focuses on providing high-frequency services on short-haul, point-to-point domestic and international routes.

3. Salient terms of the Agreement

Under the Agreement, AirAsia grants to FAX a non-exclusive and non-assignable licence to use the AirAsia brand for the purpose of the Budget Long Haul Services as well as for FAX’s marketing, communication and advertising medium.

The use of the brand is confined to the Budget Long Haul Services only and not to the RAS operations.

Under the Agreement FAX agrees not to operate scheduled flights covering sectors which are within a four (4) hour flight range from a common point or hub which AirAsia (including its subsidiaries and associated companies operating under the AirAsia brand) operates. AirAsia also agrees not to undertake scheduled flights of above a four (4) hour flight range from a common point or hub which FAX operates.

The term of the Agreement is for an initial period of five (5) years which may be extended for up to five (5) successive terms of five (5) years.

In consideration of AirAsia granting to FAX the licence, FAX has agreed to pay AirAsia a licensing fee. In order to enable FAX to endure the initial start up challenges of the Budget Long Haul Services, AirAsia has agreed to waive the payment of the licensing fee for FAX’s first operating year. Thereafter FAX agrees to pay a fee of RM680,000.00 per annum.

However should the gross revenue of FAX were to exceed RM136,000,000 per annum, AirAsia shall be entitled to received 0.5% of FAX’s gross revenue instead. There will be a cap on the licensing fee from the 5th year onwards which gross revenue will be calculated at the average of three (3) best performing years of the first five (5) years. **

The payment of the licensing fee shall be on an annual basis and the first of such payment commences on FAX’s third operating year.

**In arriving at the figure for the licensing fee, a Special Committee was formed with the purpose of negotiating with FAX and to ensure that all terms under the Agreement are entered into on an arm’s length basis. The Special Committee included members of the board and management of the Company. Dato’ Anthony Francis Fernandes and Dato’ Kamarudin bin Meranun being interested parties to the agreement were not members of the Special Committee.

4. Rationale for entering into Agreement

The Company views the branding and licensing arrangement as beneficial for the following reasons:

(a) It will increase the reach and awareness of the AirAsia brand on a global scale in view of the geographical coverage of the Budget Long Haul Services and certain advertising and promotional costs may be shared with FAX in a fair proportion;
(b) The Budget Long Haul Services will be a very important feeder service into AirAsia’s rapidly growing network and capacity;
(c) Operationally, as AirAsia will be scaling up its own operations to cater for its future operations, it will have the capacity to offer its services such as training at AA Academy, Flight Operations, etc. to the Budget Long Haul Services for a fee on an arm’s length basis;
(d) It will generate recurrent annual income from a controlled lending of the Company’s brand name;
(e) The MOU provides for an opportunity to AirAsia for a cheap entry into the budget long haul business by subscribing for an initial 20% interest at par value and another 10% option exercisable at anytime within 5 years at market valuation.

5. Directors’ and major shareholders’ interests

Dato’ Anthony Francis Fernandes and Dato’ Kamarudin bin Meranun are directors and major shareholders of the Company. Hence, they are deemed interested in the Agreement. They have previously abstained and will continue to abstain from all Board deliberations in respect of the Agreement.

The interested directors’ and interested major shareholders’ direct and indirect shareholdings in AirAsia as at 5th July 2007 are as set out in the table below.



	Direct	Indirect
	No. of Shares	%No. of Shares%
Dato’ Anthony Francis Fernandes	2,627,010	0.11769,458,382** 32.70
Dato’ Kamarudin bin Meranun	100,000	*769,458,382** 32.70

Notes:
* negligible
** deemed interested by virtue of Section 6A of the Companies Act, 1965 through a shareholding of more than 15% in Tune Air Sdn Bhd

Save as disclosed no other directors and/or major shareholders of AirAsia and/or persons connected with them have any interest, whether directly or indirectly, in the Agreement.

6. Directors’ opinion

Save for the above interested directors (who have abstained), the Board having considered all the relevant factors in respect of the Agreement is of the opinion that entering into the Agreement is in the best interest of the Company.

7. Financial effect of the Agreement

This Agreement will not provide any financial contribution to the Company in the current financial year nor will it have any effect on the share capital and substantial shareholders’ shareholdings of AirAsia. It is also not expected to have a material effect on the consolidated net assets of AirAsia and the consolidated earnings of AirAsia for the financial year ending 30 June 2007.

The Agreement will provide a positive impact on the Company from the third year of FAX’s operations and the ensuing years by guaranteeing a minimum of RM680,000.00 fees per annum with the opportunity for greater revenue if certain revenue threshold is met.

AirAsia reserves its rights under the MOU to invest up to twenty percent (20%) stake in FAX by participating in the share capital and/or subscribing for loan stock or other debt instruments convertible at AirAsia’s option into ordinary shares of FAX at par. Additionally AirAsia maintains its option to exercise a right to acquire additional shares in FAX to bring AirAsia’s shareholding in FAX to thirty percent (30%).

The Agreement will not pose any adverse effect to the day to day operations of the Company.

8. Approval required

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AirAsia does not require the approval of its shareholders or any authorities to enter into the Agreement.

9. Document available for inspection

The Agreement is available for inspection at the registered office of the Company at 25-5, Block H, Jalan PJU 1/37, Dataran Prima, 47301 Petaling Jaya, Selangor Darul Ehsan, Malaysia during normal business days from Mondays to Fridays (except public holidays) for a period of 3 months from the date of this announcement.

This announcement is dated 20th July, 2007.

 

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