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 and to the announcement made on 30th August, 2007, the Company is pleased to announce that it has today entered into a definitive agreement for the Subscription of Shares (“the Agreement”) with FAX for the Company to subscribe a total of 26,666,667 redeemable convertible preference shares Series 1 (“RCPS”) of RM1-00 each at par in the capital of the Company which will constitute 20.0% of the enlarged share capital of FAX following FAX’s Proposed Capitalisation Exercise. The subscription of the RCPS will be paid wholly in cash and is entirely funded from internal sources.

FAX is currently 80% 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 substantial shareholders. The table below shows a comparison between the current shareholding structure of FAX and the shareholding structure following the Proposed Capitalisation Exercise:

Shareholder	Existing	After further share issuance to Corvina Holdings Limited and AirAsia	%
Aero Ventures Sdn Bhd (Ordinary shares)	80,000,000	80,000,000	60
Corvina Holdings Limited (Ordinary shares)	20,000,000	26,666,667	20
AirAsia Berhad (RCPS)	0	26,666,667	20
Total Share Capital	100,000,000	133,333,334	100

AirAsia also maintains an option to exercise a right to acquire additional shares in FAX to bring AirAsia’s shareholding in FAX to thirty percent (30%). However, the additional 10% shares will be priced at the market valuation and not par value.

2. Details of the contracting parties

•  
  FAX

•  
  FAX was incorporated on 19th May 2006 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 leased from Penerbangan Malaysia Berhad (“PMB”).
  
  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 already initiated 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.

**In the negotiation of all agreements between AirAsia and FAX including this Agreement, 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.

3. Salient terms of the Agreement

•  
  
  (a) approval of the Foreign Investment Committee for the Subscription;

  (b) completion of the Proposed Capitalisation Exercise, in that the issued and paid up share capital of FAX has been raised to at least RM100,000,000-00 or FAX confirming that all the requisite subscription proceeds in respect thereof have been received and the Company Secretary duly instructed to proceed with the allotment of shares; and

  (c) approval of any other relevant Government authorities.

  
  i) Income: The Company is entitled to dividend and all other forms of distribution out of income of the Company at the same rate which may be declared to the ordinary shareholders.

  ii). Capital: On a return of capital or assets on liquidation or otherwise, participate in the distribution of the surplus assets of FAX remaining after payment of its liabilities in the following manner:

The total consideration sum for the subscription of 26,666,667 RCPS is RM26,666,667 payable in cash.

The Agreement is subject to the fulfilment of certain Conditions Precedent as follows:


As an RCPS holder, the Company enjoys certain rights as follows:

•  
  •  
    •  
      (a) firstly, in paying to the Company an amount equal to the issue price on each RCPS Series 1;
      
      (b) secondly, in paying to the holders of other shares in the share capital of FAX an amount equal to the issue price on each share, if more than one class is in issue then in the order of priority (if any) as between such classes of shares;
      
      (c) thirdly, 90.0% of the balance of the assets shall belong to and be distributed equally amongst the holders of all classes of shares in the capital of FAX, which includes the Company; and
      
      (d) lastly, the RCPS will not confer on the Company the right to participate in the residual balance of the assets of FAX after the above distributions.
    •  
      (i) on a proposal to reduce FAX’s share capital;

      (ii) any resolution, including amendments to the Memorandum of Association of FAX or the Articles, which varies or is deemed to vary the rights attached to the Company;

      (iii) any resolution for the winding-up of FAX; and

      (iv) any resolution for the disposal of FAX’s undertaking or property, or the creation of encumbrances on the same.

    •  
      The Company shall convert all the RCPS into ordinary shares of RM1.00 each in the capital of FAX upon receipt of written notice from FAX and as part of the FAX’s bona fide scheme for the listing its shares on any recognised stock exchange.
    •  
      The Company shall be allotted and entitled to subscribe for at par value, an appropriate number of additional redeemable convertible preference shares having like rights as the RCPS in order to have a proportion (in the enlarged equity capital of FAX) which is equal to the proportion of equity capital a fully converted RCPS would bear prior to the rights issue.
  iii). Redemption: The RCPS can be redeemed in whole or in part at FAX’s option at any time, but only with the prior written approval of the Company.

  iv). Voting: The Company, whilst entitled to receive notice of and attend (either in person or by proxy) general meetings, will not be entitled to vote at any general meetings of FAX save for:

  v). As to Transfer: The RCPS may not be transferred except with consent of the Board of Directors of FAX.

  vi). As to Conversion to Ordinary Shares: The RCPS are convertible in whole at the Company’s option at any time into ordinary shares of RM1.00 each in the capital of FAX in the proportion of one such ordinary share for every one RCPS.

  vii). As to Conversion as Part of a Listing Scheme:

  viii). Anti-Dilution in the event of a Rights Issue:

4. Rationale for entering into Agreement

•  
  The Company views investing in a Long Haul Low Cost airline as beneficial for the following reasons:
  
  a) International Flights to Malaysia are under served
  
  The growth Malaysian aviation industry is lagging behind the global average. The total growth rate for the past 10 years is only 3.0% per annum. Contrary to the global trend, the bulk of the growth was attributable to domestic travel. The growth rate for international travel to Malaysia is a mere 2.5% which is less than half of the global average of 5.7%. These statistics indicate that Malaysia may have been sidelined as an international destination.
  
  With Malaysia’s stability and vast natural beauty, cultural extravagance and ranked as and trouble free destinations for a city break, the Company believes there is a demand for international travel into Malaysia but it is underserved by international long-haul airlines.
  
  b) Leverage on Malaysia’s Status as a Natural Low Cost Hub
  
  For long-haul passengers to South East Asia, South East Asia is often viewed as one destination. They will choose one city as the base, and later travel to a couple of other destinations before returning to base and journey home on their return flight.
  
  The Company believes that Malaysia has the best combination of an economical and ‘hassle-free’ base as compared against Singapore and/or Bangkok. Ticket prices to Singapore (Economy class) are although high, are still affordable, but the cost of stay is exorbitant. Suvarnabhumi airport is a costly airport to operate from and flights to Bangkok are expensive relative to Kuala Lumpur. In a comprehensive UBS survey on the cost of living on major cities around the world which takes into account transportation costs, living expenses, food & beverages, tourist site fees etc. Kuala Lumpur is found to offer the cheapest destination for a city break.
  
  This is a compelling competitive advantage for a long-haul airline to operate from Malaysia. If FAX can consistently supply the lowest fare and connections against the likes of Bangkok and Singapore, this will attract a huge number of long-haul passengers to use Malaysia as the launch-pad hub for the region and forms an important feed to AirAsia’s growing network and capacity.
  
  c) Strategic Fit with AirAsia as the Gateway to ASEAN
  
  AirAsia’s route network consists of 78 routes across 9 countries and continuously expanding. By June 2008, AirAsia’s network is expected to have a total of 90 routes. The Company’s network to ASEAN destinations is denser than MAS’ & SIA’s ASEAN routes combined. Furthermore, AirAsia is the market leader for most of the routes (highest frequency & passenger carried) and 24 routes are unique to AirAsia.
  
  For passengers intending to get around the region, AirAsia is clearly the best choice – both in terms of price and connectivity. Combining AirAsia’s advantage with Malaysia’s natural position as the low cost hub for the region, this is a potent recipe for long-haul low cost airline to flourish.
  
  d) Stabilising the Demand Seasonality of Air Travel
  
  There is inherent demand seasonality in the air travel industry. AirAsia’s peak season is during the April to June and the October to December periods which do not overlap with the seasonal demands of other countries. FAX can potentially help AirAsia to increase its yields by bringing long-haul passengers during the weaker months. For example, January to March is a weak period for Malaysia but it is the peak period for China and Australia. This will be a natural hedge to smoothen out the demand seasonality aspect for AirAsia.

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 13th September 2007 are as set out in the table below.

	Direct		Indirect
	No. of Shares	%	No. of Shares	%
Dato' Anthony Francis Fernandes	2,627,010	0.11	729,458,382*	30.88
Dato' Kamarudin bin Meranun	1,692,900	0.07	729,458,382*	30.88

•  
  Notes:
  * 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.
  
  
  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.
6. Directors’ opinion

7. Financial effect of the Agreement & Risk Factors

•  
  The proposed investment in FAX is not expected to have any material impact on the financial position of AirAsia for this current financial year but is expected to contribute positively to the Company’s future financial results.
  
  Budget long haul service is a new business concept in Malaysia that will require some time to nurture to reach its full potential. The proposed investment of RM26.67 million constitutes less than 2.5% of audited FY2006 net assets (or 1.6% of the unaudited FY2007 net assets as recently announced). The Agreement will also not pose any adverse effect to the day to day operations of the Company.
  

8. Approval required

•  
  This Agreement is only subjected to the approval of the Foreign Investment Committee or other governmental authorities (if applicable).
  

9. Estimated timeframe

•  
  The estimated timeframe for completion of the Agreement is within two (2) months from the date of the Agreement.

10. 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.