KUALA LUMPUR (BLOOMBERG) - AirAsia Group Bhd's long-haul arm proposed a sweeping restructuring plan that would wipe out almost RM63.5 billion (S$20.8 billion) in debt and save the Malaysian carrier from being dragged under by aviation's worst-ever crisis.

The proposal, which requires approvals from investors and creditors, would also reduce shareholder capital at AirAsia X Bhd by 90 per cent, according to an exchange filing on Tuesday (Oct 6). Carrying through with the overhaul is the only way for the airline to survive and emerge from its grounding since late March, it said.

"To avoid a liquidation and to allow the airline to fly again, the only option is for AirAsia X to undertake a group-wide debt and corporate restructuring and update its business model," AirAsia X said. Given the current outlook, "the group will not be able to meet its immediate debt and other financial commitments."

Parent AirAsia Group has been under immense pressure this year after the coronavirus pandemic all but eliminated demand for air travel. South-east Asia's second-biggest budget carrier, once a poster child for the region's revolution in low-cost travel, reported its largest loss on record in the quarter ended June 30. Chief executive officer Tony Fernandes has been in talks for joint ventures and collaborations that may result in additional investment.

The 13-year-old AirAsia X unit had been focused on growing its fleet and expanding to farther destinations such as Abu Dhabi and Delhi. It was struggling before the crisis hit, with ongoing losses and too much debt. Now the carrier is vowing to rein in its ambitions if it can survive hibernation.

"Going forward, AirAsia X will strive to rebound as a low-cost medium haul airline with a leaner and more sustainable cost base," it said.

NEW STRUCTURE

The plan would eliminate 99 per cent of AirAsia X obligations - including aircraft lease and purchase commitments, and penalties for canceling orders - reducing its debt to RM200 million. It would also consolidate every 10 existing AirAsia X shares into one, while raising RM500 million in fresh funding, including equity and a government-guaranteed loan.

The proposal requires approval from shareholders, as well as from creditors such as lenders, suppliers and leasing companies that account for 75 per cent of AirAsia X's existing debt. It also requires the sanction from the High Court of Malaya.

As of June 30, the airline had an unaudited deficit in shareholders' equity of RM960 million, and its unaudited current liabilities of RM3.38 billion exceeded unaudited current assets of 1.39 billion ringgit.

The carrier said it hopes to begin operating with two aircraft in selected markets in the first quarter of 2021 and gradually resume flights to all destinations by end-2021. It expects to complete the restructuring by March. Lim Kian Onn, who has been a member of the board since 2012, has been appointed deputy chairman to head the restructuring.

GROWING TROUBLES

AirAsia X's growing troubles had been widely flagged. The carrier said in late August that it faced "severe liquidity constraints" that threatened its ability to resume flying and continue as a going concern, and that it needed to reach agreements with major creditors to restructure debt. It also said then that it sought support from aircraft lessors, maintenance providers and financial institutions to restart flights in early 2021.

In July, auditor Ernst & Young said there may be "significant doubt" over AirAsia X's ability to continue as a going concern.

One question mark is the fate of a large backlog of aircraft on order from manufacturer Airbus. The European planemaker is particularly exposed through its A330neo, with 78 orders from AirAsia X making up a quarter of the program's backlog.

Airbus lowered A330 output to two jets a month in April, after AirAsia X postponed deliveries and the virus slammed aircraft demand. The Malaysian carrier also has 30 A321neos and 10 A350-900s still to be delivered.

The European planemaker said it's in discussions with its customer "to find possible solutions during this very challenging time." It said the A330neo "will prove to be a most effective option for airlines as they emerge from the current situation."

Airlines globally have grounded thousands of planes as governments restricted movement to curb the spread of the virus. Carriers have been raising funds via rights offerings and seeking state support in their efforts to stay afloat. Travel demand won't return to pre-Covid levels until 2024, according to the International Air Transport Association.

JAPAN, INDIA

Virgin Australia Holdings and Colombia's Avianca Holdings have collapsed, while American Airlines Group and United Airlines Holdings are cutting more than 32,000 employees combined. Singapore Airlines said last month it would have to eliminate about 4,300 jobs, or 20 per cent of its workforce.

Meanwhile, other parts of Mr Fernandes's empire are showing strain. AirAsia said on Monday that it will cease operations in Japan immediately as it tries to reduce cash burn. The group has also stopped funding its Indian affiliate, people familiar with the matter said. AirAsia India's future may now depend on India's Tata Group, its majority shareholder, which has provided emergency funding but has yet to commit to a full rescue.

AirAsia X was already struggling even pre-pandemic, posting losses for six out of the seven quarters through December 2019. The long-haul group reported a net loss of RM305.2 million for the three months ended June 30, with sales tumbling 91 per cent.

Prior to the outbreak, AirAsia X was the only Malaysian airline that served the US - from Kuala Lumpur to Hawaii via Osaka. In November, the Federal Aviation Administration downgraded Malaysia to so-called Category 2, barring its carriers from adding any more flights to North America.

The unit's Malaysia-listed stock is down 68 per cent this year, while shares in AirAsia Group have sunk 62 per cent.

People who have purchased or made advance payments for flights that have been canceled, or for future flights, will have their payments and deposits converted into travel credits, according to the statement.