Risk Factors

5. RISK FACTORS 5. RISK FACTORS Before investing in our Shares, you should pay particular attention to the fact that we, and to a large extent our activities, are governed by the legal, regulatory and business environment in Malaysia and in other countries in which we operate, whether presently or in the future. Our business is subject to a number of factors, many of which are outside our control. Prior to making an investment decision, you should carefully consider, along with the other matters set forth in this Prospectus, the risks and investment considerations below. You should note that the following list is not an exhaustive list of all the risks that we face or risks that may develop in the future. These and other risks, whether known or unknown, may have a material adverse effect on us or on our Shares. 5.1 Risks Relating to the Airline Industry 5.1.1 Our business may be adversely affected by terrorist attacks, natural disasters, epidemics and social and political unrest. The airline industry in general has suffered substantial losses in recent years as a result of terrorism, natural disasters, epidemics, social and political unrest and other global factors. Terrorist attacks, such as those on 11 September 2001, natural disasters such as the 2011 Tohoku earthquake and tsunami in Japan, epidemics such as avian influenza, Influenza A (H1 N1) and Severe Acute Respiratory Syndrome (SARS), and volatility in social and political conditions in the regions in which we operate have in the past, and may in the future, cause substantial reductions in passenger demand, flight cancellations or delays and increases in our operating costs. For example, a series of earthquakes in Christchurch, especially the one in February 2011 resulted in severe damage to the city shortly before our inaugural flight, and followed by the earthquakes in June and December 2011 which hampered the post-earthquake rebuilding efforts. These have affected Christchurch’s attractiveness as a tourist destination and contributed to our decision to withdraw from the Christchurch route. Our LBT for the Christchurch route amounted to approximately RM37.5 million for the year ended 31 December 2011, being the first year of operations of our Christchurch route. Accordingly, any of these types of events, or other events that are not within our control, may have a significant adverse impact on the demand for our services or increase our operating costs, either of which may have a material adverse impact on our financial condition and results of operations.
5.1.2 Our business may be adversely affected by general economic conditions in the markets in which we operate. We currently conduct substantially all of our operations and generate substantially all of our revenue in the Asia Pacific Region. We expect to focus on network development in markets in the Asia Pacific Region and will prioritise capacity towards launching new routes and expanding frequency in the foreseeable future into several priority markets, namely (1) Australia, (2) China, (3) Taiwan, (4) Japan and (5) Korea. The success of our business depends substantially on the general economic conditions in these regions, and poor economic conditions in the other regions within which we operate would have an adverse effect on our business operations and financial condition. For example, the eurozone crisis had contributed to our decision to withdraw from our London and Paris routes, while the challenging economic and business conditions in Iran, including the volatility of the Iranian currency, had contributed to our decision to terminate our service to Tehran. Our London and Paris routes contributed an aggregated LBT of approximately R1VI92.7 million, while our Tehran route contributed a LBT of approximately RM1.2 million, for the year ended 31 December 2011. For the year ended 31 December 2012, our London and Paris routes contributed an aggregated LBT of approximately RM65.9 million. 5. RISK FACTORS (cont’d) There can be no assurance that the current economic conditions in the Asia Pacific Region can be sustained. An economic crisis and any continuing impact thereof on the economies of countries in the Asia Pacific Region, or any new adverse economic developments therein, could materially and adversely affect the markets in which we operate. General economic downturns could result in a reduction in flight load factors due to reduced demand or restrictions in our ability to obtain external funding. These are largely out of our control but may be detrimental to our operations and financial results.
5.1.3 The airline industry is capital intensive and has high fixed costs. The airline industry has high start-up and fixed costs due to the nature of the business. High fixed costs within the airline industry primarily relate to the acquisition of aircraft and related financing commitments. As such, to finance the expansion of our aircraft fleet, we may incur a significant amount of debt, and inability to obtain adequate financing for that purpose may impact the implementation of our growth strategy. Please refer to Sections 5.2.3 and 5.2.17 of this Prospectus for further details. In addition, aircraft fuel and maintenance costs, airport and handling costs, and staff costs are fixed per flight and do not vary significantly with per flight passenger volume. Thus, our industry is generally more susceptible than industries with lower fixed costs to the adverse impact of external shocks. As the airline industry is generally characterised by high fixed costs, any shortfall in revenue levels as a result of external shocks, including economic downturns and other events that result in a disruption in passenger load factors, could have an adverse impact on financial performance. We cannot assure you that such external shocks will not have an adverse impact on our operations and financial results. If any external shocks occur that adversely affect air travel in general, we may experience decreased revenue but would likely not see a corresponding decrease in fixed costs, which would have a material adverse impact on our business and financial and operational conditions. 5.2 Risks Relating To Our Business and Our Operations 5.2.1 We operate in a very competitive industry, where our performance will significantly depend on how effectively we compete with other airlines. There is intense competition in the airline industry between airlines, principally in terms of price, quality of service, punctuality, frequency, safety, security, branding, customer-base or passenger loyalty, and other related ancillary services. We may face direct competition from existing carriers or other new competitors in the future, either on our current routes or on new routes that we add to our network. Other carriers in the low-cost, Long-haul segment in the region in which we operate include Australia’s Jetstar and, more recently, Singapore’s Scoot. The Philippines’ Cebu Pacific is expected to launch a low-cost, Long-haul operation in October 2013. Our eXisting and future competitors in the low-cost, Long-haul market may attempt to undercut our fares in the future or increase their capacity on common routes. in an effort to increase their market share. In such event, there is no assurance that our levels of market share, traffic volume and revenue will be unaffected. 5. RISK FACTORS (cont’d) As many FSCs generally have the advantage of being larger, with greater resources (whether financial or otherwise), they may be in a better position to withstand losses on some of their routes for a longer period of time. In the event any airline were to reduce its fares to levels that we could not match (while sustaining operations) and were to maintain those reduced fares for an extended period of time, there can be no assurance that we would be able to remain competitive and match those reduced fares for an equivalent period of time. 5.2.2 We depend on regulatory approvals and licences to operate in our existing markets and to gain access to new markets. We require certain approvals, licences, registrations and permissions to operate our business, and we must comply with all regulations applicable to the operation of our business in order to retain those approvals, licences, registrations and permissions. We have no control over the regulations that apply to our business and there can be no assurance that we will obtain all the necessary approvals and licences for our business operations. If we fail to obtain any of these approvals or licences or renewals thereof in a timely manner or at all, our business could be adversely affected. Further, if we fail to comply with applicable r~gulations we may be subject to corrective measures and monitoring by the relevant governmental bodies in order to maintain our licences and approvals, or we may lose our licences and approvals, either of which may have a material adverse effect on our business operations. We are required to hold an AOC which is granted, and is SUbject to conditions imposed by the DCA. Our AOC is valid for a prescribed period following which an application for renewal has to be made. Our current AOC was issued on 13 September 2012 and is subject to renewal upon expiry on 30 September 2014. To operate either scheduled or non-scheduled air transport services in Malaysia, we are also required to obtain an ASL from the DCA. Our current ASL was issued on 10 May 2013, and is subject to renewal upon expiry on 30 September 2014. There can be no assurance that a new AOC and ASL will be granted to us upon the expiry of each current AOC and ASL, without which we will not be able to operate air services. For each route we operate, we are required to hold the requisite licences, permits and approvals from the countries to and over which we fly. The validity of each licence, permit or approval varies by country. If any licence, permit or approval is revoked or not renewed upon its expiry or if such renewal is on less favourable terms, we may not be able to operate on the affected route or may have to operate at a reduced frequency. In addition, the actions of Malaysian authorities responsible for overseeing Malaysian airlines and other third parties that we have no control over may adversely affect us. Please refer to Section 7.9.5 of this Prospectus for further details on the regulations that apply to us and our major licences, permits and approvals. (The rest of this page has been intentionally left blank) 5. RISK FACTORS (cont’d)

5.2.3 We may not be successful in implementing our growth strategy. Our growth strategy involves expanding our market share by increasing the frequency of flights to the markets we currently serve, as well as increasing the number of markets we serve. Our ability to increase our flight frequencies and our market share depends on our ability to obtain additional or new air traffic rights to airports situated within the targeted markets, our ability to establish new hubs and our ability to identify strategic routes in such markets for which such air traffic rights would be obtained. Any restriction or delay in our ability to obtain such air traffic rights and suitable time slots or in our ability to fly those routes and achieve those desired frequencies could have a material adverse effect on our growth strategy. Our growth strategy also depends on our ability to obtain additional or new aircraft and the timely delivery of such aircraft, as well as on our ability to obtain adequate financing on reasonable terms for the acquisition of additional or new aircraft. Please refer to Section 5.2.17 of this Prospectus for further details. The introduction of new routes or new hubs may not be successful, in which case those routes or hubs may need to be discontinued, such as those described in Section 7.6.5 of this Prospectus. Failure to ensure commercial viability of our business expansion and growth may result in expenses being incurred without a corresponding increase in revenue. The markets which we intend to serve in the future may be in countries where we have limited operating experience. The operation of our business in these markets may present operating, financial and legal challenges which are significantly different from those that we currently encounter in our existing markets or to which we are accustomed. Our position in the market will also depend upon the effectiveness of our marketing strategies and business development initiatives, as well as our ability to anticipate and respond to various competitive factors affecting the industry. This may include the ability to address pricing strategies of competitors, cope with rising fuel prices, provide high quality and reliable services at low fares, successfully enter new markets, order and obtain aircraft that best suit our strategy, maintain adequate control of our expenses, maintain high aircraft utilisation and load factors so as to bring down unit costs, attract, train, retain and motivate qualified personnel, swiftly respond to customer and market demands, and maintain the safety of our operations. Any failure by us to effectively compete, whether in terms of pricing, quality of services or otherwise, could have a significant adverse effect on the results of our business, operations and financial position. As we strive to expand our operations and expect to continue to do so for the foreseeable future, our ability to successfully manage our operational, financial and management information systems and resources is essential. Any expansion of our business operations and increase in flight frequencies would put a strain on these systems and resources, and could lead to a point where they are no longer adequate to support our business operations or may result in disruptions to our business operations. In light of all these factors, there is no assurance of our success in establishing new markets or expanding our current market share, and any failure to do so would harm our business operations, financial condition, profitability and growth prospects. 5. RISK FACTORS (cont’d) 5.2.4 We may not be able to maintain or grow our ancillary revenues. Our business strategy includes expanding our portfolio of ancillary products and services. We cannot provide assurance, however, that passengers will purchase these additional ancillary products and services or will continue to pay for the ancillary products and services that we currently offer. Any failure to maintain or expand our ancillary revenues could have a material adverse effect on our operations and financial results.
5.2.5 We are exposed to adverse impacts from any increases in the cost of fuel or any limitations on fuel supply. Fuel costs constitute a substantial portion of our operating expenses, amounting to an average of approximately 49.0% of our total operating expenses for each of the years from 2010 to 2012 and 47.4% for the 3 months ended 31 March 2013. As such, our operating results are significantly affected by changes in the availability and the cost of jet fuel. For example, the sharp increases in fuel prices from July 2010 to April 2011, after our commencement of flights to London in March 2009 and Paris in February 2011 significantly affected our ability to operate those routes economically, and thus contributed to our withdrawal from both routes in March 2012. Our London and Paris routes contributed an aggregated LBT of approximately RM92.7 million for the year ended 31 December 2011, and approximately RM65.9 million for the year ended 31 December 2012. In the past, there have been fluctuations in the price of jet fuel which is, among other factors, primarily based on the international price of crude oil, which in turn is influenced by supply and demand in the market, economic factors, political factors and various other factors. In the event of an exorbitant increase in fuel price or a fuel shortage, we may be reqUired to curtail some of our scheduled services to cope with such events. We can neither control nor predict the future cost and availability of fuel with any degree of certainty. Based on our fuel consumption for the year ended 31 December 2012 and the 3 months ended 31 March 2013, a USD1.00 change in price per barrel of fuel would have impacted our fuel expenses by approximately RM7.1 million and RM1.7 million, respectively and correspondingly our operating profits by the same amounts. We negotiate our fuel and undertake group-level hedging together with the AirAsia Group in order to increase the bargaining power arising from the larger quantities of fuel purchased by the AirAsia Group as a whole. We do not enter into any fuel hedging contracts directly, and any gain or loss arising from fuel hedging is recognised when risk transfers to our Group, namely upon allocation by AirAsia Berhad to us when we consume the fuel. We also pass a portion of our fuel price increases to our passengers in the form of fuel surcharges. There can be no assurance, however, that future increases in fuel prices can be offset in whole or in part by the bargaining power of the AirAsia Group or by increases in our fares and/or our surcharges, and this may have a material adverse effect on our business operations and financial condition. Please refer to Sections 7.8.1 and 12.4.4 for further details on our fuel supply, how we manage our fuel requirements and our hedging activities. 5. RISK FACTORS (cont’d)
5.2.6 Our maintenance costs will increase as our fleet ages. As of March 2013, the average age of our 9 A330-300s (excluding the new A330-300 delivered to us in April 2013) was approximately 4.9 years. Our fleet will require more maintenance as it ages and the costs for this will increase. Although we predict and expect that our fleet maintenance costs will increase in the future, we cannot with reasonable certainty predict the amounts of such increase. A potential significant increase in expenses for fleet maintenance could have a material adverse effect on our financial results and business operations. Our maintenance and overhaul costs accounted for 6.8%, 5.8% and 8.6% of our total operating expenses for the years ended 31 December 2010,2011 and 2012, respectively. 5.2.7 We may be adversely affected by any increases in the cost of airport facilities and services or any restrictions on access to such airport facilities and services. We are dependent on the quantity and quality of airport infrastructure for our current operations and for our future expansion, and we have to compete with other airlines for the availability of terminal space, time slots and aircraft parking, all of which are critical to our operations. In line with our business expansion plans, we will require support equipment and ground and maintenance facilities, including gates and hangars, at the various airports in which we currently operate, and we will require such equipment and facilities at the various airports from which we operate in the future. For efficiency in our operations and overall profitability, such equipment and facilities must be available in a reliable and timely manner. There can be no assurance that such equipment and facilities will be available or reliable in the future. There can be no assurance of our ability to lease, acquire or access airport facilities or services on commercially acceptable terms and at preferred times to support our growth and expansion plans, and the lack of any of these facilities or services may have a material adverse effect on our business operations and financial results. In addition, airport charges are determined by the respective airports or authorities, and we are unable to predict the factors that may affect any change to such charges. In addition, we are highly dependent on our operations at the LCCT in Kuala Lumpur, where approximately half of our daily flights originate. There is currently a project underway for the construction of a new low-cost terminal in Kuala Lumpur, which, when completed, will allow us to increase the number of routes we serve from our hub. If construction of this new low-cost terminal is delayed, our expansion strategy may be impeded. In addition, if fees and other costs related to operating out of the new terminal increase in relation to current fees and costs at the LCCT, our results of operations could be adversely affected. Furthermore, if fees and other related costs at airports that we conduct flights to increase, our results of operations could also be adversely affected. For example, massive increases in airport taxes, fees and handling charges at Indian airports, which were already high as compared to our destinations in Australia, contributed to our decision to withdraw from our Delhi and Mumbai routes. For example, in May 2012, Delhi airport increased airport fees by 346%. Both these routes contributed an aggregated LBT of approximately R1VI36.5 million for the year ended 31 December 2011, and an aggregated LBT of RM4.4 million for the year ended 31 December 2012. 56 5. RISK FACTORS (cont’d)
5.2.8 We rely on third parties to provide us with facilities and services that are integral to our business operations. We have entered into agreements with third party contractors and operators who are unrelated to our Promoters to provide certain facilities and services required for our operations at the various airports at which we operate, including Kuala Lumpur. These include, but are not limited to, agreements for aircraft maintenance, ground handling, refuelling services, airport facilities, information and communication technology services, catering and administrative and support services. We expect to enter into similar contractual arrangements in any new markets into which we decide to penetrate. There can be no assurance of the reliability of these third parties, and the loss or expiration of these contracts or any inability to renew them or negotiate contracts with other providers at comparable rates could adversely affect our ability to run our operations. Our reliance on others to provide essential services for us also gives us less control over certain costs and the efficiency, timeliness and quality of such services provided. 5.2.9 . We are dependent on our ability to attract and retain personnel on a cost­effective basis, especially our senior management team and highly-skilled talent. We are highly dependent on our senior management and our executive officers, in particular our Chief Executive Officer, Azran Bin Osman Rani, for the success of our business operations. Our future performance will depend upon the continued services of these persons as we believe that our growth potential and the maintenance of our unique company culture are directly linked to our ability to attract and retain the best possible professionals available in the airline industry. Competition for senior management in our industry is intense, and we may not be able to effectively retain our senior management personnel or attract and retain new senior management personnel in the future. If any of our executive officers or other key management leaves our company, or if we are unable to recruit suitable or comparable replacements, this could have a material adverse effect on our business. As we continue to expand our business, there is no assurance that we will be able to identify, hire or retain enough people who meet the high quality and service standards we strive for. We may face difficulties in maintaining our company culture as we become a larger company, and since this is crucial to our business plan, failure to maintain that culture could adversely affect our business operations and financial results. We may, from time to time, have to consider increasing our wage and benefit packages to attract and retain qualified personnel or risk facing attrition issues. Should highly skilled employees such as pilots, who have been trained by us with our resources, leave to join our competitors, our business operations could be significantly affected. Any failure on our part to attract and retain qualified and skilled employees who meet these criteria at a reasonable cost would adversely affect our corporate culture and reputation and would, in turn, have a material adverse effect on our business and expansion plans. 5. RISK FACTORS (cont’d)
5.2.10 Due to our high daily aircraft utilisation rate, our operations may be more susceptible to the adverse effects of delays. A vital part of our business strategy is to maintain high daily aircraft utilisation. High daily aircraft utilisation increases the efficiency of our operations and generates more revenue from the utilisation of our aircraft. This is achieved in part by reducing the turnaround time at airports so that, on average, we are able to fly our aircraft more hours in each day. Various delays that are beyond our control and cause reductions in daily aircraft utilisation include the following: (i) airport congestion, air traffic and air traffic control related requirements;
(ii) security and safety requirements;

(iii) bad weather or other environmental conditions; (iv) defects or mechanical problems with our aircraft;
(v) unavailability of flight crew;
(vi) strikes or work stoppages; and

(vii) acts of third parties on whom we rely for our business operations (for example, fuelling, maintenance, among others). Additionally, the expansion of our business to include new destinations and more frequent flights on eXisting routes could increase our exposure to congested airports, airports with less established infrastructure or air traffic congestion. An increase in the number of airlines operating at the airports at which we operate may also result in more congestion and delays at those airports. Such delays could reduce our daily aircraft utilisation and, in turn, limit our ability to achieve and maintain profitability. Further, high aircraft utilisation increases the risk that once an aircraft falls behind schedule on a particular day, it could remain behind schedule for all its other flights during the remainder of that day. This may result not only in disruption in operating performance but could lead to passenger dissatisfaction as a result of delayed or cancelled flights or missed connecting flights, which could then have an impact on our reputation.
5.2.11 We are highly reliant on automated systems and the Internet to conduct our business. We depend significantly on automated systems for our business operations, including our computerised airline reservation system, flight operations system, management and accounting system, telecommunications systems, website, maintenance systems and check-in systems. Whilst the provision and maintenance of computerised airline reservation system, telecommunications systems and website are via the AirAsia Services Agreement between our Company and AirAsia Berhad as detailed in Section 7.9.6(ii) of this Prospectus, these services are nonetheless ultimately provided by third party service providers. Our reservation and website systems must be able to accommodate a high volume of traffic and deliver important flight information. Substantial or repeated system failures of our website, reservation, or telecommunications systems could reduce the attractiveness of our services and incentivise our customers to fly with other airlines, thereby adversely affecting our revenue. There can be no assurance that system failures will not occur in the future. This could then result in the loss of important data, increase our expenses and generally harm our reputation. 58 5. RISK FACTORS (cont’d) 5.2.12 We are highly reliant on the continued reliability and availability of the A330-300 and the engines we use, or any other aircraft or engine types we use in the future. As our business largely depends on procuring, operating and maintaining specific types of aircraft and engines, we are particularly vulnerable to any problems that might be associated with such aircraft or engine types. Our business would be significantly affected if there was a defect in the design or mechanics of such aircraft or engines. While waiting for any such defect to be rectified, assuming that rectification is possible, our fleet would have to be grounded, or the affected aircraft or engines would have to be replaced otherwise. RegUlators could also restrict or even suspend the use of our aircraft while it conducts its own investigation into any actual or perceived design or mechanical defects. Further, any negative perception of our aircraft, whether due to safety, reliability or other concerns (whether actual or perceived), or an accident involVing similar aircraft, could lead to the pUblic avoiding our aircraft. This would have a material adverse effect on our business operations and financial results. In addition, if our lessors or vendors are unable to perform their contractual obligations to lease or sell aircraft and supply engines to us, we may have to find alternative suppliers of aircraft and engines. In such an event, we cannot assure you that we would be able to lease or purchase aircraft and engines within the time frame currently expected or at comparable prices. This would require us to obtain and use another type of aircraft and engine. We cannot assure you that any replacement aircraft would have the same operating advantages as our current A330-300s. We also may incur substantial transition costs, including higher costs associated with retaining or hiring pilots, cabin crew and engineers to operate and maintain a different type of aircraft or engine, and may also have to compensate passengers affected by delays or cancellations of our flights. 5.2.13 We have a limited operating history as a low-cost, Long-haul carrier and it may be difficult to evaluate our future results based on our past performance. We commenced operations as a low-cost, Long-haul carrier in November 2007. As such, it is difficult to evaluate our future prospects because of our limited operating history as a low-cost, Long-haul carrier. Our prospects are uncertain and must be considered in light of the risks, uncertainties and difficulties frequently encountered by companies during the early stages of operations. Any difficulties in implementing our strategies or any failure to effectively organise and supervise operations may negatively affect our business operations and financial results. 5.2.14 Any accident or sufficiently disruptive or dangerous incident involving any of our aircraft or any AirAsia Group aircraft may adversely affect our reputation and business. If any of our aircraft were lost or damaged due to either an accident or a sufficiently disruptive or dangerous incident, we would be exposed to potential significant losses due to required repairs or replacements of the affected aircraft, as well as the temporary or permanent loss of use of that aircraft. We would also be exposed to potential claims in the event that such incidents involve passenger injuries or fatalities. Events such as adverse weather conditions and natural disasters, bird strikes, technical breakdowns and human errors or sabotage are unpredictable and there can be no assurance that our aircraft will not be involved in any such events. In addition to these direct losses, any of the above incidents affecting our aircraft could create negative public perception of the quality of our airline’s safety practices. 5. RISK FACTORS (cont’d) This could have a material adverse effect on our reputation and our business operations. Further, any accidents or other dangerous incidents involving other airlines in the AirAsia Group may be associated with our Company and may create negative public perception of the quality of our safety practices, which consequently could have a material adverse effect on our reputation, our business operations and financial performance.
5.2.15 We rely on the AirAsia brand and are subject to the terms of the Brand Licence Amendment and Renewal Agreement with AirAsia Berhad. Pursuant to the Brand Licence Amendment and Renewal Agreement, we are granted a non-exclusive, non-transferable licence to operate scheduled Long-haul air services under the trade name and livery of “AirAsia X” or “AirAsia”, including the use of trademarks owned by AirAsia Berhad such as ..www.airasia.com… “go holiday”, “AirAsia GetACar” and “AirAsia Golnsure”. The Brand Licence Amendment and Renewal Agreement has an initial term of 5 years from 21 July 2012. Thereafter, parties may enter into negotiations to extend the term for up to 4 successive terms of 5 years each. The success of our business will depend on AirAsia Berhad’s awareness and ability to prevent third parties from using the AirAsia trade name and related trademarks without its consent. The “AirAsia” and “AirAsia X” trademarks are currently registered in Malaysia, the European Union and in 20 other countries throughout Asia (including the Middle East), Australia and the United States. AirAsia Berhad is seeking to register these trademarks in additional jurisdictions. Notwithstanding the above, we cannot assure you that the steps taken by AirAsia Berhad in this regard will adequately protect the AirAsia trade name and related trademarks and third parties may challenge the AirAsia Group’s rights to use the AirAsia trade name, including our right to use the AirAsia trade name and related trademarks. Issues relating to intellectual property rights can be complicated and we cannot assure you that disputes will not arise or that any disputes in relation to the intellectual property will be resolved in AirAsia Berhad’s favour. Our success also depends, in part, on our continued ability to use the AirAsia trade name and related trademarks in order to increase our brand awareness. If for any reason the “AirAsia X” trade name and related trademarks are withdrawn by AirAsia Berhad or become unavailable to us or we are required to pay a higher licence fee for the use of the AirAsia trade name and related trademarks, or should there be any other material changes to the Brand Licence Amendment and Renewal Agreement, whether as a result of a breach or otherwise, or in the event we are unable to extend the term of the Brand Licence Amendment and Renewal Agreement, our business operations and financial results would be adversely affected. AirAsia Berhad may terminate the Brand Licence Amendment and Renewal Agreement immediately upon notice if: (i) we take any legal steps to challenge AirAsia Berhad’s exclusive rights to all or any part of its brand or the validity of the Brand Licence Amendment and Renewal Agreement;
(ii) our AGe or ASL is revoked;

(iii) a force majeure event happens, including amongst others, acts of God, war, fire, storms, floods, terrorism and riots; or 60 5. RISK FACTORS (cont’d) (iv) there is change of control of AirAsia X which results in a substantial change in the existing shareholding structure of AirAsia X. In this regard, it is noted that an initial public offering of shares of AirAsia X does not amount to such a change. Either party may terminate the Brand Licence Amendment and Renewal Agreement immediately upon notice if: (i) there is a breach of the Brand Licence Amendment and Renewal Agreement by a party which is incapable of remedy;
(ii) a party ceases or threatens to cease to carry on business; or

(iii) a party goes into insolvency.
5.2.16 We rely substantially on our association with AirAsia Berhad and the other members of the AirAsia Group. We rely sUbstantially on our association with AirAsia Berhad and the other members of the AirAsia Group and on various shared services including, but not limited to, use of the brand name, information technology (including the www.airasia.com website through which 84% of our seats were sold for the year ended 31 December 2012), fuel procurement and hedging, and other services that provide negotiation strength and economies of scale through our association with the AirAsia Group. There is no assurance that we will continue to be a member of the AirAsia Group in the future. Any future termination of our affiliation with the AirAsia Group or termination of the shared services across the members of the AirAsia Group could have a material adverse effect on our business. Further, with the growing network of AirAsia Berhad and other companies in the AirAsia Group; any incidents that negatively impact AirAsia Berhad or any of the other members of the AirAsia Group could similarly have a negative impact on our reputation. We have a non-exclusive right to use the AirAsia trade name for Long-haul operations pursuant to the terms of the Brand Licence Amendment and Renewal Agreement. Although under the Brand Licence Amendment and Renewal Agreement, AirAsia Berhad may not directly or indirectly invest in, or grant a licence to, another low-cost, Long-haul carrier based in Malaysia, AirAsia Berhad may invest in low-cost, Long­haul air carriers that are based in any other member countries of ASEAN, provided that AirAsia Berhad gives us the first right of refusal to undertake such investments. AirAsia Berhad may also invest in low-cost, Long-haul carriers outside of ASEAN, provided that we are afforded a reasonable opportunity to co-invest with AirAsia Berhad. Although under the Brand Licence Amendment and Renewal Agreement, AirAsia Berhad acknowledges that they, as a Short-haul carrier, will operate scheduled flights of under a 4-hour flight range from any common point or hub, future operations by AirAsia Berhad or by other members of the AirAsia Group in other markets, or investment by AirAsia Berhad or other members of the AirAsia Group in low-cost, Long-haul carriers in other countries, could have a material adverse effect on our business operations and financial results. If (i) we are unable to leverage the AirAsia trade name, business network, expertise and overall relationship with AirAsia Berhad and the AirAsia Group in general in any material respect, (ii) there is a material change in the business strategy or key management of AirAsia Berhad that results in AirAsia Berhad re-examining its relationship with us or with the AirAsia Group or (iii) actions of AirAsia Berhad or any other member of the AirAsia Group adversely affect the AirAsia brand name, our business, results of operations and prospects would be materially and adversely affected. We cannot assure you that the actions of AirAsia Berhad or other members of the AirAsia Group will not adversely affect our business in the future. 61 5. RISK FACTORS (cont’d) 5.2.17 We may incur a significant amount of debt or may need to raise new equity in the future to finance the expansion of our aircraft fleet. In the past, we have required financing to acquire the aircraft in our fleet and we are most likely to require financing and incur significant amounts of debt in the future to fund the acquisition of additional aircraft, other anticipated capital expenditures, working capital requirements and other business expansion plans. As at 31 March 2013, we had committed to the acquisition of aircraft from Airbus at a total list price of approximately USD6.9 billion (or approximately RM21.4 billion). In addition, the future minimum lease payments for our aircraft under operating leases amounted to approximately RM2.4 billion as at 31 March 2013. To meet these financial commitments, we may need to raise additional funds. However, we cannot provide assurance that additional financing will be available to us on favourable terms or at all. Our gearing ratio as at 31 March 2013 was 2.2 times. In the event that we are unable to obtain adequate financing on reasonable terms or at all to fund our expansion plans, including acquisition of additional aircraft, we may not be successful in implementing our growth strategy, as detailed in Section 5.2.3 of this Prospectus. Further, if we are unable to secure the relevant financing to fund our aircraft acquisition, we may not be able to meet the relevant payment obligations under our aircraft purchase agreements as and when they fall due, and therefore be subject to applicable late payment interest, if any, as set out in Sections 7.9.6(iv) and (v) of this Prospectus and potential legal claims by Airbus under contractual default. Airbus would also be entitled to apply any pre-delivery deposits paid for the aircraft to satisfy any amount due and unpaid by us and be compensated for any losses or damages suffered by Airbus as a result of our default. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences, or privileges senior to the rights of our Shares, and our existing shareholders may experience a dilution in the value of our Shares. Additionally, any credit facilities that we obtain in the future may contain restrictive covenants which would limit the way in which we carry on our business activities. These credit facilities may also limit our future financing activities and would require the creation or granting of security interests over our assets. Our ability to meet our payment obligations and to fund planned capital expenditure will depend on the success of our business strategy and our ability to generate sufficient cash flow to satisfy our obligations. (The rest of this page has been intentionally left blank) 5. RISK FACTORS (cont’d)
5.2.18 We could be negatively impacted by any failure to comply with covenants contained in our leasing and financing agreements. We have entered into various aircraft financing agreements with certain financiers and various aircraft and engineering operating lease agreements with certain lessors, as well as banking facilities. These agreements contain customary termination events and also require us to comply with certain additional covenants during the term of each agreement. Some of our financing agreements are also subject to review or termination in the event of a change in control of our Company. which is defined differently depending on the agreement. Failure to comply with such covenants could result in a default under the relevant agreement, and ultimately an accelerated repayment of borrowings or a re-possession of the relevant aircraft or engine. In relation to two of our banking facilities, we have obtained waivers until 31 July 2013, from having to comply with certain financial ratio covenants that we did not meet for the year ended 31 December 2012. Further details of the aforementioned non-compliances are set out in Section 12.9.3 of this Prospectus. There can be no assurance that we will not breach financial covenants in the future, that we will meet the aforementioned financial covenant ratios when the applicable waiver periods expire, that we will be able to obtain any further indulgences or waivers for these or other matters, or that any future breaches would not result in a default under our facilities, any of which could materially and adversely affect our financial position. Certain of these agreements also contain cross default clauses, as a result of which defaults under one agreement could be treated as defaults under other agreements. As such, a failure to comply with the covenants in such agreements could have a negative impact on us. Please refer to Sections 12.9.3, 12.9.4 and 12.9.5 of this Prospectus for further details on our banking facilities, aircraft finance leases and aircraft operating leases, respectively, including details on the status of our compliance with such covenants.
5.2.19 We may be adversely affected by movements of currency exchange rates. As at 31 March 2013, 79.0% of our total borrowings of RM1.4 billion were denominated in USD. We are therefore exposed to any significant exchange rate movement of the USD. Furthermore, due to the geographic diversity of our business, we receive revenue and incur expenses in a variety of international currencies and therefore face currency exchange rate risks. For example, the recent volatility of the Iranian currency contributed to our decision to terminate our service to Tehran. On the other hand, most of our aircraft and engine maintenance services, aircraft leasing commitments, insurance contracts, and all of our aircraft purchase contracts are denominated in USD. Our fuel contracts are denominated in multiple currencies. Appreciation or depreciation in the value of the USD or other foreign currency relative to the RM, and in particular, the effects of any appreciation or depreciation of the USD in relation to the RIVI as it affects our USD-denominated borrowings, may have a significant impact on our financial results reported in RM without giving effect to any underlying change in our business or results of operations. Any currency exchange rate fluctuations may also lead to a decrease in our profit margins or to operating losses. These may be caused by increases in costs that are denominated in a particular currency or in interest expenses, currency exchange losses on unhedged fixed obligations, or indebtedness denominated in foreign currencies. We cannot provide assurance that we will be able to effectively mitigate the possible adverse effect of any future currency fluctuations on our business and financial position. 5. RISK FACTORS (cont’d)
5.2.20 We may not be able to continue to benefit from the Investment Allowance tax exemption if it is not renewed after 2014. The Ministry of Finance of Malaysia granted us income tax exemption under Section 127 of the Income Tax Act, 1967 in the form of an Investment Allowance of 60.0% on qualifying expenditure incurred within a period of 5 years commencing 1 September 2009 to 31 August 2014, to be set off against 70.0% of the statutory income for each year of assessment. For the past 3 years ended 31 December 2010,2011 and 2012, we have recognised tax incentives amounting to an aggregate of approximately RM184.4 million pursuant to the Investment Allowance tax exemption. Any unutilised tax allowances may be carried forward after 2014 until fully utilised. There is no assurance that we would be able to benefit from a similar tax exemption following the expiration thereof in 2014. Accordingly, our effective tax rate may increase as a result of the termination of the existing tax exemption.
5.2.21 We may be SUbject to increased costs if planned environmental regulations are implemented. Carbon emissions by aircraft are a serious environmental concern, and efforts have been made by lATA to encourage governments to take measures to reduce greenhouse gas emissions from their aviation industries with a view towards achieving carbon-neutral growth by the year 2020. In light of this, lATA is advocating a global approach to reduce emissions, which involves the adoption of a uniform standard for accounting for emissions across all participating international jurisdictions as opposed to separate carbon emissions standards adopted by individual countries. lATA has been working with ICAO to put in place a regulatory system to account for and control emissions and allow access to carbon markets, use revenues from economic measures such as emissions permit auctions, and provide incentives for fleet renewal with more fuel efficient aircraft. ICAO has developed certain standards, policies and guidelines with a focus on technological improvements, more efficient operating procedures and proper organisation of air traffic. There is, as yet, no mandatory system in place for the regulation of aircraft emissions by ICAO, and each jurisdiction is given the freedom to manage its respective aviation industry to comply with the policies and guidelines by ICAO. ICAO is moving, however, towards a carbon trading system such as that implemented by the European Union. While carbon emission controls have not been enacted in the jurisdictions in which we currently operate, if any such restrictions are put in place, our operations may be materially affected. If carbon emission restrictions are adopted, such controls would apply across the industry as a whole, and not imposed solely on us or any other particular carrier, and may result in increased operational costs that are passed through to customers through increases in fares. For example, the increases in our passenger fares as a result of the pass through of additional operating costs associated with the application of the European Union Emission Trading System to the aviation sector commencing 1 January 2012, contributed to our decision to discontinue our services to London and Paris in March 2012. In addition, other changes in the interpretation of current environmental regulations or the introduction of new laws or environmental regulations which affect our business may have a material adverse effect on our business and our operations. 5. RISK FACTORS (cont’d) 5.2.22 We do not have full insurance coverage for certain risks, and may not be able to obtain insurance coverage on commercially reasonable terms. As operating an airline involves many risks and hazards, the availability of insurance is fundamental to our operations and crucial to risk management. However, insurance coverage is generally not available or prohibitively expensive for certain risks, and certain aviation related insurance may become unavailable or available only for reduced amounts of coverage that are insufficient to comply with the levels of coverage required by aircraft lessors or applicable government regulations. It is to be noted the requirement for such insurance coverage by aircraft lessors or applicable government regulations is a pre-requisite for us to operate such aircraft and/or routes. In the event that we are unable to obtain the requisite insurance coverage, we would not be able to operate such aircraft and/or routes. Furthermore, with respect to government regulations, certain air service licences issued by the relevant government authorities have made it a condition in the licences for our Company to obtain specific insurances. In line with industry practice, certain business risks are left uninsured when insurance coverage is generally unavailable. These include risks such as business interruptions, loss of profit or revenue as well as mechanical breakdowns. Any inability on our part to obtain insurance, whether on commercially acceptable terms or at all, for general operations or specific assets, would have a material adverse effect on our business operations and financial performance. To the extent that any uninsured risks materialise, it could cause a substantial increase in our insurance premiums and detrimentally affect our operating results and financial performance. For example, in the event of terrorist attacks, hjjackings, aircraft crashes or other events that generally adversely affect the airline industry, there is a risk that aviation insurers will further increase their premiums or reduce the availability of insurance coverage. There can be no assurance that our insurance coverage will cover any or all actual losses incurred during our operations. If actual losses incurred by us for any event exceed the insured amount under our insurance policies, we may have to bear substantial losses which would have a material adverse effect on our financial results. Please refer to Section 7.9.3<;>f this Prospectus for further details on our level of insurance coverage.

5.3 Risks Relating To Our Shares 5.3.1 There has been no prior market for our Shares and a market for our Shares may not develop. There has been no prior market for our Shares and there is no assurance as to the liquidity of any market that may develop for our Shares, the ability of holders to sell our Shares or the prices at which holders would be able to sell our Shares. None of us, the Promoters, Selling Shareholders and the Joint Bookrunners have an obligation to make a market for our Shares. Application has been made to Bursa Securities for our Listing of, and quotation for, our enlarged and issued paid-up share capital (including the IPO Shares) on the Main Market, and it is expected that there will be an approximate 15 Market Days gap between the closing of the Retail Offering and trading of our Shares. We cannot assure you that there will be no event or occurrence that will have an adverse impact on the securities markets, our industry or us specifically during this period that would adversely affect the market price of our Shares when they begin trading. 5. RISK FACTORS (cont’d) 5.3.2 There may be a potential delay or failure of our Listing. Our Listing may be potentially delayed or aborted upon the occurrence of the following events: (i) we do not meet the public spread requirements as determined by Bursa Securities (inclUding as a result of any decision by us not to reallocate shares from the Retail Offering to the Institutional Offering as described in Section 4.3.6(iii)) of having at least 25.0% of our enlarged and issued paid-up share capital in the hands of at least 1,000 public shareholders holding at least 100 Shares each at the point of listing;
(ii) we are not able to obtain the approval of Bursa Securities for our Listing for whatever reason;

(iii) failure by the identified investors to subscribe for the portion of Shares to be placed to them; or (iv) exercise by the Joint Bookrunners, the Principal Adviser, the Joint Managing Underwriters and the Joint Underwriters of their rights pursuant to the Retail Underwriting Agreement to discharge themselves from their obligations thereunder. Upon the occurrence of any of these events, investors will not receive any Shares and we will return in full without interest, all monies paid in respect of any application for our Shares within 14 days, failing which the provisions of sub-sections 243(2) and 243(6) of the CMSA will apply accordingly and we will be liable to repay the monies with interest at the rate of 10.0% per annum or such other rate as may be prescribed by the SC upon expiration of that period until full refund is made.
5.3.3 The market price of our Shares may be volatile, which could cause the value of investors’ investment in our Company to decline. The market price of our Shares could be affected by numerous factors, including: (i) general market, political and economic conditions;
(ii) trading liquidity of our Shares;

(iii) changes in earnings estimates and recommendations by financial analysts; (iv) changes in market valuations of listed shares in general or shares of companies comparable to ours;
(v) changes in government policy, legislation or regulation; and
(vi) general operational and business risks.

In addition, many of the risks described elsewhere in this Prospectus could materially and adversely affect the market price of our Shares. Accordingly, our Shares may trade at prices lower than the Institutional Price or Final Retail Price. 5. RISK FACTORS (cont’d) Over the past few years, the Malaysian, regional and global equity markets have experienced significant price and volume volatility that have affected the share prices of many companies. Share prices of many companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. As such, the price and trading of our Shares may be sUbject to fluctuation.

5.3.4 Our Company may not pay dividends to shareholders. Dividend payments are not guaranteed and our Board may decide, at its sole and absolute discretion, at any time and for any reason, not to pay dividends. We have not paid any dividends to our shareholders since the incorporation of our Company. Although we are unlikely to pay any dividends in the immediate future, in the event that we decide to pay dividends in the future, our ability to do so will also depend on our future financial performance which, in turn, depends on the successful implementation of our strategy and on financial, competitive, regulatory and other factors, general economic conditions, demand and fares, costs of jet fuel and other factors specific to our industry, many of which are beyond our control. Furthermore, payment of dividends may also be limited by restrictive covenants contained in our current and future financing agreements which generally prOVide that for so long there is any amount due and payable under the facility or any other obligations under the facility remain outstanding, prior written consent of the lender is required before we declare, make or pay any dividend. 5.3.5 After the completion of the IPO, our Promoters’ interests may be different from those of our other shareholders. After the completion of the IPO, our Promoters will own approximately 1,277 million Shares, representing approximately 53.8% of our issued and outstanding Shares. By virtue of their shareholding in us, our Promoters will have the ability to indirectly· exercise control over us and our affairs and business, including the election of directors, the timing and payment of dividends and the approval of most other actions requiring the approval of its shareholders. There can be no assurance that interests of our Promoters will be aligned with those of our other shareholders. 5.3.6 The sale or the possible sale of a substantial number of our Shares in the public market could adversely affect the price of our Shares. Following the offering and sale of up to approximately 790 million IPO Shares, up to 33.3% of our Shares will be publicly held by investors participating in our IPO, while approximately 1,277 million Shares, or 53.8% of our issued and paid-up share capital, will be held by our Promoters. Notwithstanding our existing level of cash and cash equivalents, we may issue additional Shares after the end of the lock-up period in connection with financing activities or otherwise, and it is possible that our Promoters may dispose of some or all of their Shares after the lock-up period and/or moratorium period, pursuant to their own investment objectives. If our Promoters sell, or are perceived as intending to sell, a substantial amount of our Shares, the market price for our Shares could be adversely affected. 5. RISK FACTORS (cont’d)
5.3.7 Investors in our IPO will suffer immediate dilution in net tangible assets. The Institutional Price per Share is higher than the net tangible asset value per Share by RMO.86 after adjusting for our IPO. Investors subscribing for Shares in our IPO will therefore incur immediate dilution on a net tangible asset value per Share basis. The issuance of further ordinary shares at prices lower than the then existing net tangible asset value per ordinary share would result in further dilution. Please refer to Section 4.9 for further details on “Dilution”. 5.3.8 Our Company is required to comply with restrictions on foreign ownership of the Shares, which may affect the voting rights, liquidity and market price of the Shares. Our Articles prescribe a 45.0% limit on non-Malaysian ownership of our Company’s issued and paid up share capital. A foreign shareholder whose acquisition of Shares is determined by our Board to have resulted in this limit being exceeded, taking into account the time of acquisition of such Shares, shall be entitled to all rights, benefits, powers and privileges and be subject to all liabilities, duties and obligations in respect of and arising from such Shares, except for the voting rights in respect thereof. As a result, the liquidity and market price of the Shares may be adversely affected, particularly when the foreign ownership limit has been reached. The voting rights of the affected Shares will be automatically reinstated when the foreign ownership limit has been restored. Our Board may take various steps to prevent these foreign ownership limits from being exceeded, which would otherwise adversely affect our Company’s international traffic rights, further details of which are set out in Section 7.9.5(ii) of this Prospectus. For example, subject to the requisite regulatory approvals, our Board may be authorised to issue new Shares to Malaysians in order to reduce the proportion of Shares owned by non-Malaysians. Such an issuance of new Shares would be limited to 10.0% of our Company’s issued and outstanding share capital and also requires annual renewal of our Board’s general mandate by shareholders. However, there can be no assurance that the Company would be able to complete such an issuance of Shares and any issuance would immediately dilute our Company’s then eXisting shareholders. (The rest of this page has been intentionally left blank)

Comments are closed