SINGAPORE (Reuters) - AirAsia Bhd (>> AirAsia Berhad) Group Chief Executive Tony Fernandes has written to investors spooked by a report questioning accounting at Asia's biggest budget airline, saying it will raise funds at loss-making associates and may sell planes to cut group debt.

In a response to AirAsia shares falling to five-year lows, the CEO said the group plans to issue as much as $150 million in convertible bonds at each of its Philippine and Indonesian associates. Fernandes, who has led AirAsia's rise to a billion-dollar business from a two-plane operation in 2002, wrote in his letter that the company may also sell and lease back up to 20 aircraft in the group's fleet this year.

The comments in Fernandes' letter, sent on Monday and reviewed by Reuters, came days after Hong Kong-based firm GMT Research issued a report questioning AirAsia's accounting practices. In its report, GMT said AirAsia used transactions with associate companies to boost earnings, startling investors and leading the airline's shares to fall to a five-year intra-day low on June 12.

Fernandes' plans also come as some analysts question a strategy they say hinges on a raft of associate airlines, some of which are losing money amid stiff competition and now overdue on loan repayments to AirAsia. AirAsia has become the world's second-worst performing large and mid-sized airline stock this year after Virgin America (>> Virgin America Inc), with a decline of 34 percent, Reuters data shows.

"Some of the details here are still work-in-progress but what is written will more or less be reality," Fernandes said in the letter to investors. "Due to the recent movement in our share price, we are sharing the details with you earlier than planned," he said, without making reference to the GMT report.

AirAsia officials declined to comment on GMT's report or the letter from Fernandes.

Though a leader in the world's fastest-growing aviation market, AirAsia has been hit by competition from the likes of the Jetstar unit of Australia's Qantas Airways Ltd (>> Qantas Airways Limited) and Indonesia's Lion Air, and slid to a net loss for October-December 2014 before rebounding on lower fuel costs.

The carrier, the biggest Asian customer of plane maker Airbus (>> Airbus Group), is now taking on fewer new aircraft to manage capacity. On Monday, AirAsia's shares dropped as much as 3.9 percent, after falling a total of as much as 18 percent since GMT published its report on June 10.

"AirAsia's regional airline associate ventures are turning out to be more problematic than we initially anticipated," HSBC analysts said last week in a report titled "United We Fall."

"With the exception of Thai AirAsia, all the other airline ventures are loss-making and are being increasingly funded by the parent. Consequently, loans to associates doubled in 2014 (more than 50 percent overdue) and equaled half of AirAsia's equity value, the highest level in history."

AirAsia has previously said it plans to list the Philippine and Indonesian associates to raise funds to develop business, but has been hit by weaker demand and excess capacity in Southeast Asia.

In his letter, Fernandes said the business is improving.

"We believe that 2015 will be a very good year on the back of a better operating environment and a much more rational market. We have shown you good progress in 1Q15 ... We believe in results, not words," Fernandes said.

GMT said on Monday that AirAsia's recent moves appear to be steps in the right direction, though other issues remain unsolved. "It appears management shares our concerns about leverage across the group," Gillem Tulloch, the founder of the research firm told Reuters in an email.

Fernandes said in the letter to investors that AirAsia is looking to take the loss-making associates in Philippines and Indonesia public in 2017, seeking valuations of about $700 million for the Indonesia firm and $600 million for the Philippines business.

"I guess there is probably a bit of scepticism, they are saying 'We're going to be bringing in a couple of investors to invest in equity (in associate companies), and also in convertible bonds', so they can use the money raised to pay back into the company's balances," said Timothy Ross, an analyst at Credit Suisse.

"But I would ask, who is going to invest in a business that doesn't make any earnings, just to see their investment going up to the parent company?"

(Additional reporting by Al-Zaquan Amer Hamzah in KUALA LUMPUR; Editing by Kenneth Maxwell)

By Anshuman Daga