Sunday, September 7, 2008

AirAsia expands amid downturn

VIEW: If Air Asia's bet goes well, they will stand to capture a large market share, and also establish a strong foothold in other regions of the aviation market.

Sep 7, 2008

Analysts say that if it survives the industry slump, AirAsia could come out a winner with increased customer loyalty and a strong route network. -- STREATS
KUALA LUMPUR - AIRASIA, the region's biggest budget carrier, is making a risky bet.

As soaring fuel prices have forced other airlines to cut back, shed jobs and ground planes, AirAsia is doing the opposite: increasing flights, adding routes and boosting capital investment.

Last month, it even gave away a million free seats (although passengers still had to pay taxes and fuel surcharges). The seven-year-old company is aiming to fill the vacuum as other airlines reduce capacity, betting that more travelers will opt for budget flights amid a global economic downturn.

Analysts say that if it survives the industry slump, AirAsia could come out a winner with increased customer loyalty and a strong route network to catch the growth wave when good times return.

'They are reasonably well positioned for the long run but there's always a trade-off. It's a long term decision, which will cause some short-term pain,' said Mr Damien Horth, Asia transport analyst at UBS AG in Hong Kong.

Of course, the strategy could also backfire badly.

Already there are signs of trouble. Last month, AirAsia reported a 95 per cent plunge in its net profit for April-June quarter to RM9.42 million (S$3.90 million). But the company chalked that up mostly to a RM77 million ringgit foreign exchange loss from a weakened Malaysian ringgit, not weakness in its underlying business.

Average load factor - the percentage of seats taken up in an airplane - dipped to a still relatively strong 76 per cent, from 80 per cent in 2007.

Chief Executive Tony Fernandes remains undaunted.

'We are focused and happy with our strategy. We won't sacrifice long-term (growth) for short-term profits,' he told The Associated Press.

There are doubts, however, on whether AirAsia can fund its expansion.

It has a cash reserve of about RM1 billion but outstanding debts stand at RM5.4 billion, giving it a net debt position of RM4.4 billion. Debts are set to grow as it receives new planes.

The carrier has firm orders for 175 Airbus A320 planes, to be delivered gradually up to 2014, as part of fleet replacement and expansion.

Mr Chris Eng, analyst with OSK Securities in Malaysia, said AirAsia's growth prospects may be curbed while its joint-ventures in Thailand and Indonesia are expected to remain in the red.

'It will be challenging but we believe AirAsia can survive,' Mr Eng said, citing its efficient regional network and good cost control.

As it expands, AirAsia also faces a challenge in filling up capacity as consumer spending slows and competition increases from flag carrier Malaysia Airlines, which recently offered zero fares on surplus seats, analysts say.

'Everybody is now having to dig deeper into the well of consumer demand and the more they compete, the more fares go down,' said Mr Peter Harbison, executive chairman of the Centre for Asia-Pacific Aviation in Sydney.

The International Air Transport Association has forecast a US$5.2 billion (S$7.5 billion) loss this year for the global airline industry. It said crude oil price, currently averaging US$113 a barrel, is still 55 per cent higher than the 2007 average price while passenger demand growth is slowing even in Asia-Pacific.

At least two dozen airlines worldwide have closed down this year.

Many low-cost airlines are also struggling despite escaping the worst of the downturn.

Europe's Ryanair and Southwest Airlines in the US- two of the most resilient budget carriers - have cut capacity this year.

Ryanair, which reported a second quarter loss, said it may face its first full-year losses in 2008.

UBS's Horth warned AirAsia may also plunge into the red for the first time this year with losses stretching into 2009, as its rapid expansion and aggressive pricing policy bite into revenue.

'Assuming oil prices remain around current levels, its certainly going to be tough. The management is taking a long term approach but investors may get scared,' he said. Fuel prices account for half of AirAsia's cost.

AirAsia's stock has plunged by half from a year ago to around RM1, but has risen from an all-time low of RM0.765 in June. -- AP

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