AirAsia takes risks with expansion amid downturn

[Naim 6]

AirAsia takes risks with expansion amid downturn

 

By EILEEN NG – 19 hours ago

 

KUALA LUMPUR, Malaysia (AP) — 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 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 percent plunge in its net profit for April-June quarter to 9.42 million ringgit ($2.9 million). But the company chalked that up mostly to a 77 million ringgit ($23 million) 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 percent, from 80 percent 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 1 billion ringgit ($303 million) but outstanding debts stand at 5.4 billion ringgit ($1.6 billion), giving it a net debt position of 4.4 billion ringgit ($1.3 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.

 

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," 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 Peter Harbison, executive chairman of the Center for Asia-Pacific Aviation in Sydney.

 

The International Air Transport Association has forecast a $5.2 billion loss this year for the global airline industry. It said crude oil price, currently averaging $113 a barrel, is still 55 percent 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 U.S._ 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 1 ringgit (30 cents), but has risen from an all-time low of 0.765 ringgit (23 cents) in June.

 

http://ap.google.com/article/ALeqM5h1eWnCy...rUyDrAD931O8M80

[Azreen 0]

Time will be the best judge of this strategy. I think that if internal/operational foundation is solid, then they should be able to weather this rough patch.

[Naim 6]

Agence France-Presse - 9/7/2008 2:14 AM GM

 

AirAsia X unfazed by high fuel costs, airline failures

 

Long-haul budget airline AirAsia X said it will not hit the wall like other low-cost carriers, with ticket sales strong despite faltering economies and high fuel costs.

 

AirAsia X chief executive officer, Azran Osman-Rani, said that while there was an overall "dampening in consumer demand for travel," the carrier's low fares meant it was unscathed by the downturn.

 

He said the carrier's operating costs are low compared to other airlines, and that it would not meet the fate of UK-Canadian carrier Zoom and Hong Kong-based Oasis, which have gone under in recent months.

 

"We are a low-fare carrier. There is a big demand for travel at the prices we offer," he told AFP in a recent interview.

 

Aviation experts have expressed cautious optimism over the business model of AirAsia X, which has fares generally half those offered by full-service carriers.

 

Azran said the arrival of two brand-new, fuel-efficient A330-300 in October and December will further lower its operating costs.

 

"A lot of carriers used old planes. Some of the planes are 15 to 20 years old. Oasis and Zoom went down because they used old planes. With today's high fuel costs, it does not work anymore," he said.

 

AirAsia X has signed a deal with Airbus to buy a total of 25 of the A330-300 aircraft.

 

Azran said Airbus will deliver three A330-300 in 2009, and that it was fast-forwarding an aircraft originally scheduled to be handed over in 2011.

 

"We need the aircraft to cater for our strong passenger demand on existing routes and for our new routes," he said.

 

An affiliate of regional low-cost carrier AirAsia and Virgin Group, AirAsia X was launched in January 2007. AirAsia and AirAsia X have common shareholders, including AirAsia founder and CEO Tony Fernandes.

 

Richard Branson's Virgin Group has also taken a 20 percent stake in the airline, and the British billionaire has vowed to ensure that the project turns a profit.

 

AirAsia X currently operates with just one A330-300, mounting four return flights a week between Kuala Lumpur and Australia's Gold Coast, and also to China's Hangzhou.

 

The airline plans to offer six return flights per week between Perth and Kuala Lumpur starting November 2 and to service the Melbourne route from November 12.

 

"Three months before we fly to Perth, half of the seats have been taken. We expect 80 percent of the seats to be taken before we mount the flight," Azran said.

 

He said traffic to the Gold Coast has doubled since the route was launched in November 2007, and AirAsia X was also expected to fly to Britain in the first quarter of 2009.

 

"We are considering two airports -- to London or Manchester. We could start our services in the tail end of the first quarter of 2009," he said.

 

http://news.my.msn.com/regional/article.as...umentid=1664407

 

[Wilber Tan 0]

good luck to air asia!!