Mon, Sep 08, 2008 page11

• AirAsia makes risky bet

  IN THE AIR While CEO Tony Fernandes said long-term growth would not be sacrificed for short-term profit, doubts exist on whether the airline can fund its expansion

  • AP
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  AirAsia, the region’s biggest budget carrier, is making a risky bet. As soaring fuel prices have forced other airlines to cut back, 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.

  

  This undated photograph shows budget air carrier AirAsia X’s first leased Airbus A330 long-haul aircraft departing Kuala Lumpur International Airport’s low-cost carrier terminal in Sepang, Malaysia.

  PHOTO: AFP/AIRASIA

  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 the April-June quarter to 9.42 million ringgit (US$2.9 million). But the company chalked that up mostly to a 77 million ringgit foreign exchange loss from a weakened Malaysian ringgit.

  Average load factor dipped to a still relatively strong 76 percent, from 80 percent last year.

  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 said.

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

  It has a cash reserve of about 1 billion ringgit but outstanding debts stand at 5.4 billion ringgit, giving it a net debt position of 4.4 billion ringgit. 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.

  As it expands, AirAsia also faces a challenge in filling up capacity as consumer spending slows and competition increases from flag carrier Malaysia Airlines, analysts say.

  The International Air Transport Association has forecast a US$5.2 billion loss this year for the global airline industry. It said crude oil price, currently averaging US$113 a barrel, is still 55 percent higher than the average price last year while passenger demand growth is slowing.

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

  Horth warned AirAsia may also plunge into the red for the first time this year with losses stretching into next year, 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.
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