AirAsia: Aviation

THE COMPANY: AirAsia is one of the largest low-cost carriers in Asia, with an extensive network of around 150 routes. Within 10 years of operations, AirAsia has expanded its fleet from just two aircraft to 107 at present, and has carried more than 140m passengers. The company aspires to become the leading airline for destinations in ASEAN countries, serving a market of 3bn people. Already, AirAsia has built up established operations based in Malaysia, Indonesia, Thailand and the Philippines, servicing a network that stretches across ASEAN and also includes China, India, Sri Lanka and Australia. This is further complemented by a 16% stake in AirAsiaX, its low-cost, long-haul affiliate carrier that currently flies to destinations in China, Australia, Taiwan, Iran, Korea and Japan. AirAsia was also named the World’s Best Low Cost Airline in Skytrax’s annual World Airline Survey for four consecutive years from 2009 to 2012.

AirAsiaX’s passenger traffic grew by 12.3% in the fourth quarter of 2011, finishing the full year at 14.1bn revenue-passenger kilometres, marking growth of 36.2% over 2010. AirAsia also introduced an “empty seat” option, aimed at improving travel comfort, in February 2012 for economy customers, allowing travellers to purchase three seats in a row for a nominal fee.

DEVELOPMENT STRATEGY: The prospects for the air travel sector in the region, particularly the low-cost segment, are bright. Propensity to travel by air in the region is accelerating thanks to growing per capita income, rapid urbanisation and the increasing mobility of the population. To capitalise on this, AirAsia has already mapped out its next phase of growth, backed by confirmed orders for 272 aircraft – A320 and A320neo – to be delivered until 2026. It is also currently in discussion with Airbus for an order of an additional 100 aircraft. Over the next five years, the company plans to boost its fleet in Malaysia by some 42%, from 59 to 84 aircraft; more than double its fleet in Thailand from 25 to 56; more than triple its fleet in Indonesia from 19 to 60; and substantially expand its two-aircraft fleets in the Philippines and Japan to 15 and 32, respectively.

Over the immediate term, the key concern is that its near-monopoly in the highly lucrative domestic low-cost air travel market in Malaysia will be broken with the entrance in May 2013 of Malindo Airways (Malindo), a new 51:49 low-cost carrier start-up joint venture between Subang-based National Aerospace & Defence Industries and Indonesia-based low-cost carrier Lion Air. However, AirAsia has taken a number of measures to ensure it can compete with this new player. The key factor is its lower cost structure stemming from it being a “true-blue” low-cost carrier, as opposed to Malindo being a “hybrid” or “value” airline that uses two-class configuration and provides in-flight entertainment as well as free meals. AirAsia’s cost advantage also comes from a lower unit cost backed by economies of scale due to its size, as well as its access to cheaper funding for its aircraft by virtue of its strong and proven credit rating, while as a new start-up Malindo is considered to be carrying a higher credit risk.

Other factors that put it in a better position vis-à-vis Malindo include its strong balance sheet with gross cash of RM2.2bn ($709.7m) as of June 30, 2012, as opposed to Malindo’s presumably stretched balance sheet with initial equity having been used to fund upfront payments for aircraft purchases or leases. This means Malindo’s cash reserve will burn out much faster than that of AirAsia in a price war scenario. AirAsia also has the advantage of bigger size. By mid-2013, when Malindo starts operations, AirAsia’s fleet size in Malaysia will have grown in excess of 60, as opposed to Malindo’s 12. This means AirAsia has a much larger network as well as higher frequencies for popular routes. The AirAsia brand is also highly recognised among both domestic and overseas travellers, while Malindo is an entirely new brand, and it will take time for the new competitor to build and attract customer loyalty. Lastly, AirAsia’s good safety record is a major benefit, but Malindo, being a new airline, does not yet have a proven record.

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The Report: Malaysia 2012

Capital Markets chapter from The Report: Malaysia 2012

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