AirAsia profits slashed, but "untold fortunes" await with contrarian strategy
AirAsia’s second quarter profit result contained few surprises. Net profit fell 95% and operating margins slipped below 5%. CEO, Tony Fernandes, stated it was nonetheless a “commendable performance” given that unit fuel price increased by 65% to USD142.5 per barrel. AirAsia is maintaining its contrarian approach of continuing to grow strongly as its competitors cut back.
The carrier concluded, the current downturn will "ultimately reward untold fortunes to AirAsia". As the turbulent industry unfolds, "AirAsia will emerge as the market leader", it added.
Rapid expansion is however taking a toll on the performance of the business in the short term. Load factors fell 4.3 ppts to 76% in the sector, although the carrier stated the fall was in line with management's expectations, as capacity expanded by a third.
AirAsia passenger numbers (mill) and passenger load factor (%): 1Q07 to 2Q08
Source: Centre for Asia Pacific Aviation & AirAsia
AirAsia has introduced 20 routes since the beginning of 2008 (including six in the second quarter) and yields performed strongly (+13% in the second quarter - and better than management expectations), due to "buoyant and distinctive demand" and partly as a result of greater "internationalisation" of its network.
AirAsia sectors flown vs Average fares (MYR)*: 1Q07 to 2Q08
*Average Fare includes Fuel Surcharge, Admin Fees and Insurance Surcharge
Source: Centre for Asia Pacific Aviation & AirAsia
Ancillary revenues also performed strongly, with per passenger spend rising 34% year-on-year in the second quarter. Ancillary revenues now account for 8.3% of the total, up 1 ppt from 2Q07.
Unit costs (including fuel) increased 10% year-on-year to USD 3.57 cents per ASK. However, unit cost excluding fuel improved by 19%, stemming from productivity gains and the increased number of A320 in the fleet, as the airline transitions from its older B737-300 fleet.
AirAsia: Unit cost per ASK (USD cents): 2Q07 vs 2Q08
Source: Centre for Asia Pacific Aviation & AirAsia
AirAsia cost per ASK (sen): Non-fuel vs including fuel: 1Q07 to 2Q08
Source: Centre for Asia Pacific Aviation & AirAsia
The loss-making Thai and Indonesian subsidiaries are expected to benefit greatly from new A320s joining the fleet (Thai AirAsia currently has five and Indonesia AirAsia receives its first in Sep-08).
Long-haul partner, AirAsia X, was described by the carrier as the "dark horse that adds value". The long-haul offshoot will add Perth (02-Nov-08 as it receives its first new A330 from Airbus) and Melbourne (12-Nov-08) to its network later this year and confimed plans to add London, Amritsar (India) and Tianjin (China) to its network in 2009.
AirAsia stated the outlook remains "challenging" and the Group hinted it could be loss-making in the traditionally weakest third quarter. But it added, despite the added challenge from fuel for the third quarter, "we are confident that we will remain profitable for the full year accounted".
For AirAsia, the "key to survival" is being focused on low fares and marketing. CEO Fernandes stated AirAsia would emerge "stronger in the end", as other carriers fail and the industry consolidates.
He added, "jet fuel prices have reached to levels never imagined before and this might be the much needed catalyst for the industry to restructure. Inefficient airlines will find the current market landscape unbearable and will have to cut capacity or disappear altogether".
When they do, AirAsia has the cost structure and the brand to attack.