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Paris 2011: AirAsia eyes fleet of over 300 aircraft by 2020 with new A320neo

17-Jun-2011

AirAsia is poised to place a major new order for A320 family aircraft at next week’s Paris Air Show as the low-cost airline group looks to accelerate its expansion over the next decade. The new order, which is expected to comprise at least 145 firm A320neos and include up to 335 additional aircraft when factoring in options, will cement AirAsia’s position as the region’s largest low-cost airline group and make it one of biggest airline groups in the world.

The AirAsia Group now operates 89 A320s and already has commitments in place for 86 additional A320s. The last aircraft from AirAsia’s existing A320 order is now slated to be delivered in 2015. To ensure it has the slots it needs for growth in the second half of this decade, AirAsia needs to place a new order soon.

Ordering the A320neo is a no-brainer for AirAsia

AirAsia also needs to act quickly to secure early delivery slots for the new A320neo family of aircraft. Airbus launched the A320neo late last year and is planning to begin deliveries of the new variant in 2016. The manufacturer has been holding early A320neo delivery slots for AirAsia and some of its other leading customers, but AirAsia needs to act quickly to ensure these slots are not given to other carriers. As the A320neo offers an expected 15% improvement in fuel burn compared to the current generation A320 and therefore will allow AirAsia to further reduce its unit operating costs (which are already the lowest in the industry) switching to the new variant when it comes available in 2016 is an easy decision for the airline.

AirAsia has not topped up its A320 order book since Nov-2007, when it committed to 25 additional A320s, raising the total to the current 175 aircraft. Given its typical rate for ordering more aircraft, AirAsia is overdue for a new order. CEO Tony Fernandes also loves the publicity which comes with making big announcements at major air shows. Mr Fernandes used the 2005 Paris Air show to announce AirAsia’s selection of the CFM56 engine for the group’s very first A320 order, which consisted of 60 firm aircraft and 40 options. The following year, AirAsia used the 2006 Farnborough Air Show to announce the exercising of the 40 options and the extension of the order to a new batch of 30 options. AirAsia has also used major air shows to announce orders for its long-haul arm, AirAsia X.

The timing is perfect for AirAsia to announce the order at Paris

Negotiations between AirAsia and Airbus over a potential A320neo order have been taking place for several months. It is believed the negotiations have now concluded or are close to concluding, allowing for the order to be formally announced at Paris.

Mr Fernandes already hinted that an A320neo order could be imminent during his 1Q2011 conference call last month with analysts. During his presentation he showed a slide which predicted AirAsia would be operating between 320 and 510 “A320 equivalent” aircraft by the end of 2020. The prediction came after an analysis was conducted to look at AirAsia’s fleet requirement for its second decade. AirAsia turns ten later this year and part of its “vision” for the next decade includes becoming “one of the world’s largest airlines by any measure”.

To achieve the lower end of its target (320 aircraft), the AirAsia Group will need to take delivery of 29 aircraft per year from 2016 to 2020. This is only slightly higher than the delivery rate now planned for 2013 to 2015. AirAsia is currently slated to take 24 additional A320s in 2013, 24 A320s in 2014 and 19 A320s in 2015.

AirAsia A320 and A320neo aircraft delivery schedule: 2011 to 2026

To achieve the higher end of its target (510 aircraft), the AirAsia Group will need to take delivery of about 67 aircraft per year from 2016 to 2020. In explaining the 320 and 510 figures to analysts, Mr Fernandes said the ultimate number added will depend on how many affiliate carriers the group ends up having.

In addition to its main operation in Malaysia, AirAsia currently has affiliates in Indonesia and Thailand. AirAsia is already planning to launch new affiliates in 4Q2011 in the Philippines and Vietnam, two important fast-growing markets. If the new Philippine and Vietnamese carriers are successful and a few other affiliates are launched over the next five years, the 510 aircraft figure could be reasonable. For example if AirAsia has seven carriers in its group by the beginning of 2016, each carrier will only need to add an average of nine to 10 aircraft per year to meet the target of 510 aircraft by the end of 2020.

But launching new affiliates is a risky and unpredictable business. For example, in Vietnam it has taken AirAsia several years and multiple attempts to secure the authorisation to launch a joint venture carrier. Cross-border airline ventures are still difficult to set up in several Asian countries given the regulatory environment and ownership restrictions. To manage this risk, AirAsia will likely only place firm orders for about 150 firm A320neos. Including options and/or purchase rights for another 150 to 250 aircraft as part of the deal is ideal as it ensures AirAsia will have the delivery slots it needs should it succeed at expanding its portfolio of carriers.

This time AirAsia is not over-ordering

There will likely be sceptics who will quickly claim AirAsia is over-ordering. They will likely point to AirAsia’s multiple aircraft delivery deferral announcements over the last three years. In 2009, AirAsia pushed back 16 A320 deliveries from 2010-2011 to 2014. In 2010 the group pushed back 10 A320 deliveries from 2012 to 2015 and only four months ago, in Feb-2011, it pushed back another seven A320 deliveries from 2011 to 2015.

But it is unlikely the conditions which necessitated the deferrals will be repeated. In most of the deferral delays, AirAsia cited the delayed construction of the new permanent low-cost terminal at Kuala Lumpur, which is now finally expected to open in 2012, replacing the current overcrowded temporary low-cost terminal. AirAsia was also impacted by the global economic downturn and the credit crunch. The company’s ability to finance aircraft is particularly limited because its current structure includes one publicly listed company which needs to finance capital expenditures at three carriers. This is expected to change over the next year as both Thai AirAsia and Indonesia AirAsia pursue their own initial public offerings.

The IPOs at Thai AirAsia and Indonesia AirAsia will help finance the new order

Mr Fernandes told analysts last month the IPOs in Indonesia and Thailand are key as they will free up the balance sheet of the main Malaysian company. As a result, with the capital raised from their IPOs, Thai AirAsia and Indonesia AirAsia will be able to fund their own fleet expansion. That will allow both carriers to expand more quickly as they won’t have to compete against each other and their Malaysian sister carrier for aircraft acquisition funds.

Mr Fernandes explained that once the IPOs in Indonesia and Thailand are complete the group overall can grow thrice as fast because each of the three existing carriers will be able to pay for their own aircraft. He says there is no reason each entity cannot support one delivery per month for a total of three per month across the group. For at least the first few years the main Malaysian company will still have to help fund the fleet expansion at the new Philippine and Vietnamese carriers but this should not be too difficult as the Malaysian operation will likely not require as many new aircraft. The Malaysian market is now relatively saturated compared to the other ASEAN markets such as Indonesia.

If AirAsia ends up committing to three A320neo deliveries per month from 2016 to 2020, that would require 180 firm orders and give the group 355 aircraft by the end of 2020. That assumes no changes to the group’s current 2012 to 2015 delivery schedule. If the IPOs in Thailand and Indonesia are successful, AirAsia could also look to accelerate expansion for 2012 to 2015. However, AirAsia could also be tempted to wait until 2016, when the more efficient A320neo becomes available, to accelerate its new aircraft delivery rate.

The group is currently only slated to receive 12 aircraft next year. This is unlikely to change because the IPOs have not yet taken place in Indonesia and Thailand and it is not easy to secure short-term A320 slots. Of the 12 deliveries for 2012, four are now earmarked for Malaysia, four for Indonesia, two for Thailand and two for the Philippines. Of the seven A320s to be delivered in 2H2011, three are for Malaysia, two are for Thailand and two are for the Philippines. As a result, at the end of 2012 Malaysia AirAsia is now slated to have 60 A320s, Thai AirAsia is slated to have 24 A320s and Indonesia AirAsia is slated to have 20 A320s. Indonesia AirAsia currently also operates four B737-400s but these are to be phased out in 2H2011.

AirAsia's current fleet and allocation by hub

AirAsia Philippines is now only slated to have four aircraft by the end of 2012 but this could be accelerated after the carrier launches. The new Vietnamese affiliate is preparing to source its initial batch of aircraft externally, but is expected to later tap into AirAsia’s existing and new order.

AirAsia is the world's seventh largest airline group and could become the second largest by 2020

AirAsia is already the largest low-cost airline group in Asia. It currently is the seventh largest low-cost airline group in the world, based on capacity (ASK). The group (including all three short-haul carriers but not AirAsia X) currently flies about 830 million ASKs per week. Southwest/AirTran is currently the largest low-cost airline group in the world, followed by Ryanair, easyJet, JetBlue, Air Berlin and Brazil's Gol.

Even if AirAsia ends up expanding its fleet to the top end of its 310 to 520 aircraft estimate for 2020, it is unlikely to surpass Southwest as the world’s largest low-cost carrier. When factoring its recent acquisition of AirTran, which itself is currently larger than the AirAsia Group, Southwest is now more than five times the size of AirAsia based on ASKs. In terms of fleet, Southwest and AirTran currently operate a combined fleet of 690 aircraft with another 154 aircraft on order, according to Ascend data.

AirAsia, however, could potentially surpass Ryanair by the end of 2020. Ryanair is currently three times the size of AirAsia (in terms of ASKs) but operates in a market which is growing much slower than Asia. In terms of fleet size, Ryanair currently operates 270 aircraft and has only 39 additional aircraft on order, according to Ascend data, but has been considering placing new orders.


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