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AirAsia Part 4: AirAsia X pursues turnaround. Delhi to add to Honolulu & Sapporo as new routes

Long-haul low-cost airline group AirAsia X is optimistic it can complete a turnaround and return to profitability after seven consecutive quarters of losses. Conditions in most of its main markets are improving, including Australia and China.

AirAsia X has slowed growth significantly and is now planning to add only two aircraft over the next three years, both of which will be allocated to its Thai affiliate. But the group will consider reaccelerating expansion by sourcing additional A330-300s if market conditions continue to improve.

The Malaysian carrier will still be able to launch several new markets, starting with Honolulu and Delhi, without expanding its fleet as AirAsia X optimises its network and pursues fewer charter or wet lease commitments. Services to Europe could also potentially be resumed in the medium-term.

This is the fourth in a series of reports on AirAsia following the 15-Sep-2015 CAPA LCC Airports Congress in Bangkok. The first three reports examined the plans by three short-haul affiliates to focus expansion from new secondary hubs.

See related reports:

This report examines sister long-haul group AirAsia X, which also has been focusing expansion over the last year on new hubs following the launch of its first overseas affiliates. But expansion plans for Indonesia AirAsia X (IAAX) and Thai AirAsia X (TAAX) has slowed considerably while the original Malaysian operation has been in restructuring mode, with several route terminations and capacity reductions, in response to challenging market conditions and heavy losses.

AirAsia X slows fleet expansion

AirAsia X currently has a fleet of 26 A330-300s including 20 aircraft at Malaysia AirAsia X (MAAX), four aircraft at TAAX and two aircraft at IAAX. Over the last year, the AirAsia X Group has slowed down fleet expansion by cancelling or deferring about 20 A330-300s which were to be delivered in 2015 to 2018.

As CAPA highlighted in a 22-Aug-2015 report, AirAsia X is now only committed to receiving three additional A330-300ceos, including one slated for delivery in Oct-2015 and two for 2016, but is still committed to taking 55 A330-900neos from late 2018.

AirAsia X Group aircraft deliveries: 4Q2015 to 2026

Year 4Q2015 2016   2017 2018  2019 2020 2021 2022  2023 2024  2025 2026 TOTAL
A330-300ceo 1  2  0 0                 3
A330-900neo       2 7  8 2 55

See related report: AirAsia X slows fleet expansion, seeking a 2H2015 turnaround. Could AirAsia buy its half-sister?

AirAsia X CEO Benyamin Ismail told CAPA on the sidelines of the 15-Sep-2015 LCC Airports Congress the group is now only planning to grow the A330-300ceo fleet by two aircraft as one of the two deliveries slated for 2016 will replace an older model A330-300 which is being returned.

The aircraft being returned, 9M-XAA, is 21 years old, marking it by far the oldest aircraft in the AirAsia X fleet. All of the group’s 25 other aircraft are at most 10 years old, including 11 that are less than three years old, according to the CAPA Fleet Database.

AirAsia X Group fleet summary: as of 29-Sep-2015

Aircraft In Service On Order
Total: 26 68
Airbus A330-300 1 0
Airbus A330-300E 19 3
Airbus A330-300X 6 0
Airbus A330-900neo 0 55
Airbus A350-900XWB 0 10

The two final A330-300ceo growth aircraft, including the aircraft being delivered in Oct-2015, will be allocated to TAAX. This will give TAAX a fleet of six A330-300s while MAAX will maintain for the next three years a fleet of 20 aircraft and IAAX a fleet of only two aircraft.

But MAAX is able to increase capacity in 4Q2015 as three A330-300s which have been operating outside Malaysia for wet lease customers will return to the scheduled operation by the beginning of Nov-2015. These aircraft will be used primarily to add capacity in three of MAAX’s main markets – Australia, Korea and Japan – including seasonal increases on existing routes and new flights from Kuala Lumpur to Sapporo and from Osaka Kansai to Honolulu.

MAAX is also planning to resume flights to Delhi in 1Q2016. Mr Ismail said MAAX will again pursue wet lease opportunities in 2016 but for now will only forge short contracts of two to three months. This will enable MAAX to better match its scheduled capacity with demand, particularly in markets with seasonal fluctuations such as Australia. In recent years MAAX has been wet leasing out some of its aircraft for extended periods.

AirAsia X CEO Benyamin Ismail discusses upcoming changes to the group’s fleet, recent improvements in market conditions and the new Sapporo and Honolulu routes

AirAsia X still has flexibility to reaccelerate fleet growth

Deferring and cancelling almost all the remaining A330-300ceo orders with Airbus gives AirAsia X more flexibility. The group now has the ability to maintain capacity at the relatively conservative current level, giving it an opportunity to rework its network and focus on profitability rather than growth.

For now halting growth and even shrinking for the sake of sustainability is the only sensible strategy for AirAsia X given its weak financial position and stock price, which has dropped by more than 70% over the last year. In the most recent quarter, 2Q2015, ASKs at MAAX were down 9% year over year and passenger numbers declined by 20%.

But Mr Ismail pointed out AirAsia X can still potentially source additional A330-300neos at short notice should market conditions warrant. Having the option of acquiring additional aircraft, potentially on short-term leases, is sensible as orders cannot usually be cancelled or deferred at the last second.

It is hard to imagine there will not be any further changes to the AirAsia X fleet plan for 2016 to 2018. Maintaining a fleet of only two aircraft at IAAX is particularly hard to imagine.

Indonesia AirAsia X focuses on Australia

IAAX has struggled since taking its first aircraft in late 2014 and launching operations in Jan-2015. IAAX was initially set back by a costly four month delay in launching services to Melbourne, its intended launch route, following a regulatory hiccup in securing approvals from Australia.

See related report: Indonesia AirAsia X faces regulatory hurdles & delays but is finally cleared to launch Melbourne

IAAX currently operates five weekly flights on Bali-Melbourne, which was finally launched on 18-Mar-2015. It plans to launch five weekly flights from Bali to Sydney on 17-Oct-2015 but has suspended effective 29-Sep-2015 its four times weekly service from Bali to Taipei, which was launched in Jan-2015.

Taipei was always part of the IAAX business plan but was accelerated after the carrier encountered delays in launching services to Australia. AirAsia X’s lack of success in stimulating sufficient demand on Bali-Taipei, which is only served by full-service carriers, highlight potential challenges for IAAX in markets outside Australia.

IAAX has been looking at serving Auckland, Jeddah, Tokyo Narita as well as several potential destinations in mainland China. But with its fleet stuck at only two aircraft the carrier could be limited to the Australian market.

IAAX is now performing relatively well in Melbourne, an indication that efforts to rebuild the AirAsia X brand in Australian market have succeeded. AirAsia X is also encouraged by the initial bookings on Bali-Sydney and is looking at Bali-Brisbane, which would be its third route in the Indonesia-Australia market. IAAX would have the capacity to add Brisbane using its two-aircraft fleet but may not have the capacity to also launch other routes.

“The good thing with Indonesia is that their two routes, Sydney and Melbourne, are doing very well. We’ve been quite surprised by their loads,” Mr Ismail said. “We will see how that goes.”

Once it launches Bali-Sydney, AirAsia will have about a 27% share of seat capacity in the Bali-Australia market including a 12% share for IAAX and a 15% share for short-haul sister carrier Indonesia AirAsia (IAA), which serves Perth and Darwin. Jetstar Airways is currently the market leader with a 42% share of total capacity followed by Virgin Australia with 22% and Garuda with 15%, according to CAPA and OAG data.

Bali-Australia capacity for AirAsia and Jetstar (one-way seats per week): Sep-2011 to Mar-2016

Indonesia AirAsia X still faces challenging outlook

IAAX is now working to meet newly enforced Indonesian regulations requiring airlines to have positive equity and maintain a fleet of at least 10 aircraft, including five owned aircraft. IAAX expects to meet the fleet requirement by putting A320s that are operated by IAA on its books – although the A320s will continue to be operated under IAA with IAA crews.

For now AirAsia X continues to be optimistic about Indonesia. But the reality is that retaining an affiliate in the Indonesian market could ultimately prove to be too costly given the current regulatory environment.

A fleet of only two A330s is also clearly inefficient. The group could be better of pulling the plug on IAAX and redeploying the aircraft to Malaysia or Thailand.

Thai AirAsia X has brighter outlook

AirAsia X also has had to slow down growth at TAAX but the Thai affiliate is larger and with the fleet to reach six A330s within the next year it should have sufficient scale to be profitable.

TAAX also has faced regulatory setbacks as it is now unable to pursue expansion in its main markets of Japan and South Korea. But TAAX is able to maintain its three daily flights to Japan and one daily flight to South Korea while long-haul low-cost rival NokScoot remains locked out of these key markets as it had not yet launched services when ICAO released its determination against the Thailand DCA, which prompted Japanese and Korean authorities to block any expansion from all Thai carriers.

See related report: NokScoot and Thai AirAsia X set back by new ICAO-driven restrictions from Japan and South Korea

TAAX is now preparing to launch services in Oct-2015 to Shanghai, its first destination in China, using its soon to be delivered fifth A330. More destinations in China are under consideration along with Sydney, Moscow and Tehran.

Thai AirAsia CEO Tassapon Bijleveld told CAPA on the sidelines of the LCC Airports Congress that TAAX could launch services to Australia and Europe in 2016. He said the TAAX has already proven to be a good complement to short-haul sister carrier Thai AirAsia (TAA) with 30% of TAAX passengers connecting onto TAA-operated flights.

TAA particularly see a lot of TAAX passengers connect from Korea and Japan to Myanmar, Laos, Cambodia and Vietnam. (TAA and TAAX have different ownership structures and management teams but Mr Tassapon has shares in both carriers.)

Connections in Bangkok will continue to be an important component of the TAAX strategy as it diversifies its network. Connectivity will also continue to be an important part of the AirAsia X strategy in Malaysia.

About 40% of MAAX passengers now connect onto other AirAsia flights. This includes about 30% of passengers connecting onto short-haul affiliate Malaysia AirAsia (MAA) and about 10% onto other MAAX flights.

Malaysia AirAsia X transit traffic portion: 2011 to 1H2015

AirAsia X plans to resume Delhi in 1Q2016

MAAX is looking to boost transfer traffic and open up new city pairs as it reworks its network. Transit traffic has dropped over the last year as competition in one-stop markets such as Australia-North Asia has intensified.

By launching new destinations MAAX should be able to push up transit back to the nearly 50% level achieved in 2014. AirAsia X is particularly excited about connecting its Australian network with Delhi, which it plans to resume in early 2016.

Australia-India is a large and growing market but has limited non-stop flights and limited LCC options. AirAsia X is now able to offer connections from Australia to southern India using MAA but does not have connections to the main markets of Delhi and Mumbai. MAAX stopped serving Delhi and Mumbai in 2012 as part of an earlier restructuring.

AirAsia X recently secured traffic rights to support four weekly flights from Kuala Lumpur to Delhi made available by capacity cuts from Malaysia Airlines (MAS). MAAX is now preparing to resume Kuala Lumpur-Delhi service in 1Q2015 with four weekly A330-300 frequencies.

Malindo Air also has been allocated some of the Kuala Lumpur-Delhi rights returned by MAS, enabling the Lion Group affiliate to add three flights on the route from mid Oct-2015 for a total of 10. Malindo launched services to Delhi in early 2014, using traffic rights that had originally been used by MAAX.

Kuala Lumpur to Delhi capacity by carrier (one-way seats per week): Sep-2011 to Mar-2016

AirAsia X is also interested in resuming services to Mumbai. But there are still no rights traffic rights available to Malaysian carriers for Mumbai or other Indian metros as MAS only cut Delhi as part of its recent network restructuring.

The Malaysian traffic rights MAAX previously had for Mumbai are now used by Malindo. MAS still serves Mumbai with two daily flights while the flag carrier now only serves Delhi with one daily flight.

AirAsia X sees improvement in Australia, particularly Gold Coast and Melbourne

As CAPA previously highlighted, MAS also cut capacity in Aug-2015 by about 40% to Australia. Mr Ismail said MAAX has already noticed an improvement in market conditions in Australia, particularly in Melbourne and Gold Coast.

See related report: Malaysia Airlines restructuring Part 1: 40% capacity cut to Australia is harsh - but sensible

But competition in the Sydney and Perth markets remains intense, pressuring yields and load factors. The Perth market will become even more challenging in Nov-2015, when Malindo launches services on the Kuala Lumpur-Perth route with 10 weekly flights.

MAAX currently operates 32 weekly flights to Australia, down significantly from 56 weekly flights at the beginning of 2015. MAAX plans to add back most of the capacity for the peak southern summer season as it will operate 48 weekly flights to Australia from early Dec-2015 until the end of Jan-2016.

Malaysia AirAsia X weekly frequencies (to and from) by country: Dec-2015

But some of the increases will be temporary and MAAX will be back to 41 weekly flights to Australia in Feb-2015 with a further reduction expected after Easter.

For the off-peak months in 2016 MAAX expects to offer a higher level of capacity than currently to Melbourne and Gold Coast, which it now serves with 11 and five weekly flights respectively. “With MAS pulling out of Brisbane it’s just an automatic for us to increase frequencies [to Gold Coast]. So we are looking at that to see what we can do,” Mr Ismail said.

But after peak season increases MAAX will likely revert back to the current schedule for the more challenging Perth and Sydney markets. MAAX now operates nine weekly flights to Perth and seven to Sydney, according to OAG data. In 2014 MAAX maintained two daily flights year-round in these markets as well as two daily flights to Melbourne.

North Asia markets also recover as load factor improves

MAS has not cut capacity in most of the other markets where there is overlap with MAAX. But MAAX is still generally seeing an improvement in market conditions. For example, the Malaysia-Chia market is now finally recovering after visitor numbers from China declined significantly for over one year in the aftermath of the MH370 incident.

MAAX was also impacted in 2Q2015 by reduced demand in the Malaysia-South Korea and Malaysia-Nepal markets due to the MERS virus in Korea and the earthquake in Nepal. But both these markets have now recovered.

Overall MAAX posted an average seat load factor of only 68% in 2Q2015, its lowest ever quarterly load factor. Mr Ismail said the carrier’s load factor is expected to be in the high 70s in 3Q2015, which is close but still not quite at its normal level. MAAX’s third quarter load factor in 2011 to 2014 was between 80% and 83%.

Malaysia AirAsia X quarterly load factor: 1Q2011 to 2Q2015

AirAsia X expands in Japan with Sapporo and Honolulu flights

Meanwhile MAAX’s performance in Japan has improved since suspending service to Tokyo Narita in Aug-2015. MAAX currently only serves Tokyo Haneda and Osaka Kansai, as Nagoya was also cut in early 2015.

AirAsia X thought the Kuala Lumpur-Tokyo market was oversupplied as MAS did not cut capacity in Tokyo while All Nippon Airways recently launched services to Kuala Lumpur. MAAX is instead pursuing expansion elsewhere in Japan by launching services to Sapporo and expanding in Osaka. MAAX now serves Osaka with five weekly flights from Kuala Lumpur but is planning a new four times weekly Kuala Lumpur-Osaka-Honolulu flight which will supplement the existing service.

Kuala Lumpur-Sapporo is launching on 1-Oct-2015 with four weekly flights which AirAsia X plans to maintain year-round despite northern Japan typically being a seasonal market. Mr Ismail said flights to Sapporo are already almost fully booked through Mar-2015 and MAAX is now working with agents to try to educate passengers on the appeal of Hokkaido as a year-round destination.

As CAPA previously highlighted, MAAX initially unveiled plans in Apr-2015 to launch services to Honolulu on 1-Nov-2015 with four weekly flights from Osaka.

See related report: AirAsia X long-haul low-cost service to the US will provide an important test for the Asian model

MAAX has had to push back the targeted launch date for Hawaii as it is working to secure approvals from the US FAA. MAAX is now aiming to launch Honolulu, which will be the first US service for any AirAsia carrier, by the end of 2015.

Mr Ismail said MAAX hopes to secure FAA approval in Oct-2015. MAAX will also still need Japanese approvals before it begins selling the planned new route. “For Hawaii it’s a very processed oriented task trying to get that route through, especially dealing with authorities in America,” Mr Ismail told CAPA TV. “But we are getting there.”

AirAsia X continues to evaluate new destinations from Kuala Lumpur; the A330neo will open up new options

Delhi, Honolulu and Sapporo should give MAAX a network of 20 destinations (including Kuala Lumpur) in early 2016. The new destinations essentially replace Adelaide, Nagoya and Tokyo Narita which were all cut in 2015.

MAAX is still able to add a few more new destinations in 2016 without growing its fleet. Destinations to the west are particularly appealing as it would help AirAsia X diversify its network, which is heavily dependent on Australia and North Asia.

Currently North Asia accounts for 70% of the group’s seats (includes flights by IAAX and TAAX) while Australia accounts for another 21%. The Australia portion will increase to 22% after Bali-Sydney is launched and will temporarily reach 27% in Jan-2016 before dropping back down after the southern summer peak season.

AirAsia X Group seat capacity by region: 28-Sep-2015 to 4-Oct-2015

Tehran is now under consideration for MAAX as well as Istanbul and other potential destinations in Europe. But MAAX’s preferred European destination, London, is not likely to be relaunched in the short to medium term as the group has determined it is not accessible with its current A330-300ceo fleet and a one-stop product is not considered a viable option.

MAAX served London and Paris until early 2012 with A340s, a much less efficient but longer-range aircraft type which have since been phased out. 

London, and perhaps other Western European destinations, will likely have to wait until after the first A330-900neo is delivered in late 2018. The A330neo fleet should unlock a new phase of growth for AirAsia X.

For the now the group needs to focus on completing its restructuring and returning to profitability. The next few months will be a critical period for the world’s largest long-haul low-cost player.

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