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.
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 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.
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.
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”.
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.