AirAsia X reinforces position as long-haul LCC leader with 50 commitments for A330neos


AirAsia X is reinforcing its leading position in the fast growing medium/long-haul low-cost segment with a commitment for 50 A330-900neo aircraft for delivery from 2018. AirAsia X emerged at the Farnborough Airshow on 15-Jul-2014 as the launch airline for the new type, joining three leasing companies which have also signed up as launch customers with commitments for 55 aircraft. It is the first long-haul low-cost airline to become a launch customer.

The new commitment from AirAsia X, once converted into a firm order, will grow the group's fleet to up to 117 aircraft by the middle of next decade compared to 22 currently and only 12 at the beginning of 2013. Malaysia-based AirAsia X is already the largest group in the long-haul low-cost segment, which now consists of six carriers including four in Asia-Pacific. AirAsia X is accelerating growth as it opens new bases in Thailand and Indonesia.

The group, however, will have the flexibility to adjust growth by phasing out existing A330-300s as well as potentially cancelling some of its A330-300 and A350-900 orders. Ultimately the AirAsia X fleet will likely expand over the next 10 years to 90-100 aircraft, providing capacity growth of about 20% per annum with the possibility of even faster growth should market conditions warrant.

AirAsia X has been in rapid expansion mode since mid-2013

AirAsia X launched in 2007 with a fleet of A340s and expanded relatively conservatively until mid-2013, when it accelerated growth using proceeds from its 10-Jul-2013 initial public offering.

The IPO followed a restructuring including network rationalisation which saw AirAsia X exit unprofitable long-haul routes to Europe and New Zealand, as fuel costs spiked, hurting its A340 operation. This left it with a medium-haul focus and routes of four to eight hours within Asia-Pacific. (The only current exception is Jeddah in Saudi Arabia, which is about nine hours from its Kuala Lumpur base.)

See related report: AirAsia X strives to widen the gap with long-haul LCC competitors as IPO enables accelerated growth

AirAsia X expanded its fleet in 2013 from 12 to 19 aircraft with almost all the deliveries coming in 2H2013. ASKs levels, which had been reduced in 2012 as the carrier's three longest routes (London, Paris and Christchurch) were cut, starting increasing again in mid-2013. There will be another surge in ASKs in 2H2014 as a majority of the group's deliveries in 2014 are again taking place in the second half.

AirAsia X quarterly ASK levels: 1Q2013 to 4Q2014

AirAsia X's fleet currently consists of 22, including 20 in Malaysia and two at start-up Thai AirAsia X. The Malaysia fleet includes 17 A330-300s, two A340-300s and one A330-200 while Thai AirAsia X operates two A330-300s.

The CAPA Fleet Database lists the two A340-300s as stored but since dropping London and Paris in Mar-2012 AirAsia X has continued using the type for charters and at times for some scheduled flights when it was short of A330s due to heavy maintenance.

AirAsia X Group fleet summary: as of 17-Jul-2014

AirAsia X will transition to an all A330-300 fleet in 2015 as growth continues

The AirAsia X fleet is slated to grow 26 aircraft by the end of 2014 as another four A330-300s are delivered. As CAPA previously reviewed, start-up Indonesia AirAsia X has been allocated two aircraft while the main Malaysian unit will add two aircraft for a total of 22 including 19 A330-300s, two A340-300s and one A330-200.

See related report: AirAsia further slows fleet expansion as 1Q profit falls - with the potential to accelerate later

The A340s and the A330-200 are due to be returned in 2015, allowing the group to finally transition to an all-A330-300 fleet. The A330-300 is AirAsia X's preferred aircraft as the A330-200 is too small, resulting in higher per seat costs, while the four-engine A340 is highly inefficient and was only initially acquired as it was the only type available when AirAsia X launched in 2007.

The original version of the A330-300 is also unable to serve Western Europe, forcing AirAsia X to compromise with A340s under its initial network strategy which included Europe. AirAsia X would have preferred to return its A340s early but this proved impossible because they are leased from Air Canada rather than a leasing company. (If the A340s had been acquired from a leasing company AirAsia X would have potentially had more leverage and may have been able to negotiate an early return in exchange for A330s.)

In 2015 AirAsia X plans to take delivery of eight A330-300s, including the first three aircraft from a 25-aircraft order it completed with Airbus in Dec-2013. The group's fleet however will only grow by 19% or five aircraft (compared to growth of 37% in 2014) to 31 aircraft as the two A340s and one A330-200 are returned.

The remaining 22 aircraft from the 25-aircraft order are currently slated for delivery in 2016 (four aircraft), 2017 (seven aircraft), 2018 (seven aircraft) and 2019 (four aircraft). The Dec-2013 order increased AirAsia X's total A330-300 commitments to 57 aircraft, including prior orders directly with the manufacturer and orders with leasing companies. Of the 32 prior commitments 18 have now been delivered with four more to come in 2H2014, five in 2015, four in 2016 and one in 2017. (This excludes one leased A330-300 which is due to be returned in 2016 and replaced with a new A330-300.)

AirAsia X fleet plan (prior to A330neo order): end 2013 to end 2019

AirAsia X could cancel existing A330-300E orders slated for 2018 and 2019

Some or all of the 11 A330-300s slated for delivery in 2018 and 2019 could end up being cancelled or accelerated as it is unlikely AirAsia X will want to continue taking A330ceos once A330neo deliveries begin in 2018. Sister short-haul LCC group AirAsia earlier this year converted and deferred 41 A320ceo orders into A320neos in a move that leaves AirAsia without any A320ceo deliveries after 2016. Initially AirAsia had a mix of A320ceo and A32neo deliveries in 2017 - AirAsia X will likely have a similar thought process in trying to avoid taking A330ceos once the A330neo enters service.

The A330neo will offer a 14% reduction in per seat fuel consumption (taking into account additional seating), diluting the attraction of the A330ceo, but there would also be a concern the value of late model A330ceos would be impacted as the A330neo enters service.

In its 15-Jul-2014 announcement of its memorandum of understanding with AirAsia X for 50 A330-900neos, Airbus stated deliveries will begin in 2018. An exact month was not provided but most likely deliveries will start early in the year as the A330-900neo is slated to enter service in 4Q2017 and AirAsia X is a launch airline customer. (While AirAsia X is the first airline to commit to the A330neo it will not be the launch operator as the first batch of aircraft will be delivered to leasing companies. In the first two days of the 2014 Farnborough Airshow, Air Lease, Avolon and CIT signed up for a combined 55 A330neos.)

See related report: Airbus ends speculation and goes ahead with an A330neo, with "14% per seat" fuel savings

Market conditions and opportunities could potentially warrant accelerated growth

AirAsia X is now in the happy position that it could potentially accelerate some of its 11 2018 and 2019 A330ceo deliveries if market conditions warrant. The group is already committed to adding six to seven aircraft per year, driving an average capacity growth rate of roughly 20% per annum. This could prove to be an overly conservative figure given the Bangkok and Bali bases will still be in early phases of development.

There are still opportunities for further growth in Malaysia too, particularly as AirAsia X continues to drive up the portion of transit traffic at its Kuala Lumpur hub. But there are even better growth opportunities in Indonesia and Thailand as these countries are bigger than Malaysia and have not had until now any long-haul LCCs (although NokScoot is also planning to launch in Thailand by the end of 2014). AirAsia X has not yet decided on an allocation for the five additional aircraft for 2015 and seven additional aircraft for 2016 but most likely most of these aircraft will end up at Thai AirAsia X and Indonesia AirAsia X.

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There is also a possibility/probability of a fourth base being opened by 2018, which could force an upward adjustment in the current fleet plan. For now AirAsia X is content on focusing on the three bases (Kuala Lumpur, Bangkok and Bali) and has built its fleet plan based on having three affiliates or subsidiaries. But as the dynamic Asian LCC market continues to evolve rapidly an opportunity could quickly surface for a fourth affiliate. The options would increase immeasurably if longer haul operations became possible (eg with lower fuel prices, possible partnerships and new aircraft performance).

AirAsia X still has A350s on order

AirAsia X also has 10 A350-900s on order, which were ordered back in 2009 and are now planned for delivery from 2018 to 2020. These are perhaps the more likely orders to be cancelled or converted into the new 50-aircraft A330neo order, as the deal is finalised over the next few months.

If there are no adjustments to any of the existing A330 or A350 orders, the AirAsia X fleet will grow to 117 aircraft by the middle of next decade (57 A330-300s, 50 A330-900neos and 10 A350-900s). But it is unlikely all these aircraft will be acquired. A more realistic scenario would see the group grow by a net seven or eight aircraft per year, which would result in a fleet of about 60 aircraft by the end of 2019 and to almost 100 aircraft by the end of 2024. This would suggest a cancellation of roughly 20 orders or a combination of conversions, deferrals and lease returns.

Swapping out the 19 A330-300s currently in its fleet for A330-900neos later this decade and early next would be logical as the group's existing A330-300Xs were manufactured as early as 2005 and its A330-300Es were manufactured as early as 2008. The group's current five year fleet plan only has one of its 19 existing A330-300s being returned - this is likely the one older model A330-300 that is not an A330-300E or -300X.

According to the CAPA Fleet Database, the group's A330-300 fleet includes five 300Xs that were built in 2005 and 2006; 13 -300Es which were built in 2008 to 2014 and one A330-300 that was manufactured in 1994. The average of the group's A330 fleet is just under six years.

Lease returns however may not provide the entire solution as the group would likely still need to cancel (or accelerate) 11 A330-300E deliveries to ensure a complete transition in the delivery stream to A330-900neos in 2018. Moving up the deliveries, assuming the slots are available, could result in receiving too many aircraft for 2016 and 2017, particularly as the existing A330s may not be old enough to be returned at that point. But a cancellation could also be tricky from an engine perspective as AirAsia X in Apr-2014 committed to acquiring GE CF6 engines for its last batch of 25 A330-300s along with a multi-year service agreement. Rolls-Royce has been selected as the sole source engine supplier for the A330-900neo. While a reduction of the commitment with GE would still be feasible there is less leverage than with Airbus as GE is not on the A330neo programme.

AirAsia X, however, does not necessarily need to make any adjustments in its A330-300ceo fleet plan in the short term. It would be sensible to hold onto all its new aircraft delivery slots for now and see how the market evolves. The AirAsia Group has substantial leverage with Airbus, so solutions should be possible.

The Asia-Europe market could provide opportunity to accelerate growth

Asia to Europe routes in particular could evolve into a major growth market for the group although European services are not factored into its current fleet plan. AirAsia X has been focusing entirely on Asia-Pacific, along with limited services to the Middle East, and sees sufficient growth opportunities on medium-haul routes within Asia-Pacific to support its current business plan.

But improved operating economics of the A330neo will almost certainly lead AirAsia X to resume services to Europe. AirAsia X, in particularly AirAsia X co-founder and director Tony Fernandes, has been pushing Airbus to develop the A330neo in part because it sees the aircraft as ideal for longer routes including Europe. AirAsia X originally also had plans to serve the US west coast (with a one-stop product).

"We have been encouraging Airbus to launch this new version of the A330 for some time now," Mr Fernandes stated in the 15-Jul-2014 announcement. "I am pleased that they are offering this choice and bringing us the aircraft we truly need to develop further our low cost long haul model. We are 100% sure that the A330neo will be quite unbeatable in its size category and we look forward to enabling more people to fly further more often aboard this great aircraft."

AirAsia X could also potentially launch services to Europe before 2018 by using the new high gross weight version of the A330-300E. Much depends on fuel prices, as well as partnerships or traffic feed at the European end. A return to Europe has been under study over the past year and was particularly being pushed by Mr Fernandes and short-haul group AirAsia Berhad (Mr Fernandes is CEO of the AirAsia Group but is not CEO of the AirAsia X Group, which has a different ownership structure.)

While AirAsia X's initial European foray became highly unprofitable as fuel prices soared and had to be axed in order for the group to shore up its books ahead of its IPO, the London and Paris routes played an important role in building AirAsia's overall global profile. The routes also provided valuable feed to AirAsia's short-haul routes, providing European passengers that took AirAsia on multi-stop itineraries throughout Asia.

So far AirAsia X has resisted going back into Europe. For example it looked earlier this year at relaunching Europe initially using A340s (as the aircraft cannot be returned until 2015) but wisely rejected the idea despite some encouragement from the AirAsia side.

AirAsia X however sees the improved fuel burn and range of the A330neo as potentially providing the right economics to make 10 to 13 hour routes viable. It believes the A330neo could even prove to be a better fit for long-haul LCC routes than the 787, which is now operated by Norwegian between Scandinavia and Thailand (as well as on shorter routes to the US). Lufthansa is now expected to join Norwegian in the Europe-Asia low-cost market using its recently announced long-haul LCC subsidiary, which could operate 787s and/or A330neos.

AirAsia X emerges as the leading long-haul LCC

Asian LCC groups Jetstar and Scoot also have acquired 787s (with some of the Jestar aircraft already delivered), giving these groups the potential of entering the Asia-Europe market. But so far both have indicated they will stick to Asia-Pacific, partly because opportunities still abound. The exceptions are Jetstar's Melbourne and Sydney to Honolulu routes, which at about 11 hours are the longest routes currently operated by any Asia-Pacific widebody LCC.

AirAsia X has already emerged as the largest widebody LCC, with its fleet of 22 aircraft accounting for about 40% of the total widebody LCC fleet. With its commitments for 98 additional widebodies (38 A330-300Es, 50 A330-900neos and 10 A350-900s, according to the CAPA Fleet Database) AirAsia X will also account for about 70% of the total widebody LCC outstanding orders once the new A330neo deal is completed.

Jetstar is currently planning only very modest growth of its long-haul unit as its nine remaining 787s on order will replace its nine existing A330s. Scoot is more in expansion mode but has just 20 787s on order, some of which could end up at new Thai affiliate NokScoot.

Cebu Pacific, Norwegian, Saudi Arabia's flyNAS and soon Brazil's Azul are new to the long-haul LCC segment and also have relatively modest expansion plans - at least for now.

Widebody low-cost groups: current fleet and outstanding commitments for additional new aircraft

Airline group Launch year Current fleet Outstanding orders/commitments
AirAsia X 2007 22 (19 A330-300s, 2 A340-300s*, 1 A330-200*) 98 (50 A330-900neos, 38 A330-300Es, 10 A350-900s)
Jetstar 2006 14 (9 A330-200s*, five 787-8s) 9 (787-8s)
Scoot 2012 6 (6 777-200s*) 20 (10 787-9s, 10 787-8s)
Norwegian 2013 7 (7 787-8s) 7 (6 787-9s, 1 787-8)
Cebu Pacific 2013 4 (A330-300s) 2 (A330-300s)
flynas 2014 3 (2 A330-300s, 1 A330-200 wet leased) 0 (only committed to additional wet leases)
Azul 2014 1 (A330-200 delivered but not yet operating) 5 (A350-900s)
TOTALS 57 141

AirAsia X has built a business case despite continued scepticism

AirAsia X has performed well as a fast growth new model, but has not been a runaway success. The group was back in the red in 2013 and 1Q2014, after returning to profitability in 2012 in the aftermath of its network restructuring. AirAsia X's stock price has fallen steadily since its Jul-2013 IPO and is now trading 40% below its initial price.

AirAsia X stock price (in MYR): Jul-2013 to Jul-2014

But AirAsia X has proven there is an opportunity to stimulate demand on medium-haul routes within Asia-Pacific. The group is now growing very quickly, boosted by initiatives to increase transit traffic, which has unlocked a potentially huge new segment and now accounts for over 40% its total traffic.

As it only recently surpassed the 20-aircraft mark and began opening additional bases AirAsia X is now starting to build the scale needed to thrive over the long-run.

The new commitment for 50 A330-900neos may raise eyebrows. But it will allow AirAsia X to leverage its first mover advantage in the fast-growing widebody LCC segments as more airline groups inevitably join the party.

And, as the potential network range increases, so the options for the world's lowest unit cost airline expand.

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