Clouds loom over Malaysian budget carrier AirAsia’s future
By Eileen Ng
Kuala Lumpur, Malaysia - It has been blue skies for Malaysia’s no-frills
carrier AirAsia since it began flying five years ago, but dark clouds are
looming on the horizon.
AirAsia, a top pick of foreign investors since it was listed in November
2004, is losing its shine as high fuel costs, weaker-than-expected profits,
huge capital commitments and increasing competition threaten its growth,
Its share price plunged 12.2 percent last week to 1.30 ringgit (US$0.36) -
the lowest level in 1 1/2 years - after the government said it would allow
rival Malaysia Airlines to offer discounts on domestic routes.
Some brokerages have downgraded the stock to a “sell” amid concerns the
move may trigger a price war and hurt AirAsia’s earnings. Foreign
investors hold 45 percent of AirAsia, the region’s largest budget carrier
in fleet size.
“In the volatile airline industry, it is difficult to maintain a market
darling status for too long,” said Peter Negline, aviation analyst with JP
Morgan Securities in Hong Kong.
“We believe AirAsia is about to lose this mantle as its poor earnings
track record, high oil prices, lackluster franchises, large capital
expenditure program and increasing domestic competition all hit the
company,” he said.
AirAsia has grown phenomenally since it started operations in January 2002.
Profitable from ‘Day 1’, it now has more than 1,600 employees and flies
to more than 100 destinations in eight Southeast Asian nations, China and
Signaling Chief Executive Tony Fernandes’ big ambitions, the airline
signed an agreement last year to buy 60 new Airbus A320s over the next five
years for nearly US$4 billion, with the option to buy another 40 of the same
It also has two 49 percent-owned subsidiaries in Indonesia and Thailand.
But soaring fuel costs have hurt AirAsia’s profits. In the 2005 financial
year, the carrier posted a net profit of 111.6 million ringgit (US$31
million) in its Malaysian operations, 30 percent below its official target.
In March, AirAsia received a boost after winning rights to take over the
bulk of domestic air services from Malaysia Airlines from Aug. 1 under
government efforts to help the national carrier cut losses and become
profitable again by 2007.
Under the revamp, Malaysia Airlines will serve just 22 out of 118 local
routes and was told to charge full fares.
But the joy was short-lived when the government made a U-turn in policy this
month, allowing Malaysia Airlines to cut fares and setting the stage for a
price war with AirAsia, which has protested the move.
Transport Minister Chan Kong Choy last week said the government made the
decision to create fair competition and a “level playing field” between
the two airlines.
Despite dropping many routes, Malaysia Airlines still services the most
lucrative markets and can now effectively compete with AirAsia in its
economy class segment, analysts say.
“AirAsia has reached a crossroad,” said Muhamad Khair Mirza, aviation
analyst at AmSecurities. “It is operating in an environment that is not
conducive to its growth.”
The immediate hurdles for AirAsia are to meet large financial commitments,
balance its growth and profit target, and overcome competition from Malaysia
Airlines, he said.
“AirAsia is no longer a growth earnings story. It can become a market
darling again only if the government, or a local white knight, comes in to
revive its fortune,” he said. “Otherwise, the stock will remain
JP Morgan’s Negline said the national carrier had been viewed as a “weak
cousin” of AirAsia but it is becoming a formidable foe thanks to major
restructuring that has involved laying-off staff, reducing capacity and
selling non core assets.
On the other hand, AirAsia may be growing too fast and faces new pressure,
“The low-cost carrier model thrives on simplicity, but AirAsia’s
business is becoming increasingly complex,” he said. AirAsia risks getting
“indigestion” from excessive expansion, new fleet addition and cash-flow
burdens as high oil prices hit earnings, Negline said.
AirAsia chief financial officer Raja Mohamad Azmi Raja Razali said investors
are disappointed by the government’s about-turn but the company is still
profitable and its cash-flow remains healthy.
“Perception has turned negative because investors fear the domestic air
rationalization will hurt our business but fundamentally, nothing has
changed,” he told The Associated Press.
“There are growing pains from time to time but we will manage it in our
stride. We are not slowing down in our growth, it’s business as usual.”
Rising oil prices pose a big challenge but the airline could further raise
its fuel surcharge and hedge its fuel requirements to cope with it, he