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Clouds loom over Malaysian budget carrier AirAsia’s future

Clouds loom over Malaysian budget carrier AirAsia’s future

By Eileen Ng
Associated Press

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, analysts say.
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 Macau.
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 aircraft.
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 lackluster.”
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, he said.
“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 added.