Good year ahead for AirAsia?

AirAsia, a dominated low cost carrier in Asia is now struggling to boost earnings, where rivals such as national carrier Malaysian Airline System (MAS) and Malindo Airways are slashing fares. (Hamzah 2013) There is a new carrier, Flying Fox Airways, an Ipoh-based airline which aims to increase the accessibility of Ipoh will also become a threat to AirAsia. Due to irrational competition in the industry, the results of AirAsia in 2013 are slightly affected.

AirAsia reported a 19% drop in fourth-quarter earnings from RM303.4 million, a year earlier to RM245.4 million in the quarter ended 31 December 2013, mainly due to unrealized foreign exchange losses on USD denominated borrowings, while revenue remained unchanged at RM1.35 billion from revenue of reported in the same quarter last year. (Porter & Chong 2014) Operating profit for the fourth quarter declined 2% year-on-year to RM315 million mainly due to increase in routine aircraft maintenance checks and lower fares. (Channel NewsAsia 2014) Many people are disappointed with the poor results of AirAsia as the data shown was weaker than expected. 

However, the good news for AirAsia is the increasing number of passengers carried which grew 14% in the fourth quarter year-on-year to 5.91 million which overtook capacity growth of 10% year-on-year while the average fare was down 18% at RM158 compared to RM192 achieved in the same quarter in 2012. The average fare was 10% lower at RM166 compared to RM184 achieved in 2012. (Kumar 2014) 

Maybank Investment Bank Research analyst Mohshin Aziz said, “AirAsia has also achieved a load factor of 85% for its Malaysian operations in the fourth quarter ended 31 December 2013 due to the company’s very aggressive load active strategy.” (Malaysia Airlines forecast to post core net loss of RM1.01bil in FY13 2014) The data overall showed that the load factor are at an all-time record peak and expected to grow in 2014. 

For the full year, AirAsia’s profit slumped 55% to RM364.07 million from RM789.61 million in 2012. However, the revenue last year was up 5% to RM5.19 billion from RM4.95 billion, the previous year. (Channel NewsAsia 2014) Hence, AirAsia is still profitable compared to MAS Airlines and Malindo Airways. 

According to the AirAsia’s 4Q13 report, Thai AirAsia posted revenue of THB6.50 billion, up 16% from the same quarter last year while operating profit was down 52% year-on-year to THB444.01 million which led to a 40% drop in profit after tax at THB425.44 million. Thai AirAsia’s CEO, Tassapon Bijleveld said, “The reason of declining in profit was mainly driven by the depreciation cost of taking aircraft their own balance sheet and spending on public relation and marketing during the on-going political demonstration in Bangkok.” (Ismail 2014) The travel demand was likely dampened by political uncertainty. However, the revenues for the full year remain strong despite competition and political unsettlement. AirAsia Thailand has completely reversed losses since the first quarter of 2012 thanks to lower fuel costs and more passenger traffic. Still, competition between airlines is affecting other overseas units of AirAsia such as AirAsia Indonesia and Philippines units.

According to the AirAsia’s 4Q13 report, Indonesia AirAsia posted an increase of 25% in revenue to IDR1, 527.4 billion from IDR1, 261.5 billion last year. However, Indonesia AirAsia posted an operating loss of 330% to IDR369.09 billion from an operating profit of IDR160.72 billion. Indonesia AirAsia CEO, Dharmadi said, “The decline in operating profit was mainly due to the weakening of the Rupiah currency and pushing up dollar-denominated cost such as fuel, maintenance and its lease expense.” (Ismail 2014)

AirAsia Berhad’s group chief executive officer (CEO) Tan Sri Tony Fernandes said, “The Company aims to cut the costs down by 7.5% this year to make flying more affordable but the fares will still remain at the current level this year.” He unveiled the latest initiative of installing self-service machines as check-in counters and he noted that this would be the “first of its cost-reduction methods”. (CEO Tony says AirAsia in cost-cutting drive, installing check-in self-service machines 2014) He said the company needs to continue to be creative in driving margins up and the carrier would continue to focus on slashing costs by selling older aircraft and reducing staff, among other measures. (Channel NewsAsia 2014) Meaning that AirAsia has started to cut cost in order to save its profit margin. 

As a columnist, I believe that AirAsia has done its best to fend off the additional competition by deploying modest capacity growth and tight cost control. AirAsia has ordered more planes to accelerate expansion and the company is deferring seven planes this year and twelve planes next year to accelerate growth. (Porter & Chong 2014) The AirAsia will face with minimal competition when it expands its route network. 

Apart from this, AirAsia India, a joint venture with Tata Group and Telestra Tradeplace Pvt Ltd is aiming to start operations in India May 2014, following similar ventures in the Philippines, Thailand and Indonesia, despite opposition from other airlines and having missed a few earlier targets since September last year. AirAsia India CEO Mittu Chandilya said, “The Chennai-based airline’s fares could be 25-30% less than other airlines.” He believed that they can do it well although it can be quite a challenge to venture in at this point in time where taxes make jet fuel costs among the most expensive in the world. (AirAsia India eyes May take-off 2014)

AirAsia Berhad’s group chief executive officer (CEO) Tan Sri Tony Fernandes added, “This year would be a big year for the AirAsia group and the opening of KLIA2 will give the industry a massive boost and also enhance the customer experience. AirAsia will also introduce new duty-free business like a mall in the sky to boost its ancillary income.” (Leong 2014) To compete with competitors, AirAsia has come out with different strategies to achieve their long term objective and goals. 

As a columnist, I believe that AirAsia can stand strong in the aviation industry despite the irrational competition by competitors in the industry. According to the research house, AirAsia fought a tough battle in 2013 and has proven that it can hold its ground better than its competitors. The proven success is that AirAsia was still able to post higher operating profit and margins. (Maybank IB downgrades aviation sector, maintains Buy on AirAsia, AirAsia X 2014) Although the results in the fourth quarter of 2013 were a big disappointment, I believe that AirAsia’s outlook will be positive and the growth in 2014 will be modest compared to 2013, as the group is the most cost-efficiently run airline and it held the bargaining power in the situation in the aviation sector. 

References

'AirAsia India eyes May take-off' 2014, The Star Online, 6 March, viewed 3May 2014, <http://www.thestar.com.my/Business/Business-News/2014/03/06/AirAsia-India-eyes-May-takeoff/>

'AirAsia reports drop in profit' 2014, Channel NewsAsia, 27 February, viewed 3 May 2014, <http://www.channelnewsasia.com/news/business/international/airasia-reports-drop-in/1013666.html>

'CEO Tony says AirAsia in cost-cutting drive, installing check-in self-service machines' 2014, The Star Online, 13 February, viewed 3 May 2014, <http://www.thestar.com.my/Business/Business-News/2014/02/13/Renewed-costcutting-drive-AirAsia-group-CEO-says-airline-installing-checkin-selfservice-machines/>

'Malaysia Airlines forecast to post core net loss of RM1.01bil in FY13' 2014, The Star Online, 18 February, viewed 3 May 2014, <http://www.thestar.com.my/Business/Business-News/2014/02/18/MAS-forecast-to-post-core-net-loss-of-RM101bil-for-FY13/>

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Hamzah, A.-Z. A. 2013, 'No comfort at home for AirAsia as overseas units drag', Reuters, 20 November, viewed 3 May 2014, <http://in.reuters.com/article/2013/11/19/airasia-airline-earnings-idINL3N0IR2ZI20131119>

Ismail, B. 2014, Low Cost Leader AirAsia remains the Airline with the highest margins by achieving further cost reduction, press release, AirAsia, 26 February, viewed 3 May 2014, <http://www.airasia.com/iwov-resources/my/common/pdf/AirAsia/IR/AA_4Q13_Press_Release.PDF>

Kumar, P. P. 2014, 'AirAsia nets lower profit of RM245.4m for 4Q13', Free Malaysia Today, 27 February, viewed 3 May 2014, <http://www.freemalaysiatoday.com/category/business/2014/02/27/airasia-nets-lower-profit-of-rm245-4m-for-4q13/>

Leong, H. Y. 2013, 'Good year ahead for aviation?', The Star Online, 28 December, viewed 3 May 2014, <http://www.thestar.com.my/Business/Business-News/2013/12/28/Good-year-ahead-for-aviation-MAS-turnaround-KLIA2-opening-under-the-spotlight/>

Porter, B., & Chong, P. K. 2014, 'AirAsia Confident of Paying 2013 Dividend After Net Drops', Bloomberg, 27 February, viewed 3 May 2014, <http://www.bloomberg.com/news/2014-02-27/airasia-confident-of-paying-2013-dividend-after-net-drops.html>

Yashodha, Y. 2012, 'AirAsia Berhad: Strategic analysis of a leading low cost carrier in the Asian region', Elixir International Journal, vol. 51,viewed 3 May 2014, <http://www.elixirpublishers.com/articles/1351762459_51%20%282012%29%2011164-11171.pdf>