AirAsia expands to meet demand

AirAsia Bhd (AirAsia) is on a strong growth track with most analysts expecting that the low-cost carrier will record a commendable financial year 2017 (FY17).

With plans to expand its fleet further as well as plans to consolidate its Southeast Asian units, AirAsia is gearing up to very active and healthy years ahead.

Just recently, AirAsia signed an agreement with Airbus to order an additional 14 A320ceo aircraft to meet higher than expected near-term growth on the carrier’s regional network.

Last month, AirAsia Group chief executive officer Tan Sri Tony Fernandes announced the group’s plans to add an additional 23 planes to its fleet in the second half of 2017 (2H17).

Fernandes had also revealed that the group plans to expand to 500 aircrafts across the next decade.

“AirAsia Group is gearing up to expand to 500 aircraft by 2027, which entails adding 30 new aircraft every year for the next ten years.

“I’m confident that we can reach this target or even exceed it, especially as we set up our new associate airlines in Vietnam and China in the coming years.

“In this second half of 2017, we plan to add a further 23 planes to the group fleet, which will help solidify our strong position in intra-Asean routes and the domestic markets of Malaysia, Thailand and

Philippines, where we have been steadily adding market share.

“This year is the most number of aircraft we have added in four years, demonstrating our confidence in the competitive environment in Asia,” he said in a press statement.

On the long-haul expansion plan, in a report by Bernama, he said AirAsia X Bhd (AirAsia X) has to get some more planes and would announce some destinations once it is finalised, adding that London is not on the plan at the moment.

However, Fernandes hopes the Los Angeles route could commence next year as it the second route with most potential after Hawaii.

“We are really short of planes at the moment. So, we have to wait and see when we can get those planes,” he added.

In a recent report, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) noted that for the rest of FY17, AirAsia has plans to expand its aircraft fleet by a net growth of 27 planes; an additional seven for Malaysia, six for Thailand, two for Indonesia, three for Philippines, six for India and three for Japan.

On AirAsia’s recent order placement for 14 A320ceo aircraft, Kenanga Research commented that its total outstanding aircraft order is now at circa 410.

“Apart from the increase in fleet size, AirAsia is also targeting a higher aircraft utilisation rate of 14.5 hours (previously 12 hours) which would be accretive towards average seat kilometres (ASK) growth – an increase of circa eight per cent based on our estimates.

“While we are expecting the boost to existing capacity, we believe AirAsia is able to maintain healthy load factors of more than 85 per cent backed by strong travel demand, coupled with their extensive route options with optimal frequencies,” the research team said.

However, it also expected some yield pressure from its increased capacities and competitions from other airlines.

“While yields might be pressured from the increase in capacity, we remain confident that they should be able to maintain its RASK, leveraging on the use of technology, which are data mining/dynamic pricing enabling them to mitigate the yield pressures through increased ancillary income from more targeted marketing/sales – which they have targeted RM55 per pax in FY17 and RM60 per pax by FY18 (compared with RM48 per pax in FY16,” it said.

Addressing the ongoing fuel price fluctuation, Kenanga Research believed that AirAsia’s fuel price problems are greatly minimised as 75 per cent of its FY17 fuel is hedged at US$59 per barrel which it has factored into its assumption; comparable to FY16’s average effective fuel costs of US$56 per barrel. Aside from that, it also noted that AirAsia’s forex concerns are also mitigated by ticket sales, and partial US dollar-denominated borrowings. Consolidating to strengthen operations

Earlier this year, AirAsia hinted of a consolidated entity which groups together some of AirAsia’s Southeast Asian units.

Deemed as ‘One AirAsia’, Bernama reported that the plan seeks to bring together the company’s Southeast Asian units in Malaysia, Thailand, the Philippines and Indonesia, and to go public in two years’ time.

“The first step is to create the group company, and AirAsia Group deputy chief eexecutive officer Rozman Omar is working hard on it. Is a lot of work to do ‘One AirAsia’ as a corporate structure. But ‘One AirAsia’ as a company within a company is working really well.

“We are reducing costs, combining a lot of services, standardising a lot of products,” he told reporters recently.

Fernandes said the corporate structure exercise would be a lot of works as the company has to persuade the Malaysian, Thai, Philippine and Indonesian governments to change the ownership rules, but it is beginning to happen.

He was also reported to have a target of two years until One AirAsia could be realised and to pave the way for the setting up of the holding company, AirAsia needs to list the Philippine

and Indonesian units. Currently, only the Malaysian and Thai units are listed.

Recently, AirAsia also announced an internal reorganisation by undergoing a one-for-one exchange of shares with newly created AirAsia Group Bhd or NewCo.

Subsequently, all of AirAsia’s AOC associates -- Thailand, Japan, Indonesia, Philippines, India -- are expected to be grouped under NewCo along with its Malaysian AirAsia operations.

On this announcement, Kenanga Research noted that the new structure would be more ‘flat’ as compared to the existing structure whereby currently Malaysia AirAsia holds effective stakes of 20 to 49 per cent in Indonesia, Philippines, Thailand, Japan and India through their Investment Holding Co (AirAsia Investment Ltd).

It added, this move is in line with their plans to eventually have all existing AOC associates to be 100 per cent wholly-owned subsidiaries of the NewCo.

“That being said, we opine that there are various regulation hurdles in respective countries to overcome and the idea to have all AOC as 100 per cent subsidiaries under one group might not materialise in the near term,” it commented.

Furthermore, it pointed out that AirAsia announced the proposed listing of 57.25 per cent of AirAsia Indonesia (IAA) on the Indonesian Market (IDX) which is expected to be concluded by 4Q17.

The research team said it is positive on this move as it allows IAA to tap into the local equity market in Indonesia (IDX) to raise financing requirements to expedite growth in Indonesia.

All in, 2H17 is expected to be an exciting time for AirAsia as it revs up to meet its targets set earlier this year.

In its 2016 Annual Report, AirAsia said new routes will be introduced, including to countries in Indochina, on top of connecting its secondary hubs such as Kota Kinabalu and Johor to destinations that we already fl y to from Kuala Lumpur.

“As we press on with expansion, we will further expand our capacity and grow our fleet to over 200 aircraft by end 2017.

“With growth, however, comes added responsibility for safety. And this will continue to be given top priority.

“We will also continue to adhere to our time-tested and proven low-cost model and keep looking for more and better ways to keep our costs down. Digitalisation will be a positive boon in this regard; we look forward to seeing greater efficiencies across the board as we step up our digital processes. We will also seek ways to increase our aircraft utilisation, which features as a key consideration in our lean, cost-efficient model,” it said.

AirAsia Group is gearing up to expand to 500 aircraft by 2027, which entails adding 30 new aircraft every year for the next ten years. I’m confident that we can reach this target or even exceed it, especially as we set up our new associate airlines in Vietnam and China in the coming years. Tan Sri Tony Fernandes, AirAsia Group chief executive officer