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This article first appeared in The Edge Malaysia Weekly on October 1, 2018 - October 7, 2018

ALTHOUGH it is the largest low-cost carrier group in Asia, AirAsia Group paradoxically has an adversarial relationship with its home market airport operator, Malaysia Airports Holdings Bhd (MAHB).

But that seems to be changing. After a running dispute in July prompted a three-way meeting involving the finance minister, AirAsia Group CEO Tan Sri Tony Fernandes emerged from the meeting more positive, tweeting: “More low-cost terminals coming. MAHB now understanding what we can do.”

That said, when met last week, he is cautious, noting time will tell how meaningful the signals of change are.

“We definitely feel a wind of change. MAHB is much more responsive at the management level. But has that translated into anything concrete? Not yet,” says Fernandes.

He expects it will take several years before there is a shift in the local aviation landscape towards more low-cost carrier terminals, as is the budget airline’s stated wish.

Nonetheless, AirAsia is rejigging its expansion strategy in Malaysia — its strongest market — in response to a seemingly friendlier airport operator.

Asked whether the Malaysian market has plateaued for AirAsia, deputy group CEO Bo Lingam indicates that there is still room for growth.

“I think we can add another 30 planes [to AirAsia Malaysia] in the next three years,” he says, adding that the projection is “regardless” of whether MAHB is realigning its airport expansion strategy to fit AirAsia’s.

“Though it would be great if it is, because it would help us a lot,” he adds. in a brief separate chat with The Edge.

Fernandes states that any increase in capacity expansion for AirAsia Malaysia would be via accelerating new plane deliveries and not at the expense of growth for the group’s other markets.

To put that into perspective, AirAsia Malaysia had 90 planes as at the end of last year — about 44% of AirAsia Group’s total fleet of 205.

This year, without any rethink in new plane allocations across AirAsia’s various markets to step up domestic expansion, AirAsia Malaysia is already poised for a 12% capacity increase.

Some analysts see this as already “aggressive”. On Aug 30, Singapore-based transport research firm Crucial Perspective highlighted the planned expansion rate as a possible drag on profits this year, given that Malaysia is a key contributor to the group’s earnings.

As a snapshot, for the second quarter ended June 30 (2QFY2018), AirAsia Group recorded a net operating profit of RM325 million, of which RM205 million came from AirAsia Malaysia.

In the short term, any acceleration in AirAsia Malaysia’s capacity growth may put pressure on its earnings and share price.

A key factor is jet fuel cost, which is about 30% higher today than it was a year ago. And as it is priced in US dollars, the persistently weak ringgit is not helping.

On the airline side, even a 12% capacity increase may put pressure on yield with seats growing faster than passengers to fill them.

For perspective, in the first seven months of the year, MAHB recorded just a 3% growth in total passenger volume through its 39 airports nationwide.

In addition to cost pressure from rising oil prices, up to 2QFY2018, AirAsia Group as a whole also faced downward pressure in terms of load factor and unit revenue, Maybank Research says in a Sept 3 report.

Fernandes is unfazed. He expects AirAsia’s data-driven digitalisation initiatives and ventures to offset the impact with cost savings and further ancillary income growth.

“We’ll begin to see in the fourth-quarter some of those improvements happening, so we are not worried about oil,”  says Fernandes.

The irony of that last pronouncement would not be lost on industry observers given that both of AirAsia’s two domestic Malaysian rivals are currently loss-making.

Looking ahead, Fernandes says the group was initially expecting an average of 8% to 10% annual capacity growth for AirAsia Malaysia in the next few years, but is ready to step it up by up to 20% if conditions are right.

“Oil [prices] and currencies are weaker, but what gives me comfort is that demand is strong. Definitely profitability will be impacted [in the short term] but we are not slowing our growth because we think we are on the rise.

“We can make much more profit by cutting a lot of things and so on, but then when oil price goes down you would be scrambling to get capacity. We are not a company that will be a slave to analysts in the short term.”

While some domestic rivals such as Malaysia Airlines have reintroduced a fuel surcharge, Fernandes maintains that AirAsia has no such plans.

“Profit is definitely going to be impacted this year because of fuel, but I lived in the era of US$130 oil. We lived through that crisis and got stronger and better.

“Oil has a habit of sorting out the men from the boys.”

During the last oil peak, AirAsia relied on ancillary revenue to offset the impact. “Now, digital is my saviour,” Fernandes declares.

While one aspect of AirAsia’s digital transformation focuses on driving ancillary revenue by monetising its passenger data, another aspect is in finding cost savings.

“If you take out oil, our costs are down 5% over the past year [due to the digital initiatives]. If you take out currency [impact], it’s probably about 10%,” he says.

The savings come from such things as using data to deploy predictive maintenance works that save on repair costs, for example, or rostering pilots using artificial intelligence for more efficiency.

 

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