Friday 29 Mar 2024
By
main news image

WITH the black box now in hand, it will not be long before investigators piece together the events that led to the loss of Indonesia AirAsia’s Flight QZ8501. It may bring closure to some, but the answers may put even more pressure on the regional aviation industry that is still recovering from the loss of two Malaysian Airline System Bhd (MAS) planes last year.

Depending on the findings, AirAsia Bhd, which owns 49% of Indonesia AirAsia, could be vindicated or suffer another blow to already weak sentiment. It doesn’t seem to matter that Indonesia AirAsia is 51%-controlled by Indonesian investors. The wider AirAsia brand is expected to feel the pinch from the crash.

“The disaster will definitely have a negative impact on AirAsia’s brand. Sure, the accident happened to an Indonesian carrier (Indonesia AirAsia), but it is a global brand. It is human nature to feel high anxiety post-crash, and people will look at alternatives in the short term, perhaps two to three months,” says Maybank Investment Bank analyst Mohshin Aziz.

However, as long as AirAsia conducts itself well, it will bounce back, notes Mohshin, who is still positive on the longer-term outlook of the group.

As the wider market started to tumble towards the end of 2014, AirAsia’s share price bucked the trend, rising to as high as RM2.94, due mainly to the sharp fall in jet fuel prices.

“The lower oil prices do give AirAsia some breathing room. They are hedged at US$88 per barrel for half of their fuel needs for the whole of 2015. You can say they either get it half wrong or half right,” Mohshin says. Note that fuel costs make up over 40% of the airline’s operating costs.

Following the loss of Flight QZ8501, AirAsia’s share price fell 15.31% to as low as RM2.49 before rebounding to RM2.77 last Friday.

Despite the incident, analysts are still relatively bullish on the stock, with an average target price of RM3.18 from 10 calls. There were five “buy” calls, two “hold” calls, one “outperform” call, one “add” call and one “trading sell” call.

“I’m still positive on AirAsia. At the current price, with the risk premium, it is a good time to buy if you take a longer-term view,” says Mohshin.

Still, there are some structural headwinds for AirAsia. Other than its core Malaysian business, other subsidiaries have been loss-making. While Asia is the fastest-growing market for air travel, it is also expected to see the quickest expansion in capacity going forward, with the size of incoming capacity almost the same as the existing one.

The lower oil prices have been a boon for the airline industry, but in an environment in which capacity is expanding rapidly, airlines like AirAsia may not see the same margin expansion as its peers in regions where consolidation has already taken place.

“In the near term, load factors and ticket prices will be lower. But we won’t see the impact so soon. Most passengers flying today made their bookings typically 1½ months in advance. Load factors now are not a strong indicator of the impact. But we will see the impact down the line,” says Mohshin.

Perhaps the bigger concern moving forward is whether the disaster would slow down AirAsia’s aggressive expansion into new territories like Japan and India. Mohshin says regulators are going to scrutinise AirAsia much more closely now that it has lost its “accident-free” status.

At least, the short-term impact on AirAsia is not expected to be as severe as what happened to MAS with Chinese travellers following the MH370 disaster.

“We have seen from past incidences that the Indonesian travelling public is quite resilient compared with other countries, although foreign passengers travelling to Indonesia may be less willing to fly Indonesia AirAsia. Compared with the Chinese reaction to MH370, I expect less of a backlash from the Indonesian travelling public,” says Leithen Francis, managing director of Singapore-based public relations firm Francis and Partners.

It helps that AirAsia’s founder and group CEO Tan Sri Tony Fernandes has handled the entire situation very professionally.

“Unlike MAS, Tony is the owner, and the boss of AirAsia for 14 years. He knows his way around in all aspects of the business and is able to answer questions instinctively with the utmost confidence, and is seen as genuine and trustworthy. Of course, his personality also helps,” Mohshin says.

The QZ8501 incident has exposed some weaknesses in AirAsia’s business model, one that lies on having a non-controlling stake in another carrier but including it under the AirAsia brand.

“AirAsia has the same brand across all businesses. From a marketing perspective, that is a powerful multiplier effect. Advertising and marketing in AirAsia Malaysia can benefit AirAsia Thailand and vice versa, for example.

“In the good times, this is great. But the downside is that an accident like this hurts the brand, although a different airline operator may be involved. Consumers don’t distinguish. As far as they are concerned, it is all AirAsia. Hence, there is an adverse impact on all AirAsia-related brands,” says Francis.

Nonetheless, the benefits of using one brand outweigh the negative aspects, Francis opines.

blackbox_aa_36_1050“Even with different brands, consumers will see through it. For example, Indonesia AirAsia pilots conduct their training in Malaysia at AirAsia’s training facility.”

As the search and rescue efforts for Flight QZ8501 continue in the Java sea, Francis says it is pointless to speculate on the cause of the crash and relate it to previous Indonesian air disasters.

“Previous Indonesian airline crashes involved aircraft landing. Take-off and landing are the most dangerous parts of flying. A crash while the aircraft is cruising is very rare,” Francis says.

Meanwhile, AirAsia continues to be beset by finger pointing, even from Indonesian ministry officials, who threatened to revoke Indonesia AirAsia’s licence earlier last week.

“The reality is that these statements are unsubstantiated. Until we see something in writing, everything is premature. Even the insurers have been quiet about it. Regulators, lawyers and insurers will make sure their facts are absolutely correct as they have the burden of proof. However, speculators don’t, so they can say anything,” Mohshin says.

Was it human error, equipment failure or plain bad luck? The records in the black box shall reveal the answer soon.

 

This article first appeared in The Edge Malaysia Weekly, on January 19 - 25 , 2015.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share