By Chan Quan Min
AirAsia India’s Bangalore-Goa maiden flight last week spoke of AirAsia Bhd’s enthusiasm for expansion into new markets, but back home in Kuala Lumpur the budget airline is fast reeling in growth plans after a cutthroat fare war.
After over a year of intense competition with Malaysia Airlines and new market entrant Malindo – during which industry-wide capacity grew by almost a fifth – AirAsia has smartly made the first move to hold off expansion plans.
The decision to limit growth could not have come any sooner as competition has already claimed a portion of AirAsia’s typically wide profit margins.
Malaysia Airlines or MAS has been even harder hit, losing RM1.2 billion in 2013 and a further RM442 million in the first quarter (1Q14) while AirAsia remained profitable, albeit less so.
The true culprit, according to aviation analysts, is the “load active, yield passive” strategy practised by both airlines that called for heavy discounting to fill additional flight capacity of up to 18% added during 2013.
MAS in particular added the most amount of new flights and seats as part of CEO Ahmad Jauhari Yahya’s turnaround strategy to “drive revenue, revenue, revenue.” But the airline was not able to convert higher passenger numbers into earnings and remained operationally unprofitable.
Interestingly, AirAsia’s first quarter (1Q14) results presentation slides cited “irrational pricing” as the reason behind Malaysia Airline’s continued unprofitability.
The same irrational pricing, which aviation analysts roundly view as unsustainable, inevitably led to a loss in pricing power for the airlines. This is also called yield erosion in more technical language. Yield is a measure of average ticket prices often used as an indicator of financial performance.
Slowing growth good for the bottomline
Observers have noticed that AirAsia was increasingly doing away with the destructive ‘load active, yield passive’ strategy of last year.
Aireen Omar
The clearest indication of the airline taking a new direction came last month from CEO Aireen Omar. “AirAsia continues to be disciplined in an industry where irrational competition exists,” she said in a statement.
“We are focussed on running a lean operation, adding in capacity where needed and cutting routes and frequencies where applicable to ensure better profitability.”
AirAsia has twice this year deferred plane deliveries originally scheduled for later this year up to 2018. And, later this year, 12 of its older aircraft will be sold for about RM550 million in cash.
AirAsia and its affiliate airlines make their aircraft orders as a group. Total orders of the airline group’s workhorse, the Airbus A320, have been reduced at last count to 24 planes in 2014 and just 10 planes in 2015, according to a CIMB Research report.
After accounting for the sale of 12 aircraft, AirAsia’s Malaysian fleet will add just four aircraft this year. This is not a big reduction from its earlier plans to expand by five planes in Malaysia.
Compared to 2012 and 2013, however, AirAsia is in absolute terms cutting growth by half. The Malaysian fleet added seven planes in 2012 and eight planes in 2013 (see chart below).
An AirAsia official told KiniBiz not one of the four aircraft will go to the Kuala Lumpur hub, with the airline preferring to expand at its secondary Malaysian hubs instead.
The airline dressed in red may be retreating from competition but it is by no means the loser. Analysts have cheered the slower pace of expansion as a sensible move against yield erosion.
In a recent report, Mohshin Aziz of Maybank IB Research noted improving yields for AirAsia after the airline began “optimising its schedule and taking out capacity on some high frequency sectors.”
He considered it a “sure sign that the fare war has ended and the market has become more rational.”
CIMB Research expects AirAsia to return to market leading profits as soon as next year. The airline is already among the world’s most profitable, fueling rapid expansion over the past decade.
Elsewhere in the group, Indonesia AirAsia is seeing route cuts to deal with rising costs from the rupiah’s recent decline against the US dollar. AirAsia Philippines is still fraught with growing pains a year in from a merger with another Phillipines-based budget airline.
You must be logged in to post a comment.