By Stephanie Jacob
AirAsia X believes that it will be come back into profitability in the second half of 2015. With external factors starting to turn in their favour, things are looking up for the long-haul budget carrier. Nonetheless, achieving the turnaround will be as much about what it does internally, as what happens externally.
______________________________________________________________________
The statement which low-cost, long-haul carrier AirAsia X Bhd (AAX) says it will turn around in the second half of 2015 (2H15) has been repeated so often by the group’s top management that it has almost become a sort of mantra for the airline.
Listed on the Main Market of Bursa Malaysia in 2013 at RM1.25, the airline is now trading almost four-fifths below that at 27 sen. For those who invested in AAX back in July 10, 2013, the fall in the worth of their investments has been steep.
As the carrier approaches the second anniversary of its listing, the AAX board and management team know that it is crunch time. This can be seen through several decisions which have been taken over the past year.
First the former chief executive officer (CEO) Azran Osman Rani, who took the airline through its listing process, was replaced by the board of directors at end-January 2015. In his place, AirAsia co-founder Kamarudin Meranun was appointed group CEO and AAX’ head of investor relations Benyamin Ismail was made acting CEO.
Benyamin Ismail
Then more recently at AAX’ annual general meeting (AGM) on June 4, 2015, the board forgoed their directors fees amounting to some RM434,658. Kamarudin, who is also a director of the company, said the board had forfeited their fees because they wanted to be in solidarity with the shareholders.
AAX’ board includes Rafidah Aziz, Tony Fernandes, Kalimullah Hassan, Lim Kian Onn, Fam Lee Ee, Asmat Kamaludin, Yusli Mohamad Yusoff, and Kiyotaka Tanaka. At the AGM, it was also announced that Kalimullah and Tanaka would not be reappointed due to personal reasons.
Nonetheless, what the shareholders want to see is the budget carrier posting profits after enduring a financial year 2014 (FY14) loss of RM519 million and a first quarter of 2015 (1Q15) RM125 million loss.
Can AAX’ management deliver?
In a recent conversation with KINIBIZ, AAX’ acting CEO Benyamin Ismail reiterated his confidence that the airline will return to the black in 2H15. He said that many of the new initiatives they have undertaken are starting to show results and the airline is on track to return to profitability.
“I think 2Q15, which is coming up, is still going to be a bit bleak. Because a lot of our initiatives are most likely to kick in the second half of the year. So 2Q15 I think, we will still be in the red. But the most important thing is in the 3Q15 and 4Q15, I am quite confident that we will see the return of AirAsia X (into profitability),” he said.
Focused on capacity management
Much of AAX’ woes since it was listed has been caused by overcapacity in its key sectors such as and Australia and North Asia. One of the biggest factors which has impacted the budget carrier was Malaysia Airlines’ “load active, yield passive” strategy, which saw it increase capacity in the region and drop fares dramatically to fill its planes – a strategy that hurt both the airlines.
With Malaysia Airlines now under new management and in the midst of its own turnaround, analysts believe that AAX will benefit from any route or capacity cuts taken by the national carrier, especially if it shifts its focus away from region routes to longer-haul routes.
Maybank Research aviation analyst Mohshin Aziz said: “We concur that any reform measures at Malaysia Airlines will ultimately benefit the industry.” But also cautioned, “we do not know how quickly Malaysia Airlines will mobilise its business reform initiatives.”
On June 1, 2015, Malaysia Airlines’ new CEO Christoph Mueller said: “The route network will undergo some changes in the next couple of months but not significantly… Malaysia Airlines is not a regional carrier. Of course we will have our backbone in the region, but not a regional carrier. We will be an international full-fledged carrier and we will keep operating long-haul aircraft.”
For AAX, it is a mixed message. On one hand, the fact that Malaysia Airlines does not plan to become a regional carrier will be welcomed, on the other hand, the fact Malaysia Airlines plans to have significant presence in the region may mean less reduction in capacity than AAX might have liked.
Nonetheless, Benyamin emphasised that AAX is not waiting for Malaysia Airlines to deal with the overcapacity in the market.
“I could not wait (for Malaysia Airlines)… I did not have a sugar daddy to support me. So what I did was I cut (capacity)… because if I had waited for them then I would have been in an even worse position now,” he said. (The full interview will be published tomorrow).
As such any capacity or route cuts by Malaysia Airlines would provide upside but AAX is not waiting for a miracle and is not dependent on such actions to meet its goal for a 2H15 recovery, said Benyamin.
Falling load factors are a concern
AAX’ move to cut capacity was reflected in its 1Q15 results where its capacity fell 3.2%. However, Maybank Research’s Mohshin noted that AAX’ load factors also fell, which means fewer passengers flew with AAX during the quarter under review.
“Load factor has declined a whopping 12.2 percentage points year-on-year to 73.6% despite cutting capacity by 3.2%,” said Mohshin, adding that this proves that competition is rife and that AAX is struggling to deal with it. Load factors are a measure of capacity utilisation.
Benyamin admitted that falling loads are a concern but said that it is a pattern across the industry. He said that one of the reasons that AAX’ loads fell from the year before was because previously it had been discounting its fares heavily in order to utilise capacity, and he has stopped doing that.
Furthermore during 1Q15, AAX ceased all marketing as a sign of respect for the victims of the QZ8501 crash, said Benyamin. He is confident that loads can be stimulated and will improve now that its marketing has restarted.
AAX’ needs to be patient with expansion
Nonetheless, Benyamin said while he is ready to add capacity, he will not do so without being confident that the route has recovered. However, he said that AAX will look into starting up new routes which would attract more passengers such as the KL-Osaka-Honolulu route, for which the airline is in the process of gaining the necessary regulatory approvals.
Analysts believe that AAX’ ability to manage its capacity and expansion will be crucial to its recovery.
“The current AirAsia and AAX strategy for the Malaysian market of focusing on improving yields while reducing the Malaysia-based fleet makes sense… the outlook could start improving in 2H15 if it maintains its new more conservative approach to capacity and pricing,” the Centre of Aviation said.
For AAX, managing its capacity prudently will allow it to work on improving its yields because it will not need to heavily discount prices to fill its planes. Yield is often used as the de facto measurement of pricing, effectively the amount paid for every revenue per kilometre flown.
Furthermore, Benyamin said that there is a lot of upside in terms of improving yields as capacity and competition normalise. Taking advantage of this will certainly help AAX get back into the black.
Tomorrow: AirAsia X acting CEO: Our turnaround not dependent on Malaysia Airlines
You must be logged in to post a comment.