By Stephanie Jacob
AirAsia X’ management promises its shareholders that a return to profitability will come in the latter half of 2015. This appears doable as external factors like competition and fuel costs turn in its favour. But it will be what is done internally which will determine if the turnaround is sustainable over the longer term.
There is a theory that if you repeat something often enough, then it will become a reality. For AirAsia X (AAX) that mantra is that the airline will finally fly back into the black come the second half of 2015 (2H15).
For shareholders of this long-haul low-cost carrier, such an event cannot come a moment too soon. Remember that when AAX was listed on Bursa Malaysia, it opened at RM1.25 per share, today it trades as a penny stock at about 25 sen per share.
The fall has been steep and substantial, and the shareholders will be waiting eagerly for some value to return to their investments. They will also be hoping that any turnaround is sustainable over the longer term.
In fairness to AAX, it has faced a tough external environment since listing. The market has been filled with overcapacity and a weak yield environment as a consequence of increased competition.
So certain changes in the external environment will undoubtedly contribute to a turnaround. One of the biggest factors is the changes, or rather potential changes, set to take place at Malaysia Airlines.
Malaysia Airlines is probably AAX’ biggest competitor in terms of its route network.
Tony Fernandes
Theoretically both employ different business models, with one being a full-service carrier and the other a low-cost carrier, and therefore offer different products. And AirAsia founder Tony Fernandes has often said that there is space for both Malaysia Airlines and AAX in the Malaysian aviation market.
Nonetheless, given that they fly similar routes, what one airline does can and will have an impact on the other. Since joining the bourse, AAX has felt that impact as its listing coincided with Malaysia Airlines adopting its “load active, yield passive” strategy.
This strategy focuses on increasing capacity to drive load factors (which is a measure of capacity utilisation). This is done by lowering yields (fares), in the hope that the income from the higher amounts of traffic will cover the reduction in fare revenue.
In executing this strategy, Malaysia Airlines increased its capacity heavily in routes to Australia and also to North Asia – also key sectors for AAX. Then in order to fill its planes, it proceeded to discount its fares heavily.
At times, over the past two years, it would often cost a passenger about the same to fly with Malaysia Airlines with all its frills, as it would to fly with plain ol’ budget AAX. Ultimately, the strategy failed badly for Malaysia Airlines but it also hurt AAX.
Fernandes summed it up by saying: “If with our cost structure (AAX) you are selling it at RM400 and a full-service airline sells it at RM350 with triple the cost structure – how can you compete? So this was the issue but it appears to be getting better.”
It is getting better because Malaysia Airlines, in the midst of its own transformation programme, is almost certain to make changes to its route network and reduce capacity too. But it is important to remember that there is no way to know when these changes by Malaysia Airlines will come.
If they come later rather than sooner, then AAX will have to wait to see any positive impact and the fear is that it may affect the turnaround. Nonetheless, both AAX’ management and analysts believe that any cut from Malaysia Airlines will be good for AAX.
More importantly, what is positive is that AAX seems to look at any potential boost from what happens at its competitor as an extra to its efforts rather than the foundation on which it is anchoring its plans.
Benyamin Ismail
AAX’ acting chief executive officer (CEO) Benyamin Ismail said: “We are not waiting for a miracle, our turnaround does not rely on Malaysia Airlines.” He added that it was the steps the carrier has taken internally, on its own accord, which have stemmed the bleeding and which will lead to a turnaround.
Since it was listed, AAX has seen a lot of factors which are perhaps out of its hands go against it. Now, aside from the weak ringgit versus the US dollar, those factors appear to be turning in its favour. Aside from changes at Malaysia Airlines, the lower cost of fuel will undoubtedly also help AAX in the short term.
But what AAX’ shareholders will undoubtedly want is long-term sustainable growth and profits. To achieve that, what happens to AAX internally will be as important as external factors going its way. Acting CEO Benyamin assured shareholders that this is what the airline has been working on.
In a statement which he said: “There are a lot of things we have been doing to our operations. Just to make sure all our processes are tight, to make sure we are not fat in terms of our operations. We have streamlined a lot of our operations to save a lot of cost,” will be welcomed by shareholders.
AAX’ ability to properly manage its capacity and route networks will also be crucial to it being sustainable in the long run. As competition eases, it will be tempting to start increasing capacity and introducing new routes, but AAX will need to be patient in any such move.
It should focus on increasing its loads without conceding too much in terms of yields. And work on ensuring that its yields normalised and strengthened since it does not have to heavily discount its fares to attract passengers these days.
The improving external environment and the lower fuel prices will give AAX a boost. But in the long run, properly balancing loads, revenue, and cost will be the difference in achieving a sustainable turnaround come 2H15.
GRRRRR!!!
Yesterday: AirAsia X acting CEO: Our turnaround not dependent on Malaysia Airlines
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