AirAsia relaxed about price cuts in aviation industry

ASEAN+ January 10, 2017 01:00

By THE STAR
ASIA NEWS NETWORK

3,436 Viewed

LOW-COST AIRLINE HAS HEDGED THE BULK OF ITS OPERATING COSTS, SAYS CEO FERNANDES



An environment of rising competition in the airlines sector forcing the players to reduce prices works well for AirAsia Bhd.

AN ENVIRONMENT of rising competition that is forcing airlines to cut ticket prices suits AirAsia, the discount carrier’s chief says.

Chief executive officer Tan SriTony Fernandes said the low-cost carrier (LCC) had hedged the bulk of its operating costs.

He said the airline would thrive on competition that is expected to see players being forced to operate under higher operating costs and lower revenue due to tickets being sold at discounts.

AirAsia has hedged 76 per cent of jet fuel requirements for this year, its interest rates were fixed and 66 per cent of its aircraft purchases were hedged.

Fernandes also said that the weak Malaysian ringgit worked in its favour and the real battle was between its domestic competitors – Malaysia Airlines and Malindo Air – both of which are operating from Kuala Lumpur International Airport (KLIA).

AirAsia is largely operating at KLIA2, which is a dedicated low-cost terminal.

“Our model is robust ... we made good profits when fuel was at US$130 a barrel and will make good margins with ringgit at RM4.50 to the US dollar,” he said.

“We will use ancillary income to fight higher costs and the battle is really at KLIA between Malaysia Airlines and Malindo Air ... good luck to the winner.

“The bonus for us is that the weak ringgit has made Malaysia a cheaper place and that has given us an immense boost to grow and become like the Dubai of the region where people transit here to other destinations,” he said in an interview.

Fernandes said that the airline wanted to grow its ancillary income from RM50 per passenger to RM60 and would be more aggressive in this area to counter the increases in cost due to the weak ringgit.

“Our revenue is higher due to higher loads. So the risk is minimal as we have fixed a lot of our cost,” he said.

Last December the airline had reduced food prices by 30 to 40 per cent and it had seen higher demand and more than 90 per cent in passenger load.

Of the 28 new planes the airline will add to its fleet this year, eight will be deployed for Malaysia and the rest for its other operations including those in Japan and India.

“I am shocked how some analysts look at things, but we will have record growth this year,” he said.

“Our first quarter sales are positive, ahead of the same quarter in 2016.”

Recently, Deutsche Bank Research had a “sell” call on AirAsia, citing several reasons. It believed that higher competition and fare discounting would push yields down.

Apart from that, the research house said the higher oil prices, weaker ringgit and over-supply in the airline industry would push costs higher for the airline. Its 12-month target price was RM1.75 per share against AirAsia’s closing price last Friday of RM2.22.

On airline yields, Fernandes said the true comparison for LCCs was Rask (revenue per available seat kilometre/mile) and not yields.

“We don’t care about yields and do not believe Rask will go down,” he said.

“We make money from selling seats, ticket prices, food and all the ancillaries.”

Rask is a unit measure that determines the profitability of an airline irrespective of the load factor.

As long as it is higher than the operating cost, the airline is profitable.

However, the Deutsche report said things could change if “competitive intensity is not as bad as feared, and the sale of Asia Aviation Capital results in positive sentiment lift.”