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AirAsia has tougher battle on home turf

October 09, 2014 16:34 IST

Stewardesses pose in front of an Airbus A340 passenger jet.

Stewardesses pose in front of an Airbus A340 passenger jet. Photograph: Charles Platiau/Reuters

Tony Fernandes declares war on rivals in India, but the airline’s financials are stressed.

AirAsia’s rival airlines in India have kept themselves super-busy in the past few months -- by moving court against the former’s launch, adding flights on the routes where AirAsia is operating, and engaging in a price war.

On his part, AirAsia group chief executive officer Tony Fernandes hasn’t been quiet either.

He has declared a war on rival airlines in India and said AirAsia will give them a run for their money.

However, do airlines in India need to worry so much about AirAsia?

Air Asia CEO Tony Fernandes.

Air Asia CEO Tony Fernandes. Photograph: Daniel Munoz/Reuters

Events in the past 18 months show AirAsia might have a bigger battle on its hand as far as its own financials are concerned.

Its consolidated profit in 2013 was the lowest since 2009 due to intense competition in Malaysia, a slump in demand because of political crisis in Thailand and the impact of currency depreciation.

Analysts and aviation experts say the group’s weakness in its core South East Asia market will add to the pressure on its Indian arm as it intensifies competition in India.

AirAsia aircraft

An Airbus A340 AirAsia X passenger jet arrives on its inaugural flight from Kuala Lumpur to Paris. Photograph: Charles Platiau/Reuters

Operating cash flow, margins and the group’s return on equity in 2013 were also the lowest in the past four years.

AirAsia’s consolidated results includes income from the parent airline in Malaysia and the share of profit or loss from its airlines in Thailand, Indonesia and the Philippines. (The airline follows January-December financial year).

AirAsia did not respond to an email query.

“AirAsia is a successful and proven player.

"It has got a powerful brand, proven product, long-term fleet commitment and large infrastructure (maintenance, repair and overhaul or MRO, training etc) at key places.

AirAsia aircraft

AirAsia aircraft. Photograph: Reuters

"However, I am not sure of AirAsia India’s ability to absorb the kind of losses that are likely in India, especially given their under-capitalisation in India and challenges in other markets.

"The airlines performance in India in the first half of the year has not been encouraging,”’ said Kapil Kaul of Centre for Asia Pacific Aviation.

AirAsia India launched operations in June and flies to Goa, Chennai, Kochi, Chandigarh and Jaipur from its Bangalore base.

It has two Airbus A320 planes. AirAsia India is a joint venture between AirAsia Malaysia (49 per cent), Tata Sons (30 per cent) and Telestra Tradeplace (21 per cent).

AirAsia flight crew members take off AirAsia Japan CEO Yoshinori Odagiri's (C) shirt to show the company's uniform underneath during an AirAsia Group news conference in Tokyo July 1, 2014.

AirAsia flight crew members take off AirAsia Japan CEO Yoshinori Odagiri's (C) shirt to show the company's uniform underneath during an AirAsia Group news conference in Tokyo July 1, 2014. Photograph: Issei Kato/Reuters

Malaysia-based analyst Shukor Yosuf points out that AirAsia’s latest results indicate that profit has been eroded by intense competition and heavy finance charges on its aircraft acquisitions.

“AirAsia remains strong as it has the lowest seat cost per passenger kilometre (unit cost) and has a distinct first-mover advantage in South East Asian markets.

"The airline’s creditors are comfortable with AirAsia’s gearing. There is a danger the growth may be stunted by aggressive low pricing by many LCCs (low-cost carriers) in the region and Tony Fernandes has flagged this.

"AirAsia in India will face tremendous competition from the local airlines, but it is nimble and wily enough to overcome the challenges, especially with Tata group as its partner,” he added.

According to Subhranshu Sekhar Das, director (aerospace and defence) at Frost & Sullivan, AirAsia has the leadership, access to funds and resources.

“This is critical for expansion. Sharing of infrastructure amongst its airline brands also makes it competitive.”

In view of the challenges, AirAsia Malaysia is slowing down capacity addition, deferring planned aircraft induction, and selling older planes.

Broking houses have cut earnings estimate for the airline in 2014 owing to falling yields. An HSBC Global Research report in June pointed out that AirAsia India would face the same challenges as other domestic airlines.

“Losses in short-term (for AirAsia India) are probably inevitable given the challenging domestic environment and sub-scale operations.

"Any prospects of a turnaround in the medium-term will likely depend on the venture’s ability to launch international operations from India. AirAsia India’s medium-term prospects remain uncertain,” HSBC analysts Rajani Khetan, Mark Webb and Achal Kumar said in their report.

The report added that with the exception of Thai AirAsia, all its regional joint ventures have been struggling to compete with strong incumbents (Lion Air in Indonesia and Cebu Air in the Philippines) and even years after these ventures were launched they struggle to remain profitable.

AirAsiaAIRASIA MALAYSIA IN NUMBERS

Aneesh Phadnis in Mumbai
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