AAX keeps faith in its model
Stephanie Jacob 

When AirAsia X Bhd (AAX) first took flight 11 years ago, the big debate was the viability of the long-haul low-cost model.Over a decade later, the model remains firmly at the centre of debate even as its popularity soared (see P.10).

The airline’s development and performance over the last 11 years encapsulate why. After its most recent two financial years booked in net profits, there is a possibility that AAX might slip back into the red on the back of high oil prices in FY18.

Investors will remember that it was not that long ago that the airline was swimming in the red. In July 2013, AAX listed on the main market of Bursa Malaysia and for that year it posted a net loss. FY14 brought no relief as the airline slipped further into the red.

In January 2015, a new management team led by AirAsia Group co-founder Datuk Kamarudin Meranun took over, with Benyamin Ismail as acting CEO (he was confirmed as CEO later that year). The new team’s mandate was to push the airline back to profitability.

It succeeded in narrowing the loss in FY15 and then brought the airline back into positive territory in FY16 and FY17. However, Benyamin acknowledges that oil prices have given AAX a beating and admits there is a possibility of a loss this year.

“I do not know yet, I think the second quarter (2Q) fuel prices moved up quite a bit so it was a tough quarter.”

AAX took to the sky on its inaugural route from Kuala Lumpur to Gold Coast, Australia.

The airline was among the first to try the model, joining Australia’s Jetstar as the only two carriers testing whether the popular short-haul budget model can be successfully modified to long haul.

Over a decade later, AAX has grown by leaps and bounds. Today, it carries millions of passengers on 29 routes across the Asia-Pacific, Middle East and America. From its sole hub in Kuala Lumpur, the group has established further hubs in Bangkok, Thailand and Bali, Indonesia. Across the group, the fleet size has burgeoned from two to 32 planes.

“The third quarter is looking ok, (though) we need to take a look at the statistics. It is a tough call… I do not know if we will be profitable or not yet,” Benyamin tells FocusM at AAX’s headquarters Red Q in Sepang, Selangor.


Keeping costs in check

Nonetheless, Benyamin remains convinced of the viability of the long-haul low-cost model. He points out that when the fuel price soars, most if not all, airlines are affected.

Some have argued that oil price fluctuations are the flaw in the budget long-haul model. However, he believes that the prudent management of costs and pushing efficiencies, which airlines have more control over, matter much more.

“Over the past three years since I came into this role, we have been undertaking a lot of cost initiatives,” Benyamin says. “A lot of it involves renegotiating contracts for things like ground handling, overflight charges and airport charges.”

For example, AAX negotiates with each airport to try and gain incentives in terms of airport charges. This could include agreeing to lower fees should the airline be able to deliver higher traffic.

On other things like ground handling, AAX tries to sign as many short-term contracts as possible. This gives it room to renegotiate them frequently.

Aside from cost cutting, the airline has also looked at ways to improve its efficiency. Among the measures have been to stop long-stay crews on shorter flights and to fly crews back to KL on overnight flights rather than keep them at the destination.

“We also have been quite lean on manpower and have not been increasing (our headcount) aside from the requirements for pilots and crew,” he notes. “We also make sure that our aircraft are well maintained.”

Lately, AAX has also been undertaking what it calls fuel tankering. Under this system, aircraft are loaded with most of their fuel needs at KL because it is cheaper than doing so at the destinations.

“We load more at KL before we fly to our destination because it is cheaper compared to other places,” Benyamin says. “Before the prices were more balanced but now Malaysia is cheaper so we tend to do this.”

Currently, AAX claims to have the lowest cost per available seat kilometre, or CASK, in the world. “Our CASK is probably about 1.98 US cents, while AirAsia Bhd’s is about 2.1 to 2.2 cents. For the full-service carriers, it is about five to six cents, which is very high,” he says.


Growing revenue

However, an airline cannot live on cost cutting and efficiencies alone. It needs to be able to grow its revenue base in order to remain profitable and keep growing, acknowledges Benyamin.

One way is to push its ancillary products like choosing a seat and baggage, as revenue earned from these items go straight to AAX’s bottom line. “(Offering) all of this come at no additional cost to us and so we try to play with all these things,” he says.

After just over a decade in the business, AAX is also gaining some level of pricing power in the market. This is particularly true in its more mature markets where it is an established brand, and destinations which are generally very popular and well visited.

AAX is also seeing a slowly shifting trend where travellers are starting to opt to spend less on the travelling part and more once they arrive at the destination.

“We are starting to see that people want to spend more at the site. They want to stay in a nice hotel or spend more on shopping,” he points out.

Ultimately, Benyamin believes that growing AAX’s market share in the long-haul low-cost sector will become easier as more customers embrace the concept, particularly in the Asian market and among the older generation.

“Young people and middle- aged people understand it … I think with the older generation it is a bit different. In Malaysia, the penetration is very high, whereas in Japan or India it might be slightly different.

“I think it is all about education, we are saying we give you value for your money. You are paying for your seat and that is it. If you want food, then you can pay for it. (Meanwhile) a full-service carrier will charge you for everything under the sky (whether you want it or not),” he says.


Long-term viability

All this leads back to the question of AAX’s prospects, both in FY18 and beyond. In the near term, analysts are choosing to take a more cautious view amid the high oil price environment.

Global crude oil is currently trading 13% higher year-on-year at around US$72 per barrel. It hit a high of US$86.29 in early October. This is due to a range of geopolitical issues including the re-imposition of sanctions on Iran by the Trump administration and the volatile political situation in Venezuela. The bottleneck in shale oil production has also affected prices, say analysts.

In the first half of FY18 (1HFY18), the airline saw revenue up slightly at RM2.32 bil from RM2.22 bil in 1HFY17. Nonetheless, due to an increase in fuel costs, it booked a net loss of RM16 mil versus a RM57.8 mil profit year-on-year.

“Recall that AAX slumped into the red from a profit in 1HFY18, as a result of elevated fuel cost,” notes a recent MIDF Research report on AAX, adding that it expects high crude oil prices to remain a challenge.

The brokerage says the current environment is a chance for AAX to prove its model. “Its ability to sustain earnings in the long run would be largely driven by the continuous improvement in cost structures and the generation of meaningful revenue on new routes,” it opines.

Given the challenging environment, MIDF Research has lowered its earnings forecasts for FY18 and FY19, and is expecting the airline to record a loss in this FY.

However, it believes AAX is capable of bouncing back in FY19. “We are expecting AAX to return to profit in FY19. This could be possible through further cost-cutting initiatives, better capacity utilisation and stable fuel environment.

“Although we are downgrading the stock (to neutral) due to short-term headwinds, we remain encouraged by AAX’s long-term prospects that are tied to the strategic plans of further reductions in CASK, and a stronger focus on core markets.

“This will be supported by AAX’s gradual shift to a modern fleet operation via the purchase of new-generation aircraft,” it adds.

Maybank IB Research analyst Mohshin Aziz says the high oil prices are an acid test for AAX’s business model.

He points out that historically, AAX had struggled when jet fuel prices rose above the US$90 mark.

“We forecast that it will record a substantial loss in 3QFY18, but should be profitable in 4Q as it is seasonally the strongest quarter,” he opines in a recent research note.

However, he still believes that AAX will scrape by FY18 with a small profit. He has a neutral call on the counter.

Overall, analysts have a mixed view on the budget long-haul carrier.

According to data provided by Bursa Marketplace, four have strong buy and buy calls on the stock.

A further four have a hold call while three have rated AAX as sell. FocusM

This article first appeared in Focus Malaysia Issue 307.