Tuesday, June 2, 2009

X-rated success

AirAsia X CEO Azran Osman-Rani tells Business Spectator's Isabelle Oderberg:

Isabelle Oderberg: I wanted to start by asking you about the funding position. There's been some suggestion that AirAsia X may need more funding and is possibly considering an IPO?

Azran Osman-Rani: The short answer is we don't have any specific and immediate plans for an IPO. That story got started because we were talking to one of the reporters about our expansion plans with the number of aircraft that we're getting and it's just more planes that we get and we'll have financing, primarily debt financing for those planes and at some point the equity structure of AirAsia X needs to grow to support future planes.

But to me that comes into the picture for example for our funding requirements for 2011 and beyond and there are obviously various means of getting equity financing – in IPO or just asking existing shareholders for more capital, new investors, there's so many different permutations and it's still very early days. The whole point is, whatever the means is, the most important thing for us is to demonstrate that we will finish 2009 with a good net profitability position, even amidst current macro conditions and that would give a good baseline for any future fund raising.

At the moment, that's really what we're focussed on. We've got our debt financing covered for this year for aircraft so it's really just finishing the year with a good track record and maybe next year we can re-look at where the capital markets are going to be but it's really anyone's guess when would be a good time to go to the market.

IO: So if capital markets do have some sort of recovery to a point where you thought they were healthy enough, you would consider going to market for a capital raising?

AOR: Yes, but we would only consider it depending on the variables next year. My main focus is making sure that we complete the year with a good story to tell because with AirAsia X, we've sold the story, now we need to sell an actual track record and ability to deliver.

IO: What's the situation with new planes? How many are you taking on and have you scaled back the number that you're taking on?

AOR: No we haven't. We basically placed an order for 25 brand new A330's from Airbus when we started. We took two last year. We're on track to take three this year in September, November and December and then three more next year and it's staggered so no we haven’t changed. In fact we have brought one plane order ahead of schedule. We were supposed to take only two this year, but we negotiated and got one order ahead of time.

IO: What's the current size of the fleet?

AOR: Right now we've got two brand new 330's. One leased 330 and two A340's so we have five.

IO: And how many more are you taking on over the coming 12 months?

AOR: Well we'll get three more brand new 330's this year, September November December so that will be eight for the end of the year and three more next year by mid next year so we'll have 11 by the end of the next year.

IO: The airline sector isn’t a particularly comfortable place to be at the moment, just generally, as is always the case in a downturn. I am just wondering if you could tell me a little bit about demand in Asia and where you're finding the demand is perhaps falling off and on the other side, where it's staying strong?

AOR: I think it's falling off with other traditional airlines however we're still growing. We expect to triple the number of passengers that we carry this year, so if it's falling, it's not falling with us.

IO: You mentioned traditional airlines, they're sort of starting to be seen a little bit like dinosaurs. Do you think that budget carriers are going to completely dominate the market and if so, how long?

AOR: I think this industry will ultimately shape up to most other industries, be it financial services, retail, automotive, where basically you will see polarisation of the market. There are going to be clearer brands and clearer product offerings targeted at the mass market and clearer brands and product positioning targeted at the premium market, because they're very different needs and when I say 'premium' I don't necessarily just mean first class and business class, but also people who are travelling on economy class, but are at the higher end. Airlines have to decide where they will compete and be good in their respective areas. I think the problems are going to be airlines who are stuck in the middle, who are not strong enough to compete with the best premium brands, be it Singapore or Emirates or what have you, and don't have the cost base to compete with low cost carriers. So that problem is the hollowing out in the middle and that's what's going to happen.

IO: We saw recently in Australia Jetstar – Qantas's budget line – doing some restructuring and putting a renewed focus on Asia and Jetstar Asia. Does that worry you, that increased competition?

AOR: Not really. Asia is big so we actually till today have very very limited routes that we compete head to head with Jetstar or even Tiger for that matter. Because they're flying from let's say an Australian point direct to Thailand or to Japan or Honolulu, we don't fly those routes. We fly from Kuala Lumpur so there's not really been any head to head competition.

IO: There seems to be quite an emergence of budget carriers in Asia. Do you foresee any rationalisation?

AOR: Absolutely. Absolutely.

IO: Can you paint a picture for me how you think it's going to evolve? That rationalisation?

AOR: It's easy to offer very low fares and it's always exciting to offer low fares and build up excitement. You can't sustain it if your cost structure doesn’t support it and we've seen it in the past with the likes of Oasis, Hong Kong and Zoom and all these other so called low cost carriers or budget carriers that collapse because they're trying to offer low fares but their cost structures were marginally different from traditional carriers. So the key is, when you look at budget carriers, you have to look at which ones really have the unit costs to support a low fare positioning and it's very clear to me that carriers that charge low fares but have a high cost, well they're not going to last very long and there's still quite a few of them out there.

IO: Can you name any for me? Are there any specific ones?

AOR: No, I'd rather not.

IO: Do you think that any of your own expansion plans will come through takeover, if those airlines are going to struggle with their unit costs or load ratings or whatever are the metrics that you look at? Are they going to be attractive to AirAsia X?

AOR: Really no, because what we've learnt with airlines is they're very very different animals. Take for example even the planes, because that's the single biggest thing you’ve got in an airline, right? If you're taking someone's aircraft and it's got different configuration, it adds so much more complexity by having to operate different types of airplanes, otherwise you spend a lot of money to refurbish it. It might be a lot better to just buy new planes and expand rather than take over someone else's plane.

Just to come back to your point of cost structure, you keep mentioning Jetstar, actually it's very easy for you to get what is Jetstar's unit cost in terms of US cents per available seat kilometre. At AirAsia X we only have four planes at the moment. We get our fifth in a couple of weeks, but we're already at 2.4 US cents per available seat kilometre for the full year 2009. I don't think they're even anywhere close to double that. So it's a huge huge cost difference.

IO: I'm going to come back to that in a second and the cost structure, I just want to ask you one more question though about these airlines and rationalisation. If it makes more sense for an existing carrier not to take over a plane and redeploy it and have to refurbish, is there going to be a market for these carriers that are struggling and if so, where is that going to come from? Are we going to see private equity weighing in?How will the rationalisation take place if not from existing airlines?

AOR: The sure answer is: I don't know. There will be airlines that want to take over other airlines for a number of ego reasons or they think they can extract synergies from the sheer scale, but just from our experience it's so much more complex. One of the big airline mergers right now is Click Air and Vueling in Spain and you can just see how long it's just been dragged on and how much management attention is wasted on consolidating. It's a very painful process, but that's the same in many industries and it doesn’t stop people from thinking they can somehow extract value. That's why most mergers end up destroying value.

IO: Is AirAsia X considering any other possible Australian bases?

AOR: Of course, yes.

IO: Do you think it's likely that we'll hear about any more Australian bases soon?

AOR: Yes.

IO: How soon?

AOR: Yes. Soon as in this year. Yes.

IO: Will there be more than one new Australian destination announced this year? Or will it be one this year and more next year? How many are you expecting to add?

AOR: Just one this year. We are planning another one either in 2010 or 2011.

IO: This year we'll hear about more destinations for AirAsia in Australia. That's interesting. What do you think the reaction will be from Australian carriers?

AOR: Again, at the end of the day Qantas doesn’t fly to Kuala Lumpur so we don't go head to head with them.

IO: I guess I was just thinking in terms of more and more people being flexible with their destinations in Asia and people might be more willing to go through Malaysia to get to another destination with you if they can save money and I'm just wondering whether that kind of competition is existent. Maybe it's not!

AOR: You know you're right there and knowing Qantas, they will probably fuss about it, but I think this is where they really need to figure out where they're positioned because if they try on the one hand to compete with AirAsia X where as I said you're competing with someone with a 2.4 US cents cost structure and at the same time you're trying to compete with the likes of V Australia and having all the frills and lunches and the latest seats and all the nice stuff. You would be stretching yourself too thin and people would get are getting confused.

IO: You mention the cost structure, how the rebound in oil prices is affecting you in this sort of environment?

AOR: Not at all, because we're basically 100 per cent spot, whether oil's at $40 or $60. The reason why we're not fussed about oil – and we learnt about this back when oil was above $US100– is that it's not so much where oil price is, but how it affects other airlines more, because it's always a relative game. The reason we're not fussed about it is because as oil prices go up more, it affects other airlines first before it does us and so they end up having to either increase their fares or introduce fuel surcharges and all that; and the reason for that is that we use new planes. They're more fuel efficient, but more importantly, we have more seats in our planes, so the amount of fuel that you're burning per seat is significantly lower with us – I'm talking like more than 25 per cent lower fuel prices on a per seat basis. So other airlines, therefore, when oil prices go up have to respond earlier than we have to, and as long as we keep maintaining our target fare difference of 30 to 50 per cent lower than other airlines I think that's a position where ultimately people will get more and more price sensitive and the will trade down.

IO: But you're comfortable being exposed to the spot market? You said you're 100 per cent spot.

AOR: 100 per cent spot.

IO: Is that likely to continue going forward?

AOR: Realistically, yes. Because one of the things we've learnt with fuel hedging, it's a risky strategy. Because of the way the counter-party structure is working with banks – they take your money up front and they take your money on the other side as well – it doesn’t really mitigate your risk.

IO: Have you seen any impact from swine flu?

AOR: Yeah, I mean our revenues are down by about 5 per cent.

IO: For what period?

AOR: January to April and April.

IO: And do you attribute that wholly to swine flu?

AOR: No. I mean part of that may be just general demand contraction. People getting a bit wary about flying long haul distances but it looks like, by the looks of things, it's nowhere near as bad as SARS was and people are now discovering that fatality rates are even lower than the common flu.

IO: Thanks for your time Azran.

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