Friday, September 3, 2010

AirAsia faces battle against rival LCCs

18 August 2010

KUCHING: Thai AirAsia is expected to face a number of new potential rivals on its position as Thailand’s leading low-cost carrier (LCC).A joint venture of low-fare airline AirAsia Bhd (AirAsia) and Thailand’s Asia Aviation, Thai AirAsia is currently the sole low-cost airline operating both domestic and international flights from Suvarnabhumi Airport.

However, Thai Airways and Tiger Airways had announced earlier this month that they intended to start a new LCC in Thailand to compete against Thai AirAsia. The new airline, which will be 51 per cent owned by Thai Airways and 49 per cent by Tiger Airways, would be called Thai Tiger Airways (TTA) and operate from January or February next year.

CIMB Investment Bank Bhd (CIMB Investment) reported that the added competitive pressure from TTA was undoubtedly negative as it could force Thai AirAsia to lower its fares and give up several percentage points in profitability

However, the latter had the benefit of incumbency, a well-recognised brand, a wide and well-connected network through links with the larger AirAsia group in Malaysia and Indonesia, both of which provided for customer convenience and a larger fleet with greater economies of scale.

“As a result, we expect Thai AirAsia to survive the onslaught relatively well. TTA, on the other hand, must be prepared for at least two years of losses as it attempts to wrest market share through promotional offerings and heavy marketing,” said CIMB Investment in its research note.

From a balance sheet point of view, if the competition became too fierce and operating cash flow at Thai AirAsia turned negative, AirAsia might have to continue financing the working capital requirements of its Thai unit.

“In our view, an increase in financial support will probably be unnecessary given that a recapitalisation of Thai AirAsia is on the cards upon its listing, which is slated by mid-2011,” added the research firm.

However, the presence of TTA might reduce the valuation multiples realised by TAA on its initial public offering (IPO) and lower the value of AirAsia’s equity in TAA.

Furthermore, potentially lower profitability at TAA due to competition might also reduce its operating cash inflows and slow the pace at which TAA’s debt to AirAsia was repaid. AirAsia would probably be receiving only partial repayment from TAA, given that some of its working capital loan could be capitalised into TAA equity before the IPO.

Moving away from the Thai AirAsia story and to something more positive, AirAsia’s efforts to defer the deliveries of the A320s would significantly reduce capital expenditure (capex) levels and gearing ratios.

“This is positive because in just three years, we expect the net debt-to-equity ratio to fall from 2.61 times in financial year (FY) 2010 to only 1.84 times in FY12. The lower capex (capital expenditure) may also allow AirAsia to consider paying its maiden dividend sometime this year or next,” the research firm said.

Meanwhile, Indonesia AirAsia had been adopting a niche strategy of international routes as it could not effectively compete against larger rivals like Lion Air in the domestic market.

“With fewer aircraft allocated to Thai AirAsia and Indonesia AirAsia, the associates will be able to use their operating cashflow to pay down related-party debt owed to AirAsia, rather than accumulate rising amounts of unpaid aircraft leasing charges,” said the research house.

Conclusively, the aircraft delivery deferrals would enable AirAsia to move away from aggressive topline growth in favour of profit growth as slower capacity growth could help lift yield and load factor.


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