Jan 15,2009
Once lauded as a budget model for the entire continent, AirAsia has been downgraded from “neutral” stock by analysts to “sell,” a result of the uncertain economic situation plaguing the aviation industry.
Nevertheless, the CEO Tony Fernandes remains optimistic: “One has to see our record of coping with crises.”
It was mere months ago that the company was soaring; Fernandes was introducing a huge range of hotel and finance projects.
But thirty airlines collapsed in 2008, and the International Air Transport Association has predicted a further $2.5 billion in industry losses for 2009, after $5.2 billion in 2008.
Despite the declining air traffic in Asia, the budget carrier is expanding and taking delivery of new planes.
Fernandes claims “I still think there’s a huge demand for travel,” relying on the concept that the financial crisis will encourage travellers to downgrade to no-frills carriers, such as AirAsia.
His theory stands in spite of the results of Synovate’s study in August, which found that the first luxury to be axed in difficult economic times for Malaysians was travel.
Oil prices cause losses for carrier
Furthermore, the third quarter of 2008 saw AirAsia post its first net loss since becoming public in 2004.
The losses of $136 million were attributed to the airline’s hedging contracts against higher oil prices, prior to their dramatic fall. Nevertheless, a pre-tax profit has been anticipated for 2008 of $835,000 on revenue of $677 million.
As oil prices fell well below the $70 mark, AirAsia seems set to lose further, as the $50 mark had projected $481 million in losses, and barrels are currently below $40, according to the The Malaysian Insider.
“I really don’t think most analysts in this part of the world know what they’re talking about,” Fernandes responds to the analyst downgrade on AirAsia stock, from neutral to sell. Thge share price has fallen from its peak in October 2007 of 65 cents to 27 cents. “All I’m seeing is a very strong load.”
The load factor for AirAsia did only drop one point between the second and third quarter of 2008, to 75 percent. Furthermore, the carrier had a 33 percent increase in seats.
Total passengers for the quarter jumped 24 percent in comparison to 2008, and the average fare also grew 12 percent.
The low share price prompted Fernandes to attempt to take AirAsia private, but financing proved too much of an issue in the current climate.
Future plans show promise for AirAsia
It seems that in spite of ongoing financial issues, the many plans Fernandes shared in 2007 continue to come into fruition, with the launch of long-haul budget carrier AirAsia X, the no-frills financial service, Tune Money, and the hotel chain, Tune Hotels.
Expansion plans may have consequences for all of the operations, with AirAsia X bearing debts for 25 Airbus A330s worth $5 billion, the recent departure of both CFO and CEO of Tune Money despite predictions of a $3.5 million profit in 2009, and only two hotels opened of the planned 18 for 2008.
The future may not be a bleak for AirAsia; after all, many doubted Fernandes’ ability after he bought AirAsia back for one cent in 2001, and assumed its $11 million in debt.
Furthermore, AirAsia has introduced 29 routes in the past year, flying 110 in total, and 37 of which are exclusive to the carrier.
The airline continues to exercise its competitive advantage, and have prospered whilst rivals Nok Air in Thailand is shrinking, and Adam Air in Indonesia has collapsed.
The permission to fly the lucrative route between Kuala Lumpur and Singapore has been a further boost; until recently the Malaysian and Singaporean governments had sought to protect their flag carriers.
The replacement of existing Boeing 737s with new fuel-efficient Airbus A320-200s is also expected to lead to savings, but finance could prove an issue, as AirAsia already boasts a debt of $1.8 billion.
“If we can’t get credit, what’s going to happen to other airlines [whose credit isn’t as good as AirAsia’s]?” Fernandes questions. “If after three years, there’s still a credit crisis, we’re all screwed anyway. If people can’t get loans there won’t be an economy to speak of.
Despite his reach to India and China, the future, it seems, lies in AirAsia dominating its home ground of Southeast Asia, Forbes Asia reports.
“I’m a big believer in ASEAN,” says Fernandes, hoping for an open skies policy that isn’t expected until 2015. “If we can get an ASEAN common market, who cares about India and China?”
“Our playground is 600 million people.”
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