AirAsia X targets RM200mil profit

31 Jan 2009

AIRASIA X Sdn Bhd, which started business just over a year ago, is projecting revenue of RM1bil and a net profit of RM200mil this year.

The long-haul associate company of AirAsia Bhd posted a modest profit in the last quarter and says the big leap in the business will come as it takes delivery of more planes and flies to more destinations this year.

“We have more seats per plane and we fly more hours,” chief executive officer Azran Osman Rani tells StarBizWeek. “These two things give us a 50% unit-cost advantage over a traditional long-haul carrier.”

The huge improvement forecast by AirAsia X is a stark contrast to what most airlines around the world are saying and experiencing. Mounting losses and sluggish load factors have cast a long shadow over the industry that has been rocked by one problem after another, the latest being high fuel prices and poor demand.

The International Air Transport Association has forecast airlines would lose billions of dollars globally as passenger travel is expected to decline by 3% and cargo by 5% in 2009.

The global economic slowdown will depress travel demand, but AirAsia X feels whatever passengers it will lose would be made up by those who opt for cheaper fares.

“This is a climate where people will be more value-conscious,” Azran says. “The bottom market will fall and the top end of the market will trade down.”

The path to profitability for AirAsia X began in November last year when, after using just one leased plane since November 2007, it took delivery of two new aircraft.

The new A330s had 383 economy class seats as opposed to the traditional layout of between 280 and 295 seats.

“By having more seats, our unit costs were lower,” Azran says, adding that the new planes also mean higher fuel efficiency. He is targeting a cost of 2.5 US cents per available seat km in 2009, as opposed to what the benchmark of between 6 cents and 7 cents for traditional full service airlines.

The airline has also been lucky that it has been buying fuel from the spot market and is not paying the penalty of hedging fuel costs at much higher prices.

Azran says even though hedging is something the airline will look at as its fleet grows, that will not be done at the moment.

Another plus for AirAsia X is that its planes fly more hours per day than a traditional full service airline because it does not employ a spoke and hub model.

By connecting into AirAsia’s regional network from the low-cost carrier terminal, AirAsia X has been able to cater to travellers who do not have Kuala Lumpur as their final destination. Those factors - high turnaround, lower cost and more seats - mean it can charge far less for each ticket and make a good profit at the same time.

Helping growth and profitability are the high load factors enjoyed since its launch. The original routes to the Gold Coast in Australia and Hangzhou in China enjoyed a load factor of 80% and newer routes to Perth and Melbourne saw load factors of 72% and 78% respectively.

“That shows we can quickly get volume - and at prices that make the business work,” says Azran.

More seats and flights led to AirAsia X posting a profit of US$10mil and a profit margin of 30% during the last quarter. For 2008, revenue was RM250mil but AirAsia X sold RM375mil worth of tickets for the year.

The forward sales, currently RM125mil, are expected to grow dramatically this year as more destinations and planes are added to the fleet, and this would help fund the purchase of new aircraft this year.

AirAsia X is expected to take in three new A330s this year from September, four in 2010, six in 2011, six in 2012 and four in 2013.

The airline will fly to Stansted Airport on the outskirts of London from March 11 and will use a A340 that will be configured much like a full service aircraft with business class seats and economy class seats.

Azran believes the flight to London, even though the profit margin would likely be in the single-digit range, would be a key driver for the airline in other aspects.

“London will be a challenge but it’s more for brand recognition and it enhances our credibility with suppliers and financiers,” he says, adding that it should also appeal to the growing number of cost-conscious business class travellers.

The airline plans to take delivery of two A340s this year and have daily flights to Stansted.

Apart from London, AirAsia X will be exploring more routes to China, Australia and India this year.

Should AirAsia X achieve its targeted financial performance for 2009 and based on what it thinks it could do in 2010, Azran says, that would make it an attractive listing candidate. Timing of a listing will, however, depend on the health of the global equities market.