Friday, March 1, 2019

Airasia's 4Q18 results shows purchasing power is weak

Airasia is going to be fine. They have positioned themselves to grow when there's space for them to. Although the leasing of planes that they have sold are committed, the commitment is not long. In any case, the way Airasia positions itself, it will need the planes anyway. It has rooms to grow in Philippines, India and even Indonesia and Japan. Whether those new additions will translate into immediate profits is however arguable. Hence, comes to the bigger issues.

I know where and what Airasia is thinking, to an extent. It wants to be the dominant ASEAN airline - forget me saying about low costs airlines as even in Malaysia one can see that they have 58% market share. If that is the number, this means low costs airlines is now mainstream, and full fledged is going out of mainstream. The way Airasia positioned that, to me - in the short run will have some issues. If one is to buy tickets, pricing wise, the competition is scarce especially in Malaysia. To fly to Singapore from KL though, we have additional options for cheap fares.

However, for Malaysia, that option is almost now negligible. Airasia is actually fighting against Airasia in terms of pricing. For example, if I want to fly from Penang to KL around 8pm to 10pm, I have options in terms of pricing - all from Airasia. If I go out of Airasia, then I have to pay considerably more. Hence, Airasia has positioned themselves as such. It has crowd out Malindo and MAS. It plans to also crowd out others in other countries that it operates in - such as Thailand, maybe Philippines in the longer term. For Indonesia, it will be tough as Lion Air is very strong despite the sad event last year.

For 2019 and 2020, what used to not be its strategy for last 2 years, it has brought back into decision. Hedging fuel price. Hence, so far so good. It has hedged 52% of fuel for 2019 at USD63 and 40% for 2020 at USD60. That, by itself shows that Airasia knows what is the price point, people will be willing to buy its tickets. Hence, by eliminating some of the uncertainties in costs, it can strategize better.

Now, then if Airasia is doing that well, why is it announcing such a bad result. To me, it was triple whammy for the last quarter. What supposed to be the most promising quarter usually as it is holiday period, they turned in losses - massive. The first thing was fuel costs. Something went wrong. I know they did not hedge as at last year's policy but it was USD91 jet fuel. The highest Brent crude went was about USD80, then towards November it went down to as low as USD52 in December. I also understand that Airasia sells a lot of their tickets upfront but at USD91 is surprising.

Second thing, of course is the weak currencies throughout ASEAN. A lot of the costs are in USD - from lease to fuel to interests payment.

The third thing, for Airasia is the lease costs which it has to now bear because it has sold a substantial number of its planes and need to leaseback. These are costs which will stay. I do not see our ASEAN currencies to be significantly stronger in the next few quarters. Neither will the lease be going off soon.

However, one BIG thing which I do not put in as a whammy is the weak pricing of its tickets. Its RASK is 14.82 sen for 4Q18 against 15.46 sen in 4Q17. It can say that its total available seats has grown substantially by more than 20%, but that drop is also bad. Suffice to say that the load factor has also gone down from 88% to 84%. As mentioned, usually, this is the period where people travel - many a times for leisure. Hence, its pricing is now elastic, significantly elastic - which is no good. Perhaps, Airasia for regionally has no longer become the airline for leisure but business travel has become a big part of its business. When people take off for holiday or stay at home, its yield suffers - as they have become leisure traveller rather than business traveller, perhaps.

I may be wrong in some part - but the argument of huge disparity of income is potentially true. The richer ones are travelling to Europe, or Japan. The poorer ones are no longer flying for holidays or maybe very petty when comes pricing.

No good for the economy. Airasia will overcome that in the longer run as it now understands demand and readjust. It has readjusted partially, as mentioned above in hedging the fuel price early. But the poor spending behaviour shows that people are very timid when comes to purchasing. What I fear is that the trend that Airasia has shown being a regional airline is that not even Malaysia, regionally people are not having that much freedom to buy.

I have seen in some of the results, not even on Airasia but others. The larger scale of things, we do not know how big will the impact be in the shorter term future. I have mentioned about what's dangerous in the near term, but this is one which is really I am seeing signs that shows what is potentially coming.


reyes430 said...

my 2 cents on airasia quarter result & upcoming result

on Revenue

i think 2018 is a good year as whole year revenue grow 9% with most of the revenue source growing.

Malaysia will continue to grow but competition is getting more intensive
Indonesia and Philippine are not doing quite well
Thailand (associate)- growth looks like stagnant?
India- (associate) -growth very strong, but has yet to reach a comfort level of economy of scale?
Japan (associate)- too small to affect anything yet

on cost
CASK -ex fuel will continue to increase especially on maintenance and overhaul, leasing cost and user charges. the reduced of depreciation and finance cost are not able to offset the cost hike.

fuel cost are hard to predict but with their hedging plan on 2019, it could be quite safe to estimate the worst case scenario? The increase of capacity has lead to increase passenger carried and market share, however i think airline business are the one hard to make profit because too many costs to worry. What Airasia had been doing the past year has great control over some of their costing (particularly leasing fees and maintenance and overhaul cost due to provision) and hence able to deliver higher than average margin.

Now with the sales of aircraft, the cost model has somehow changed. coupled with the drops of average fare price make this -suppose should be the best quarter become a disaster.

Tony has been stressing that this year is the best year for Airasia, while i have faith and no doubt into how he grew the business and expand his ancillary income, i am abit worry on the costing, fuel price as well as the competition of malaysia airlines on 2019.

Anyway i am amazed by the innovation and entrepreneur spirit of Tony and Airasia as it is rare among malaysia public listed companies.

Looking forward to your valuable input. Once again, thank you for all your sharing

reyes430 said...

and one more thing which also mentioned in your write up, the coming JUNE will have new airport levy and possible increase on passenger service charge, this in your opinion will also lead to Airasia targeted group of people to reduce travelling?

felicity said...

At the back of my mind I am also thinking, AirAsia is telling the government this is so much AirAsia can do. When the government looks at the success of Tony, they start thinking of taxing. Mahathir talks about socialist mentality which I think has truth.

The government has to think that the connectivity is the one bringing business and growth to the country. One cannot start taxing on business and trying to be Robin Hood. That model does not work. Even China has more out of that thinking. They have done the direct opposite.

felicity said...

China move out of that thinking...

reyes430 said...

Hi Felicity,

What do you think about the latest target price by CIMB research? Overall the implementation of MFRS 16 will put leasing liabilities back to the book. Aside from accounting adjustment, what would the impact on Airasia ?