Fernandes: AirAsia thrives on competition

Fernandes: ’The bonus for us is that the weak ringgit has made Malaysia a cheaper place and that has given us an immense boost to grow and become like the Dubai of the region where people transit here to other destinations.’

Group CEO says the low-cost carrier has hedged the bulk of its operating cost

SEPANG: An environment of rising competition in the airlines sector forcing the players to reduce prices works well for AirAsia Bhd.

Group chief executive officer Tan Sri Tony Fernandes said that the low-cost carrier (LCC) had already hedged the bulk of its operating cost.

The airline, according to him, will thrive on competition that is expected to see players being forced to operate under higher operating cost and lower revenue due to tickets being sold at discounts.

AirAsia has hedged 76% of jet fuel requirements for this year, its interest rates were fixed and 66% of its airplane purchases were hedged.

Fernandes also said that the weak ringgit worked in its favour and the real battle was between its domestic competitors – Malaysia Airlines Bhd and Malindo Air – both of which are operating out of the Kuala Lumpur International Airport (KLIA).

AirAsia is largely operating at KLIA2, which is a dedicated low-cost terminal.

“Our model is robust...we made good profits when fuel was at US$130 a barrel and will make good margins with ringgit at RM4.50 to the US dollar.

“We will use ancillary income to fight higher costs and the battle is really at KLIA between Malaysia Airlines Bhd and Malindo Air...good luck to the winner.

“The bonus for us is that the weak ringgit has made Malaysia a cheaper place and that has given us an immense boost to grow and become like the Dubai of the region where people transit here to other destinations,” he said in an interview.

Fernandes said that the LCC would want to grow its ancillary income from RM50 per passenger to RM60 and would be more aggressive in this area to counter the increases in cost due to the weak ringgit.

“Our revenue is higher due to higher loads. So the risk is minimal as we have fixed a lot of our cost,” he said.

Last December the airline had reduced food prices by 30% to 40% and it had seen higher demand and more than 90% in passenger load.

Of the 28 new planes the airline will add to its fleet this year, eight will be deployed for Malaysia and the rest for its other operations including those in Japan and India.

“I am shocked how some analysts look at things, but we will have record growth this year.

“Our first quarter sales are positive, ahead of the same quarter in 2016,” he added.

Recently, Deutsche Bank Research had a “sell” call on AirAsia citing several reasons. It believed that higher competition and fare discounting would push yields down.

Apart from that, the research house stated that the higher oil prices, weaker ringgit and an over-supply situation in the airline industry would push cost higher for the airline. Its 12-month target price was RM1.75 per share against AirAsia’s closing price last Friday at RM2.22.

Commenting on airline yields, Fernandes said the true comparison for LCCs was Rask (revenue per available seat kilometre/mile) and not yields.

“We don’t care about yields and do not believe Rask will go down.

“We make money from selling seats, ticket prices, food and all the ancillaries,” he said.

Rask is a unit measure that determines the profitability of an airline irrespective of the load factor.

As long as it is higher than the operating cost, the airline is profitable.

However, the Deutsche report said things could change if “competitive intensity is not as bad as feared, and the sale of Asia Aviation Capital (AAC) results in positive sentiment lift.”

On AirAsia realising value in its leasing arm, AAC, Fernandes said the non-binding bids were in and due diligence was being carried out.

“We are moving as per our timetable and these are good quality bids and bidders,” he said.

Asked if a special dividend of 40 sen to 50 sen would be paid to investors once AAC is sold, he said “it is really up to the board.”

The impending sale of AAC had also added to analysts’ concerns as AirAsia had relied on leasing income to support its growth.

Towards this end, Fernandes said that the disposal of that part of the business would not result in a material decrease in its financial performance.

On the Philippines and Indonesia operations, which are seen by analysts as bogging down the group’s other operations especially in Malaysia, he said that the results should speak for themselves.

“I have said this many times, let the results speak for themselves. Let’s look at the fourth quarter (2016) numbers.”

Asked to comment on Deutsche’s report, Fernandes said that he cannot predict stock valuations.

“How the market analyses, is not for me to decide. But obviously, I have great confidence in the company as Datuk Kamarudin Meranun (chairman of AirAsia and co-founder) and I are going to own 11% more in AirAsia with the share placement.”

Fernandes and Kamarudin are taking up a placement of AirAsia shares in a transaction worth RM1bil.

He said the loan for the share placement is being worked out by Credit Suisse, BNP Paribas and RHB Bank.

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