AirAsia eyes double-digit growth with more passengers and costs control

PETALING JAYA: AirAsia Group will push for higher passenger loads while keeping a tight lid on costs to sustain earnings this year to mitigate the effects from rising oil prices and volatility in currency.

AirAsia group CEO Tan Sri Tony Fernandes said he is forecasting a 10% revenue growth this year after a similar jump to RM6.9bil last year.

“Our strategy of investing in technology three years ago will give us a huge advantage in the next five years, and it will be a big help in reducing costs and growing revenue.

“We think we are finally moving towards our ancillary income target of RM60 per person this year. Ancillary continues to be an engine of growth and revenue will grow this year,’’ Fernandes said in a reply to questions from StarBiz.

AirAsia, which recorded a RM2.03bil in net profit last year, is seeing forward loads in the first quarter of 2017 at 89%. Last year, passenger loads rose 10% to 86% and the group flew 56.5 million passengers.

In its presentation to analysts last week, AirAsia said it was targeting ancillary income of RM60 in 2018 after reporting RM50 in 2016, but Fernandes wants to achieve RM60 this year.

“We see big areas of growth, led by the boom in data. We will be able to offer more personalised and more conversion on our websites, leading to more sales.

“Our mobile strategy is for AirAsia to be the first choice of travel to buy products led by ease and lowest fares, more so with our express pay which is equivalent to amazon one click,’’ he said.

In its presentation slides, AirAsia said at least 70% of its sales came directly via, adding that there was more room for growth in conversation rate, which is now at 5%. A single percentage point increase translates to additional sales of RM1bil.

“Other revenue of growth is our associations. Indonesia and the Philippines are new engines of growth. Asean inter-travel is booming as long as costs are low,’’ Fernandes said, adding that with the rising demand for air travel, “I had to use other airlines in the last few weeks, as I could not get into our own flights. That has happened the first time to me since the past 16 years.’’

For the past two consecutive years, AirAsia reported RM2bil in net profit, largely from higher sales, lower fuel cost and with its rivals, mainly Malaysia Airlines Bhd, still in recovery mode. But analyst have said that the playing field would get tougher this year, something that Fernandes is not too overly concerned about.

CIMB Research, in a note, said Malindo Air’s remarkable capacity expansion in 2016 and planned growth in 2017 meant that AirAsia would face more competition this year. AirAsia is also planning to expand its capacity by eight aircraft this year, after shrinking the fleet last year.

It added that with the weaker ringgit and higher oil price, it expected AirAsia’s core earnings per share for financial year 2017 to fall 52%.

“The group plans to increase available seat kilometre by 10%. It is willing to sacrifice yields to maintain loads, which suggests a potential decline in revenue available seat kilometre.

“Fuel costs should remain stable, with 75% of fuel requirements hedged at US$60 per jet barrel. We expect 2017 operating margins to remain healthy at 23%,’’ Morgan Stanley Research said in a report.

To Fernandes, his biggest challenge is to get regulators understand the difficulties that airlines face in growing markets.

“What we have been doing for 16 years shows us that we are competitive, in fact we are durable to competition. There has been competition for 16 years but we have continually grown margins and profits and our main secret is low cost, great people and huge networks. We made money when oil was at US$140 a barrel.

“To compete, you have to be better than us. To have lower fares than us, you have to have lower costs.

“You must remember that we are competing in markets where we are a significantly smaller player such as in Indonesia, India and the Philippines. Yet, we have and are heading towards the AirAsia Malaysia-style of profitability. The key to sustainable profits is low costs. The right strategy is continued innovations,’’ Fernandes said.

AirAsia Malaysia is the biggest contributor towards group revenue. Its cost per available seat kilometer in the last quarter of 2016 was 11.70 sen, said to be the lowest for an airline globally.

On the 2016 financial results, Macquarie Research said, stripping out exceptional gains of RM403mil, AirAsia’s net profit would be at RM1.634bil. The research house said this was up 141% year-on-year, beating its own estimates and consensus estimates by 6% and 8%, respectively.

“We were positively surprised to see that AirAsia’s fuel consumption increased only 4% despite carrying 16% more traffic in the year,’’ it added.

Though Fernandes is talking about sustaining the growth momentum in 2017, AirAsia’s primary attraction for this year is the speculated special dividend from the low-cost carrier.

CIMB Research estimated AirAsia’s special dividend to be RM1.12 per share after the sale of its leasing arm, Asia Aviation Capital.

According to Bloomberg consensus, of the 24 research houses tracking the airline, 18 have a “buy” call on the stock with a 12-month consensus target price of RM3.29.

On Friday, the stock shed 6 sen to close at RM2.70 a share. The consensus estimates for revenue for 2017 is RM6.9bil and for operating profit, RM1.5bil.

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