This article first appeared in The Edge Malaysia Weekly on March 4, 2024 - March 10, 2024
IT seems that everyone can not only fly with AirAsia but can also fly farther in the future.
While the investing fraternity was waiting for Tan Sri Tony Fernandes to unveil the regularisation plan for Capital A Bhd, the co-founder of the low-cost carrier announced instead that AirAsia was looking at expanding medium- to long-haul networks to Europe, Africa and North America.
He says the airline has an order book of 647 aircraft with Airbus, comprising 612 from the A320 family and 35 from the A330 family.
On top of that, AirAsia intends to adopt the hub-and-spoke model while maintaining its low-cost feature. Its current model is the direct network, or point-to-point model, in which it deals only with direct flights between two cities.
The hub-and-spoke model channels traffic to a hub (such as klia2) before moving passengers to their respective destinations. This adds to economies of scale in terms of ground handling and services, and helps to better fill the planes along the journey.
Another item on the task list is to obtain a licence in Singapore. The company is also keen to have one in Vietnam and perhaps Myanmar.
All these announcements speak for Fernandes’ optimism and confidence in the prospects of AirAsia and the aviation industry, having been through the worst turbulence in the airline’s history. And he still believes it is commercially viable for low-cost airlines to fly long-haul.
“More so now,” Fernandes tells The Edge, when asked whether he still believes in the long-haul business, which AAX has struggled to grow even pre-pandemic, owing to costs and competition with full-service airliners.
Capital A’s aviation segment revenue of RM13.69 billion in 2023 is more than five times that of AirAsia X’s RM2.53 billion.
For Fernandes, the game changer is the Airbus A321XLR, a narrow-body plane suited for the low-cost long-haul model that AirAsia wants to use.
Fernandes prefers to refer to it as “medium-haul”, referring to flight time below 10 hours, as opposed to the three to six hours normally referred to in the industry. “The A321XLR has changed our business model and made me much more bullish.”
The struggle was partly because it was “not easy to fill 400 seats” on the bigger, wide-body A330 that AAX has been using, Fernandes says, explaining why the long-haul operation did not fare well in the past.
The A321neo can seat 180 to 244 passengers, says Airbus in its official website. The extended range model can fly up to 10 hours on each run. Incidentally, Asia is about 10 hours across by flight.
“The [smaller] A321 opens up a whole bunch of new routes. They really give a massive boost”, Fernandes says, as he shoves a thumbs up into the air, “to the long-haul model”.
AirAsia will still use the wide-body A330, which comprises 11% of its fleet, as it plans to revisit longer routes to Europe, Africa and the Americas. The bulk of its fleet consists of the A320, which is more suitable for flying below six hours.
Now that AirAsia is adopting a multi-hub-and-spoke model in Malaysia, Thailand, Indonesia, the Philippines and, soon, Cambodia, Asean will be AirAsia’s playground.
“Asia was a step too far for us,” Fernandes says, recalling how AirAsia had to sell its India operation and shut down in Japan during the pandemic.
The carrier is “desperately trying to get a licence in Singapore” as well as Vietnam, he adds. “Have we missed the boat on [Singapore and Vietnam]? Probably. We’re not going to be the biggest, but it’s all part of being [in the business].”
Blue skies but with clouds
Although lifted by high demand and high fares post-pandemic, airlines faced elevated fuel prices, supply chain constraints and the impact of the strong US dollar.
In 2023, Singapore Airlines Ltd saw record earnings but flagged competition and rising costs. Similarly, Ryanair Holdings plc sees a weaker-than-expected 2024 despite higher fares, on higher fuel and staff costs, after missing forecasts in 3Q.
At home, Malaysia Airlines Bhd CEO Datuk Captain Izham Ismail sees the upside in airline yields narrowing against 2019 levels, after its first profitable year since 2014.
In Thailand, Thai Airways International’s 2023 revenue represented 80% of pre-pandemic levels. Its debt restructuring is still ongoing. In China, slow international travel demand dragged airlines in the country into 2023 losses, although this year’s numbers have been encouraging.
Fernandes believes recovery in passenger count will gain momentum.
He says AirAsia expects total passenger count in 2024 to be around 90% of 2019 levels, when AirAsia and AAX combined flew more than 82 million passengers. They flew 61.1 million passengers in 2023 (74% of pre-pandemic levels), with 76% of their 242 planes operational at end-December.
The majority of AirAsia’s fleet will be back by this month, and all are likely to be return by end-June, he adds.
Fernandes acknowledges that AirAsia needs to strengthen its balance sheet. Thus, a fundraising exercise of US$400 million (RM1.9 billion) is being contemplated for Capital A’s injection of its aviation business into AirAsia X.
The group is “exploring financing opportunities for Indonesia AirAsia and Philippine AirAsia”, its presentation deck showed.
In 2023, AAX issued 7.78% of its enlarged share base to raise RM50 million via a private placement. Earlier, in 2021, Capital A raised RM1.31 billion through private placements and rights issue of debt securities.
Securitisation is expected to be part of the regularisation plan for Capital A. The plan is to issue US$200 million revenue bonds, which securitise 20% of revenue in selected routes.
That said, not everyone shares his optimism.
“Low-cost, long-haul remains tough to succeed in,” says Endau Analytics founder Shukor Yusof. “AAX may drag down its sister airline, which has better long-term prospects, as the LCC model in Southeast Asia is still solid,” he says.
Fortress Capital CEO Datuk Thomas Yong says the merging of the airline business into AAX “can offer synergies” and focus on growth geographies.
Challenges range, however, from fleet optimisation to operating environment and market competition. The fundraising targets also “appear ambitious”, Yong says.
A veteran industry analyst at a boutique asset management firm says AirAsia’s ambition to unlock new routes with the A321 “may risk invoking another round of irrational competition” from full-service carriers.
Obtaining a licence in Singapore might be a challenge, because the government has to protect its national carrier, the analyst says. The licences it has obtained in other countries are places where “they cannot rely solely on their flag carrier’s capacity to meet the country’s demand”, he adds.
There are valid reasons for Fernandes to be optimistic, such as post-pandemic travel.
For the entire group to achieve a better footing, however, the new operating model must work and people must want to continue to fly with AirAsia.
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