Friday, 8 August 2014

I hope Air Asia will confound its critics and prove them wrong


WATARU YOSHIDA, Nikkei staff writer

SINGAPORE -- Southeast Asia's budget airlines are growing frail from all the fare cuts they are forcing upon one another.

     Cut-rate carriers profit by squeezing their own costs and charging for certain services that some traditional airlines still offer for free. But the business model does not seem to be working anymore. Instead, a faster-than-expected pace of fare declines is taking its toll.

    On July 1, Tony Fernandes, CEO of Malaysia-based AirAsia, announced that his airline would re-debut in Japan through AirAsia Japan, a newly established venture with four Japanese partners, including Internet shopping portal Rakuten.

     The announcement came during a Tokyo news conference that, perhaps unintentionally, showed just how excited Fernandes was to get back into Japan. At one point, he hugged Rakuten CEO Hiroshi Mikitani.

     AirAsia had previously done business in Japan on a limited basis through a partnership with the parent of All Nippon Airways. But there were problems. AirAsia ended up terminating the partnership in June 2013 and withdrawing from Japan.

     Despite the bitter experience, the airline has remained fixated on doing business in the country. One reason Fernandes has been itching to have AirAsia again fly to and from Japan might be his airline's aggravating business performance. Sales for 2013 increased 5% from 2012, but net profit plunged 54%. The company blamed the decline on a surge in fuel costs.

     But AirAsia seems to be suffering from a permanent structural problem, too, one that it hopes to fix by linking Southeast Asia with Japan.

     An airline's financial health is usually gauged by looking at its revenue per available seat mile. The RASM index is obtained by dividing operating income by available seat miles, which are calculated by multiplying available seats by the number of miles a carrier's jetliners fly during a designated period. AirAsia's RASM slid 7% in 2013.

     AirAsia, founded in 2001, has continued to grow by wooing passengers from existing airlines with fares that at one point were more than 50% lower.

     All the bargains AirAsia has been handing out have contributed to Malaysia Airlines' financial crunch. AirAsia took to the skies with the marketing slogan "now everyone can fly," but its dominance of the budget airline market lasted only a decade.

     A week after Fernandes hugged Mikitani in front of Japanese reporters, Azran Osman-Rani, CEO of AirAsia X -- the AirAsia group's mid- and long-range flight operator -- told The Nikkei that his carrier intends to double sales with flights to and from Japan in the next three years.

     According to the CAPA -- an independent provider of market intelligence, analysis and data services -- budget airlines' share of Southeast Asia's aviation market on a number of seats basis grew to slightly less than 60% in 2013, almost double that of two years earlier.

     Fare-slashing will probably continue; there is really no other option for a budget carrier. And the industry could end up cannibalizing itself.

     Consider that the 2013 net profit of Philippines-based Cebu Pacific Air declined a whopping 85%. Or that Singapore-based Tigerair closed its Indonesian unit, Tigerair Mandala, on July 1.

     Are you getting the picture?

Read in full here.

I hope Air Asia will confound its critics and prove them wrong......No further comment.

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