AirAsia’s business model under strain - growth is slowing

[george]

AirAsia’s business model under strain

BY KATHY CHU, GAURAV RAGHUVANSHI AND MEGUMI FUJIKAWA

WHEN Malaysian entrepreneur Tony Fernandes bought the struggling AirAsia in 2001, his goal was to build a budget airline group that could take advantage of the explosive travel growth he saw coming in the region.

To do that, Mr Fernandes made AirAsia into the McDonald’s of the aviation industry, bridging Asia’s checkerboard of sovereign states and aviation rules by rolling out franchise-like joint ventures under the AirAsia brand, in countries from Thailand and the Philippines to India.

In about a decade, that model turned AirAsia into a group encompassing nine carriers, of which the three listed companies had $2.3bn in revenue in 2013. While the number of annual airline seats in the Asia-Pacific region has doubled to 1.7-billion during the past decade, the number of seats available on budget airlines increased tenfold to 400-million, according to the Centre for Asia-Pacific Aviation (Capa).

But as the AirAsia group grapples with its biggest crisis yet — the aftermath of the December crash of a plane operated by its Indonesian affiliate — that franchise model and the growth on which it was premised could be under strain.

AirAsia’s once heady traffic growth is slowing as competition increases, causing profit to shrink at AirAsia’s Malaysian flagship company. AirAsia Thailand has become unprofitable and AirAsia carriers in Indonesia and the Philippines are restructuring, creating challenges for the Malaysian group. In 2014 the AirAsia group carried 50-million passengers, Capa estimates, 9.3% more than the previous year but the slowest growth since the airline began operations under Mr Fernandes in 2002.

Analysts expect AirAsia’s earnings to be hurt by the AirAsia flight 8501 crash, which killed all 162 people on board, when the company posts results at the end of February.

Meanwhile, cultural and regulatory tussles have hampered AirAsia’s efforts to expand its franchises further in markets such as Japan and Vietnam.

There "is a limit to bringing all AirAsia’s business ways into the Japanese market", said Shinzo Shimizu, a senior vice-president at former joint-venture partner ANA Holdings, after the partnership fell apart in 2013.

AirAsia said last year that it was setting up a second Japanese joint venture with different partners. A spokeswoman for the AirAsia group declined to comment for this article.

Mr Fernandes, known for his no-nonsense attitude and his trademark uniform of jeans and a red cap, overhauled AirAsia after he bought it in 2001 from the Malaysian government for one ringgit (28 US cents) and the assumption of 40-million ringgit ($11m) in debt. He established the first joint venture in Thailand in 2003, taking a minority stake to comply with Thailand’s rules barring foreigners from owning more than 49% of an airline It now has similar stakes in franchises in Indonesia, Thailand, the Philippines and India, as well as AirAsia X, its long-haul carrier.

Despite the minority stakes, AirAsia exercises a high degree of control over its joint ventures, dictating matters from branding to in-flight retail. The control has rankled some partners, but it also has been responsible for the airline’s success in training pilots and flight attendants, and negotiating contracts for aircraft, former employees say.

"Even from the inside, you would not see much of a difference between AirAsia Malaysia and AirAsia Philippines," said Dany Bolduc, who worked for the Kuala Lumpur-based flagship for two years until 2013, managing in-flight sales of items such as caps and T-shirts across the group.

"The model has to be consistent across the markets (in which) they operate."

Analysts say one of AirAsia’s greatest achievements has been persuading regulators in the countries where it operates to let it keep the AirAsia name despite its minority-partner status.

"AirAsia has successfully branded itself," said Yeah Kim Leng, dean of the business school at Malaysia University of Science and Technology. "It has really standardised the service quality, corporate culture and expectations that customers have."

But the franchise model has some drawbacks for AirAsia’s affiliates, which grapple with higher costs than the Malaysian flagship. Affiliates pay the flagship fees for services, including maintenance and leasing planes. Cost per available seat kilometre, a common measure of aviation costs, was $3.99 in the quarter ended in September for AirAsia’s Malaysia operations, compared with $5.14 for Indonesia and $5.24 for Thailand, according to AirAsia filings.

"No matter what, the cost is going to be higher than the main company," said Brian Thomas Hogan, MD of XSQ Aviation Consultancy and a former chief executive adviser of Zest Air before its partnership in the Philippines with AirAsia.

Other would-be partners have balked at AirAsia’s attempts to control them. For ANA of Japan, one source of friction was that AirAsia relied heavily on website bookings, which account for about 85% of the AirAsia brands’ ticket sales, although in Japan reservations through travel agents were more common, a spokesman for ANA said.

AirAsia also was not willing to alter a system that required passengers to check in at least 45 minutes before departure, even though other major Japanese airlines had a 15-minute cutoff, the spokesman said.

The Malaysian group said when the partnership dissolved that the companies had "a fundamental difference of opinion between its shareholders about how the business should be managed, from cost management to where the domestic business operations should be based".

AirAsia scrapped plans for a highly publicised partnership in Vietnam in 2011, saying it was unable to get Vietnamese regulatory approval to use the AirAsia brand, which it said was "fundamental to the successful conduct of the business model."

A person familiar with the proposed joint venture with VietJet Aviation JSC said cultural clashes were also responsible for the dissolution of the partnership.

"Vietnamese people have their own way of thinking about how to manage the company, and AirAsia thought it could do it the AirAsia way," the source said.

-- bdlive.co.za / Agencies

[Xircal]

Cut prices and use bigger aircraft like the A321 which is a stretched version of the A320s the airline currently uses instead. Since the two types are very similar, pilots only need minimal training to switch to the larger aircraft. Fernandez could probably do a deal with Airbus to swap some of his existing fleet for the larger model.

Probably the biggest problem though is the lack of suitable airports. Phuket International for example is building another terminal to raise passenger numbers to 12.5 million, but it still only has a single runway which limits both landings and takeoffs. Since there's no suitable land nearby to develop a secondary runway, there's not much room for expansion there.

Koh Samui is owned by Bangkok Airways which charges other carriers a small fortune to land there.

AirAsia X, the airline's international offering hasn't taken off [sic] as expected and I certainly wouldn't want to travel long haul in a cramped cabin such as their domestic routes use.

So yes, they've got a problem on their hands.

[Ricardo]

There's still plenty of new demand to come, as less-wealthy people become more used to air-travel at affordable prices, and as new routes are added which bypass congested hubs. From CNX we can now fly direct to four other Thai destinations, as well as the capital/main-Thai-hub !

There's also still scope for bypassing KUL & linking his other busier destinations direct, the European LCC-model.

But IMO the biggest single source will be China, where there may be government-resistance to a foreign-owned/managed airline taking serious market-share, Tony has yet to establish a Chinese subsidiary. That will be huge as/when it comes.

There's also less competition here from holiday-charter flights, than RyanAir or EasyJet saw in Europe, in their early days. Those used to do overnight-flights of 3-4 hours each way, which helped them achieve higher aircraft-utilisation, but Air Asia's trying adding earlier/later flights instead, to extend their flying-day.

With Air Asia X he has to persuade people to 'fly thru' to maintain loads at profitable levels, which is tricky where feeder short-haul flights to/from secondary-destinations are sometimes low-frequency, and there are fewer turn-rounds for him to work his faster/more-efficient magic on. There is also more competition from lower-cost established airlines in the Gulf or India or China. I'm not sure if he'll be able to pull it off.

[bdenner]

<snip>

AirAsia X, the airline's international offering hasn't taken off [sic] as expected and I certainly wouldn't want to travel long haul in a cramped cabin such as their domestic routes use.

So yes, they've got a problem on their hands.

I don't know about that, TW and I flew AirAsia-X (A333) KL to the Gold Coast a couple of days ago - full to the brim. I have flown this route many many times, since it was introduced, rarely has spare seats. AAX is a little more comfortable than domestic and well worth paying a few extra Baht for the Quite Zone.

Looking forward to Thai AAX and direct flights DMK to Australia.

Edited February 17, 2015 by bdenner

[siam2007]

while I have full respect what Datuk Tony Fernandez has achieved, he made a lot of costly errors and does so until today. When they founded AirAsia Philippines, they decided to make the crappy useless Airport of CLARK their homebase. I am sure this had cost them Tens of Millions of $. nowadays, almost nobody is using it anymore. They finally bought into ZEST AIR to get slots at NAIA, which they could have done in the first time.

The next giant mistake he made and makes until today, is to not add smaller Turboprop aircraft to serve less-busy secondary routes and act as feeder for the main trunk routes or even their longhaul operation. All other successfull Budget Airlines such as CEBU PACIFIC or LION/MALINDO or NOK do that and they do well with it.

AirAsia had to cancel many many routes due to low demand, as they could not fill a 180-seater every day. But 72/76 seats are filled quite easily.....

I can only assume that Datuk Tony is too busy with his silly toys (QPL Premier League Team, or his Formula1 Team which he now luckily got rid off), which are eating his wealth so he had to invent new and higher charges and ancillary revenue options every other month

[TallGuyJohninBKK]

AirAsia Thailand has become unprofitable.

Edited February 17, 2015 by TallGuyJohninBKK

[merlen10002]

Just went AirAsia from Bangkok to the Gold Coast, had to wait a few day more days to get a flight, all book,, both from BKK to Kuala Lumpur, Kuala Lumpur - Gold Coast, same on return, good flight no problems, all full both ways, on time or a bit early, wait at KL a bit to long, but have booked again in March back in April,

return 15,000 BHT including extras, ,, other air lines well over 30,000 BHT, Air Asia is doing OK from what I see, will go with them every time.

[Bob L]

I fly on Asia's airplanes when I must and never when I don't have to. Asian pilots are terrible, poorly trained and are not capable of making split second, good,decisions. Most couldn't fly a Cessna 182 because they are not taught to fly unless they do it by computer. I have lived in Thailand for 13 years and hold a commercial pilot, multi engine air ticket along with an instructors rating and years as an air traffic controller in the USA. Aviation in all of Asia sucks.

[Thian]

Air asia online booking system is a pain in the a$$. Also try booking a flight plus hotel, it doesn't work.

For the rest i don't have any problems with air-asia. The only thing which scares me is when their pilots start speaking "english", how can they communicate with the air-tower if they can't speak any proper english???

[Bob L]

LA Center to Air Asia" Air Asia 1425 , descend to 17 thousand, turn right heading 090, squak 2547,report crossing bravo, contact approach control 128.75" Air Asia to LA Approach..." LA Center, My Co Jai"

[ALFREDO]

<script type='text/javascript'>window.mod_pagespeed_start = Number(new Date());</script>

I fly on Asia's airplanes when I must and never when I don't have to. Asian pilots are terrible,

So which of the Airlines operating in TH domestic, you would fly, if you can, had to choose?

Air Asia? Nok Air? Orient Thai? Thai Lion Air? Bangkok Air? - only on some routes, same Bangkok-Udon Thani a price worthy choice, Thai Air? - usually more expansive.

Had recently, a female Co Pilot on my flight to Udon Thani, but cannot remember now, which Airline,

Good possibility it was Thai Lion Air, or Nok or Air Asia?

LA Center to Air Asia" Air Asia 1425 , descend to 17 thousand, turn right heading 090, squak 2547,report crossing bravo, contact approach control 128.75" Air Asia to LA Approach..." LA Center, My Co Jai"

Just give the crew a certified English-Thai Translator, with some flight slang knowledge into the cabin.

All OK than.

Edited February 17, 2015 by ALFREDO

[bdenner]

<snip> , descend to 17 thousand, <snip>" LA Center, My Co Jai"

This'll probably start a ruckus!

OK joke but, as an airline pilot, I would have thought you would use the correct terminology!

[Phil Water]

This is arguably the most successful airline in recent history and placed the largest ever single deal for airplanes ever announced with the manufacturer that most of you Euro lovers like. ( hint: not Boeing ) and you guys are trying to slight him. I read the first few posts and couldn't believe the comments from those who have the gaul to call some thai organizations ignorant. Then on another thread I read about A-340 responses that identified more ignorance. Really? I am guessing... no not guessing, a little research proves that these posters really have no idea. Where in the &lt;deleted&gt; did they earn their money that allows them to live in a paradise like Thailand??

[bkkjames]

From not betting on the ruff riders lol

[Ricardo]

<snip> , descend to 17 thousand, <snip>" LA Center, My Co Jai"

This'll probably start a ruckus!

OK joke but, as an airline pilot, I would have thought you would use the correct terminology!

"descend to flight level 170" ?

do I win the prize, or a D-hat ?

[TallGuyJohninBKK]

I fly on Asia's airplanes when I must and never when I don't have to. Asian pilots are terrible, poorly trained and are not capable of making split second, good,decisions. Most couldn't fly a Cessna 182 because they are not taught to fly unless they do it by computer. I have lived in Thailand for 13 years and hold a commercial pilot, multi engine air ticket along with an instructors rating and years as an air traffic controller in the USA. Aviation in all of Asia sucks.

Perhaps there isn't an absolute correlation between aviation safety and pilot skill, but there's certainly going to be a high correlation.

In that regard, AirlineRatings.com's list of the world's 10 safest airlines for 2015 included 3 Asian carriers: EVA, Cathay Pacific, Singapore Airlines. So those organizations must be doing some things right.

http://www.airlineratings.com/news/425/worlds-safest-airlines-for-2015

Top of the list again is Qantas which has a fatality free record in the jet era. Making up the remainder of the top ten in alphabetical order are: Air New Zealand, British Airways, Cathay Pacific Airways, , Emirates, Etihad Airways, EVA Air, Finnair, Lufthansa and Singapore Airlines.

Though on the same site on the same day (Jan. 6, about a week after the Indonesia AirAsia crash) the above list was posted, there also was a column by the site's Editor-in-Chief/Asia Pacific Bureau Chief posted on that site under the headline:

Why I would never fly with AirAsia

http://www.airlineratings.com/news/427/why-i-would-never-fly-with-airasia

AirAsia brought the low-cost concept to Asia in 2002. It has been a huge success,with more than 230 million passengers carried on the group's services....Up to December 28, the airline group had operated without a fatality butit has not completed the International Air Transport Association's OperationalSafety Audit....The audit is an internationally recognised evaluation designed to assessthe operational management and control systems of an airline. Other majorlow-cost carriers that have not done IOSA include Southwest Airlines in the USand Ryanair and Easyjet in Europe....AirlineRatings.com initially rated the AirAsia group five stars out of apossible seven because it had not done the audit. But would I fly onIndonesiaAirAsia? I never have and never will... And I would not considerflying on any airline that had not done IOSA. IOSA makes a difference.

Edited February 19, 2015 by TallGuyJohninBKK

[TallGuyJohninBKK]

The AirlineRatings site above has their own ratings scale for each airline, with a maximum of 7 stars/points available. The airlines earn points for completing safety audits, having a fatality free record of at least 10 years, and other criteria.

In looking at the list:

--all the AirAsia properties score 4 of 7,

except for Indonesia AirAsia which had no rating.

--Nok Air scores 4 of 7.

--Orient Thai scores 5 of 7.

--ThaiAir and ThaiSmile score 6 of 7.

The Asian carriers among the top 10 safest list -- Cathay Pacific, EVA, and Singapore -- all scored 7 out of 7, along with quite a few other Asian carriers, including a lot of the Japanese and Chinese majors.

http://www.airlineratings.com/safety_rating_per_airline.php

The largest factors in their ratings, both valued at 2 stars each, are being IOSA certified and the airline's country of origin meeting all 8 safety criteria of the International Civil Aviation Organization (ICAO).

Here's their chart, showing how AirAsia and the Thai carriers were rated. The blue color showing that they receive a point/points in that category:

Edited February 19, 2015 by TallGuyJohninBKK

[blueyeshk]

It's really close to impossible to use AirAsia in the future overrun by mainland Chinese which come with unbearable noises and rude manners- I feel better at Shenzhen train station than the crowd they put on the flights - this has nothing to do with racism it's just a fact.