This article first appeared in The Edge Malaysia Weekly on February 19, 2018 - February 25, 2018

AVIATION industry observers reckon that 2018 will see a price war among Malaysian airlines as AirAsia Bhd last year expanded its capacity at the fastest rate since 2013 and will continue to add to its fleet this year.

And according to aviation pundit Shukor Yusof, if there is a price war, AirAsia will come out on top.

The low-cost carrier (LCC) has the largest fleet in Malaysia followed by Malaysia Airlines Bhd (MAB) and Malindo Air.

“Yes, [there will be a price war] and it is a war that AirAsia is good at winning,” says Shukor, who is attached to Endau Analytics.

Other observers agree that there will be a price war, given the additional capacity, similar to the scenario in 2013.

To recap, the launch of Malindo Air — the largest airline in Southeast Asia by fleet and which is jointly owned by Malaysia’s National Aerospace and Defence Industries and Lion Air of Indonesia — triggered an all-out price war in the aviation market in 2013.

According to the CAPA Centre for Aviation, AirAsia added 28 aircraft to its fleet last year, the most since 2013 when the group added 36. The expansion in 2013 was the most extensive in a year in the airline’s history.

The group, which consists of six airlines based in six countries, ended 2017 with a fleet of 204 compared with 176 at the start of the year. According to CAPA, it took delivery of 24 new aircraft — 17 A320ceos and 7 A320neos.

The group also took delivery of seven second-hand A320s, which were mainly delivered to its Indian affiliate, and retired three aircraft. In total, AirAsia’s fleet expanded 16% last year.

The Malaysian operation received 18 new aircraft last year and transferred five to AirAsia Philippines and Indonesia, for a net increase of 13 planes in 2017, and grew its fleet to 90.

The expansion looks set to continue this year. In a reply to The Edge’s questions, AirAsia says it is looking to add 28 to 30 aircraft this year.

According to CAPA, AirAsia will have more than 230 planes in its fleet by the end of the year, a number that is expected to exceed 300 by the end of 2021.

AirAsia X Bhd (AAX), the long-haul arm of AirAsia Group did not add capacity last year. The airline is expected to resume its capacity expansion this year. AAX has 66 A330-900neos on order and will begin taking delivery by the end of the year.

According to CAPA, the long-haul LCC will add six or seven A330-300s to its fleet in the second half of the year, thus giving a new impetus to growth in its Malaysian, Indonesian and Thai markets.

Will AirAsia slash its fares to capture a bigger share of the market to fill its additional capacity? Not at the moment, says the airline, as demand is still strong with a high load factor for the entire group.

So, what warranted the aggressive capacity expansion? Is there strong demand for air travel in Malaysia and the other places in the region that AirAsia flies to?

“I am not convinced about the domestic market. However, we are betting on regional market growth. Flights within Southeast Asia and to India and China may grow at a faster pace,” says Malindo Air chief executive Chandran Ramamurthy via email.

“We feel that there is overcapacity in the domestic market and adding frequency may put pressure on yields,” he says. However, he does not believe there will be a price war among the Malaysia-based airlines.

It is not known whether AirAsia will employ a load-active strategy this year to fill the seats of its flights.

AAX is expected to do so, which may result in lower yields for it this year, says MIDF Research analyst Danial Razak. 

In his Nov 24, 2017, report on AAX, Danial says the airline’s revenue per available seat kilometre (RASK) fell 3% in the nine-month period ended Sept 30, 2017, as average fares dropped and seat capacity increased.

“With CASK (cost per available seat kilometre) climbing 6.1% year on year, there will be a narrowing of RASK-CASK spread. Average fares are likely to be under pressure in FY2018 as a result of AAX embarking on a load-active strategy to squeeze out its competitors,” he says.

However, this strategy will only be employed in certain sectors where there is overcapacity, he tells The Edge.

“Load-active strategy is positive in squeezing out competitors, a positive for AAX to strengthen its foothold in the competitive market. However, we only see this happening on certain routes with overcapacity.

“We are encouraged to know that AAX has already embarked on capacity management on certain routes with the addition of more unique routes. We expect the overall yield to hover around a comfortable range, considering that more frequencies will be added to more unique routes, which historically have generated lucrative margins.”

So far, AirAsia has been able to fill the seats of its flights and maintain a high load factor.

In 4Q2017, its consolidated operations (Malaysia, the Philippines and Indonesia) increased seat capacity by 15.7% to 11.93 million while passengers carried increased 17% to 10.44 million, for a load factor of 87.5%.

The load factor was higher than in the previous corresponding quarter — 86.6% — and in 3QFY2017 — 86.7%. However, the fourth quarter is usually a seasonally strong period for air travel due to the year-end holidays and festivities.

The International Air Transport Association (IATA) predicts that in 20 years, the global air passenger market will double to 7.8 billion from four billion now. Much of the growth is expected to be seen in Asia.

“This means, we may have an average annual growth of 4%, a decent rate to absorb the current capacity and expansion plan of major airlines,” says Chandran. Malindo is adding four Boeing 737NG to its fleet of 45 this year.

As for MAB, its chief executive Izham Ismail was quoted by Bernama as saying this will be a tough year for the national carrier. It is expected to turn around in the first quarter of 2019 — a year later than initially targeted. The report did not explain why 2018 would be a tough year for the national airline.

MAB will also increase its capacity this year, albeit at a slower rate than AirAsia, as it takes delivery of six second-hand A330s.

Its fleet of six A380 super-jumbos has been replaced by a similar number of the smaller A350XWBs since December last year. The A350s are used mainly for the Kuala Lumpur-London route, after a trial period covering certain Asian destinations, including Penang.

In July 2016, MAB placed a firm order for 25 Boeing 737MAX, which will replace some of its Boeing 737-800s. The latter will be returned to the lessors by 2019.

Besides the firm order, the national carrier also has the option of adding eight of the widebody Boeing 787 Dreamliners by the third quarter of 2019, as well as the option of purchasing another 25 of the 737MAX.

As at last Wednesday, AirAsia was trading at RM4.27 per share, exceeding analysts’ average target price of RM4.11. Macquarie Research has the most bullish target price of RM6.30 for the airline.

However, AAX’s share price has not had a good year, closing 4.8% lower at 39 sen last Wednesday. This was just 2.63% higher than analysts’ average target price of 38 sen.

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