AIRASIA BHD and its loss-making associate AirAsia X Bhd are consolidating their operations, where possible, in a major exercise to cut cost and improve efficiencies, sources say.
The move will also see the group’s founder, Tan Sri Tony Fernandes, play a more prominent role in the management of AirAsia X.
This has prompted intense speculation that AirAsia X CEO Azran Osman-Rani may leave the long-haul budget carrier he has helmed since July 2007. But Azran, when contacted, denies this.
“The consolidation exercise began about two months ago and is expected to bring about 30% overall savings — for example, in terms of fuel cost — across the group by the second quarter of next year.
“Wherever the two companies can consolidate their departments, they will. They will ride on each other’s strengths rather than waste cost and talent through duplication. The ultimate aim is to try and have much leaner operations,” a source familiar with the plan tells The Edge.
It is a practical move, the source adds, pointing to some cases where there are two heads — one from each company — running similar operations at the same airport.
The engineering, commercial and ancillary departments are among those that will be merged. “Where the two can co-exist, they should. They can benefit from economies of scale. However, there are no lay-offs planned as the group is expanding,” the source explains.
AirAsia Group CEO Fernandes, when contacted, confirms that the two companies are in the midst of a consolidation exercise and that he’s playing a more prominent role in AirAsia X. He, however, does not elaborate.
“Yes, I’m effectively running AirAsia X with the management. The consolidation is all about cutting cost, which benefits both companies,” he says.
On speculation that the exercise will lead to the two companies being merged, resulting in the delisting of AirAsia X, he replies, “No way”. He goes on to say that he expects AirAsia X to make “excellent” profits in 2015, without elaborating how, and that associate Thai AirAsia X will also be profitable.
The source says both companies will remain listed. “At the end of the day, there is no change of shareholders in AirAsia and AirAsia X.”
Given AirAsia X’s dismal financial showing in recent quarters, it is no surprise that Fernandes wants to have a bigger say in the running of its business, analysts say.
“A lot more decisions are being referred to him,” a source says. Thus, there has been intense speculation within the group that Azran has been looking to leave AirAsia X, other sources say.
When contacted, however, Azran says: “Not true, I’m not leaving the company.”
AirAsia X recently reported a net loss of RM210.85 million for the third quarter ended Sept 30, 2014 (3Q2014) — its fourth consecutive quarterly loss and its worst showing since its listing in July 2013 — as higher operating expenses, foreign exchange losses and finance costs nipped at margins.
For the nine months to date, its net loss came in at RM350.91 million compared with a net profit of RM44.34 million in the same period a year ago.
Analysts say they expect AirAsia X to return to a potentially small profit next year, based on its latest plans to revive the business. These include tapering capacity growth, ramping up ancillary income, reducing capacity on its route network during lean months and redeploying the aircraft on “wet-lease” charters to third party airlines elsewhere in the world.
“The company has initiated some of the turnaround plans and is confident of turning itself around. The worst is over,” the source tells The Edge.
The sharp fall in oil prices in recent months will certainly help AirAsia X reduce fuel costs, but analysts say the positive impact to its bottom line may be offset by other factors such as the depreciating ringgit as much of its cost is in US dollars. Yield recovery may also not pick up in a strong way.
RHB Research Institute aviation analyst Ahmad Maghfur Usman says AirAsia X’s deteriorating balance sheet raises concerns over how the carrier will go about funding its future aircraft acquisitions.
On Dec 15, AirAsia X placed a firm order from Airbus for 55 A330neo aircraft, which are relatively more fuel efficient, for US$15.2 billion and targeted for delivery from 2018. This bumps up its total order from Airbus to 91 aircraft. To reduce heavy upfront cash payment, it said it would use operating leases for all of its 2015 aircraft deliveries.
“The carrier is expected to see high depreciation and lease expenses squeezing potential profits,” Ahmad Maghfur says in Dec 16 report on the sector.
Bloomberg data shows that of at least 16 analysts that track the stock, most (or nine of them) have a “sell” call on it, with the 12-month target price at 66 sen a share. The stock has shed some 31% so far this year to 69 sen last Tuesday.
Analysts, however, are more optimistic about AirAsia’s prospects, both from an earnings and stock perspective.
AirAsia reported a smaller third quarter net profit (3Q2014) of RM5.4 million compared with RM35.48 million in the same period a year ago, due to lower operating profit and higher finance cost. However, net profit for the nine months to date has more than doubled to RM512.27 million compared with RM198.62 million before.
“AirAsia will deliver solid earnings from 2Q2015 onwards as the benefit of lower fuel price trickles in. The weaker ringgit against the US dollar will offset some of the benefit as 60% to 70% of its operating costs are denominated in USD. On a net basis, it is still favourable and we raise our FY2015 and FY2016 earnings by 24.4% and 11.2% respectively,” says Maybank Investment Bank Research analyst Mohshin Aziz.
Most analysts have a “buy” call on the stock, with the 12-month target at RM3.23 a share, according to Bloomberg data. The stock has gained some 34% this year to close at a year-to-date high of RM2.90 last Tuesday.
This article first appeared in The Edge Malaysia Weekly, on December 29, 2014 - January 04, 2015.
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