AirAsia X chief not sweating over rising fuel prices

This article first appeared in The Edge Financial Daily, on May 28, 2018.

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KUALA LUMPUR: Rising jet fuel prices are the bane of airlines as they put the squeeze on costs, but AirAsia X Bhd’s (AAX) boss Benyamin Ismail is not sweating over this. At least not yet.

The 41-year-old chief executive officer believes speculators are keeping oil prices afloat and that the oil market remains oversupplied.

Oil has been trading near a 3 ½-year high on concern about the potential supply disruptions from Venezuela and Iran. Bloomberg data shows that year-to-date Singapore jet fuel kerosene spot price has risen by 13.6% to close at US$87.99 (RM350.20) per barrel last Friday, from US$77.44 on Dec 29 last year.

“I am not starting to sweat [over the rising prices of jet fuel] yet because even when prices soared above US$100 a barrel a few years ago, we still managed to sustain ourselves [even though] we were barely making money. So [at current levels] we are still okay, we just have to be smarter on how we approach things,” he told The Edge Financial Daily in an interview last week.

“There is a segment of the market that is saying fuel prices will drop, while another segment believes oil prices will surpass the US$100 level. I think prices will come down because I believe the global fuel market is still oversupplied and speculators are moving the prices up,” he said.

Amid the uncertainty of fuel prices, Benyamin said the long-haul low-cost airline is holding off plans to hedge its future fuel requirements.

“We currently hedge about 12% to 14% of our fuel needs, at US$69 per barrel, down from 60%-70% for our 2017 fuel needs when the fuel prices were low. We would love to hedge more, but the problem now is that I am still not very comfortable with where the fuel prices are heading. There are still many uncertainties,” he said.

“I think it should come down to the US$70 per barrel level towards the end og the year, or probably next year. I am more comfortable [to start hedging] when fuel prices are within the US$60 to US$70 per barrel range,” he added.

For the first quarter ended March 31, 2018 (1QFY18), aircraft fuel expenses, which amounted to RM470.48 million, constituted 38.88% of the airline’s total operating expenses of RM1.21 billion.

Benyamin said the airline will continue to reduce overall costs by increasing the utilisation of its aircraft.

“The most important thing is to make sure all our planes fly. In comparison with last year, our utilisation [for 1QFY18] has increased to 16.5 hours per day from 15 hours previously, which is good for us as that means more revenue,” he said.

AAX saw its net profit quadruple to RM41.5 million in 1QFY18 from RM10.34 million a year ago, supported by a 13% year-on-year (y-o-y) growth in passenger volume. Revenue in 1QFY18 also rose 7.2% y-o-y to a record RM1.27 billion from RM1.18 billion in 1QFY17.

Benyamin said 2QFY18 and 3QFY18 are likely to be “lean quarters” for AAX as the number of holidays in these two quarters is relatively lower than 1QFY18 and 4QFY18.

“Traditionally, the second and third quarters are lean periods. But potentially what you will see is we will be driving our passenger load factor at the expense of fares. As such, revenue will increase in tandem with rising load factor. When you see our [past] numbers, revenue always outpaced the past quarter and we will try to do that as much as we can,” he said.

AAX’s seat capacity for 1QFY18 grew by 14% to 1.9 million seats, from 1.66 million seats a year ago.

Benyamin said the airline is aiming for about 20% to 35% growth in seat capacity for FY18, through higher aircraft utilisation and six aircraft deliveries this year, which will bring AAX’s total fleet size to 36 aircraft.

“Operating profit [in 2QFY18] should be sustainable. Looking at the second quarter, the local currency has not moved much compared with the first quarter, so there is still a buffer for us to make some good money. It [2QFY18 results] won’t be as good as 1QFY18 because usually the first and fourth quarters [are the strong periods],” he added.

“But I am quite confident [of FY18]. The market has been quite buoyant in terms of travel demand and the industry has so far been quite rationale in terms of competition. So I think it is still going to be good [remaining] quarters for us,” he said.

AAX will be adding a new destination in China in the second half of this year, following the launch of its Amritsar-Kuala Lumpur flight on Aug 16. However, he declined to name the new destination as the airline has yet to obtain the necessary approvals from the authorities.

“We recently announced the new route to Amritsar, which is our third destination in India. Ticket sales have been great for us so far.

“Additionally, we will be increasing frequency of flights to certain [existing] destinations this year,” he said, but did not elaborate.

On AAX’s relationship with Malaysia Airports Holdings Bhd (MAHB) after the latter slapped a lawsuit against the airline seeking RM34.88 million in unpaid dues, Benyamin said: “Communication is now much better between us”.

“We are working together to fix things, that is important. I have to say that [our relationship] has improved from where we were in the past. We have a [joint] working committee now, working on issues at klia2,” he said.

MAHB on April 30 filed a suit against AAX, claiming the airline owed it RM34.88 million in outstanding airport charges, rent and late payment charges.

AAX, however, disputed the claims, saying it had consistently made monthly payments to the airport operator, and hence would file a defence against MAHB’s claims.

Year to date, AAX shares have risen 12% to close at 37 sen last Friday, giving it a market capitalisation of RM1.54 billion.