IN the last five years, AirAsia X Bhd’s (AAX) financials have fluctuated, swinging between profits and heavy losses. However, two straight years of losses — RM88 million in the financial year ended Dec 31, 2013 (FY2013), and RM519.3 million in FY2014 — prompted a major revamp of the company’s top-level management.
Self-proclaimed aviation geek Benyamin Ismail was appointed to the unenviable position of acting CEO early this year. His task is singular — to turn around the heavily loss-making, long-haul low-cost carrier (LCC) by the end the year.
Six months into the job, Benyamin tells digitaledge Weekly that the airline is “on track” to a recovery by the end of this year.
The new leadership has made noticeable changes to AAX, including the recalibration of routes in its growing network.
“We have been working quite hard in the last six months, relooking our routes to see what is performing well and what is not. We needed to see what we should continue … and what to withdraw,” says Benyamin.
Low-yielding destinations like Narita have been axed while high-capacity but low-load routes have had their frequency reduced. The airline is still looking at more cuts in the North Asian market. At the same time, AAX is keeping passengers excited with new destinations like Sapporo and working on breaking into the Americas market by flying into Hawaii at the end of the year once it has obtained regulatory approval.
It is also looking at other destinations like New Delhi and Auckland.
With almost half of AAX’s routes still unprofitable, capacity rationalisation is starting to yield results.
“What I can say is that a lot of the routes have improved … Some (markets) are now borderline breakeven. Those markets were coming from a very bad position of loss. Australia was bleeding and was the worst of our routes. So, we cut capacity … it helps to stop the bleeding a little bit,” he explains.
AAX’s other turnaround strategies include increasing marketing efforts to educate consumers about its vast network of destinations, collaborating more with travel agents to drive load factors up and imposing stricter internal cost-control measures.
“What I have seen in the last three months is that there was no accountability or business case for what we did. There were no cost controls, no monitoring of purchasing and all kinds of issues. I am not saying AAX was not well managed. We are already the lowest-cost carrier in the world but we can be lower.
“Now, all approvals come to me. I make sure everything is monitored — hotel stays, everyone flies economy (class), no one overstays their business trips — and has standard operating procedures. For me, it is all dollars and cents,” Benyamin says.
His efforts are not being reflected in the balance sheet just yet. In the first quarter ended March 31, 2015 (1Q2015), AAX made a loss of RM125.92 million, a tenfold jump from RM11.28 million in the same period last year. This translates into a loss of 5.3 sen a share. The next quarter seems to be as grim, looking at the released statistics of lower passenger numbers and low load factors in 2Q2015.
Also, AAX’s share price has been on a decline since its September 2013 listing at RM1.25 a share. Last Friday, it closed at 18.5 sen. This means that the stock has shed 64.34% year to date and 81.6% since its initial public offering.
However, Benyamin remains confident. “2Q15 is going to be very negative. But you will see an improvement. The third and fourth quarters will be better and so will next year. I am still working with the team on it.
“We are committed to turning the company around. What we promise shareholders is that this is long-term. I cannot promise the share price will go back to RM1.25 next year but you will see some upside — 30 or 40 sen in the next two years, perhaps. If there were no upside, we would not have had shareholders pumping in millions through our recent rights issue.”
This confidence will be reassuring to many investors but they should not ignore the challenging environment in which AAX operates.
To start with, its operating costs are at risk of escalating due to the weak ringgit. Benyamin says only 55% of operating costs for rental and maintenance of aircraft is denominated in US dollars but an aviation analyst has put it much higher at 70% to 80%. Meanwhile, about 30% of AAX’s revenue is denominated in the ringgit, which has lost nearly 17% against the US dollar this year.
Further, Asia’s skies are getting crowded with ambitious LCCs. Those who were caught in the wake of the AirAsia group’s first-mover advantage are now hot on its heels and giving AAX a run for its money.
For example, Malindo Air (MA), a member of Indonesia’s Lion Group, has quietly grown its local presence and launched new services that overlap with AAX’s key markets. It launched daily Kuala Lumpur-Kathmandu flights in February, a stronghold for AAX and one of its more profitable routes. There is talk of MA going to Perth and Taipei. With its narrow-body aircraft, it can reach most of AAX’s destinations.
Thailand-based NokScoot is also slowly moving out of its comfort zone and wants a share of the regional pie. It currently flies to Singapore, Nanjing and Osaka but plans to expand to Vietnam, Myanmar and South Korea from 2H2015.
Benyamin argues that AAX is well placed to withstand competition in the region, thanks to its ability to leverage the AirAsia group’s wider network.
“The biggest thing that we have that others don’t is our network. Sixty per cent of our passengers come from the AirAsia group. I am quite confident that we are still slightly ahead of the curve but we will have to be watchful of them (competitors),” he says.
Even so, start-ups in the no-frills market, like Vietnam’s Thai VietJet, which received its air operator’s certificate at the end of 2014, and Malaysia’s Flymojo, which will operate out of Senai Airport in Johor and Kota Kinabalu Airport in Sabah, are going to further crowd the skies. While the new players do not fly to AAX’s destinations, they could challenge the supply of feeder traffic from the AirAsia group — the very ethos that Benyamin says will guarantee AAX’s success in the long term.
AAX has not always reacted well to competition. Its long-standing rivalry with Malaysia Airlines (MAS) often came at a cost — lower yields and profits. In fact, Benyamin attributed AAX’s dismal 2014 performance to the price war that MAS started.
“Ideally, you don’t want a full-service carrier to be your main competitor. But towards the end of last year, they were pushing fares at our levels and levels way below our cost. Close to 80% of its routes … Australia, North Asia and China … match ours. So, that impacted us quite a bit,” says Benyamin.
MAS’ restructuring and trimming of its long-haul network this year will lead to overall capacity reduction but the impact on AAX will only be confined to the overlapping routes.
The risks to AAX’s turnaround are obvious but it is too soon to dismiss the stock before the end of the year, given the management’s commitment and active steps to ensure its success. As Benyamin says, “I’m not here to sell a view that I am not going to achieve.”
This article first appeared in digitaledgeWeekly, on August 17 - 23, 2015.