Author: Mei Ling Tan

With slow economic growth, reduced passenger yields, overcapacity, rising jet fuel costs and unfavourable foreign currency movements, 2017 looks set to be another tough year for the aviation sector. But far from signalling the end of the world, AirAsia Bhd group chief executive officer (CEO) Tan Sri Tony Fernandes believes there’s an opportunity in every crisis.

He continues to be bullish on a variety of potential developments, pointing out that sitting on his hands is not an option.

“Rather than burying our heads in the sand, we see these [challenges] as an opportunity to drive more tourism. With the right support from the tourism and culture ministry and airports, we can turn these negative elements into positive,” he told The Edge Financial Daily in a phone interview.

The low-cost carrier’s (LCC) stellar earnings this year have sent its share price soaring 79% year-to-date to close at RM2.31 last Friday and Fernandes is convinced AirAsia will perform better in the coming year.

“We are looking good. The year 2016 is set to be a record year and we will build on it [in the coming year]. We have hedged 80% of our anticipated fuel use in 2017, while most of our aircraft purchases are hedged against the US dollar with fixed interest rate loans. So, our risks are mostly covered,” he said.

The airline returned to profitability in the nine months ended Sept 30, 2016 (9MFY16), posting a net profit of RM1.57 billion compared to a net loss of RM13.37 million a year ago. This was helped by an increase in aircraft operating lease income and a 22% reduction in the average fuel price to US$62 (RM277.14) per barrel in the third quarter ended Sept 30, 2016 (3QFY16), from US$79 per barrel in 3QFY15. Revenue was also 21% higher at RM5 billion in 9MFY16, from RM4.14 billion in 9MFY15.

“I am very bullish about our business outlook for 2017. Amid the slow growth environment, airlines such as ours will benefit [as more passengers choose to fly with LCCs],” he added.

Fernandes pointed to the weaker ringgit against the US dollar, saying it is helping draw more tourists to the country. “These factors support air travel,” he said.

While concerns are mounting about an overcapacity in the Asian markets next year, Fernandes thinks otherwise as he expects demand to grow at a faster pace. AirAsia Group itself is deploying an additional 28 aircraft for its system-wide operations in 2017, a 15.9% increase to 204 from 176.

“AirAsia is an Asian airline and [our] capacity is spread across the region. The markets need more capacity. The ringgit depreciation and economic conditions have driven people to stay closer to home and take shorter trips. It is time to drive our very strong advantage with growing market share,” he said, adding that AirAsia’s cost structure and ancillary income will enable it to grow market share. In 3QFY16, its ancillary income per passenger remained consistent at RM46 year-on-year.

“Asean is still booming. We have started operations in India (in 2014) and we still have China to go.

“A great part of our growth is also coming from connectivity. More people are travelling through Kuala Lumpur to go to other destinations such as Australia and China,” he observed.

Thus, unlike its full-service counterparts, AirAsia is moving full steam with its expansion plans.

“Depends on where you are in the cycle, we have been cautious in the last two years. Two years ago, we stopped growing, tightened our belt [and] refocused. We fixed AirAsia Philippines and Indonesia AirAsia and now we are going to grow, while other airlines are still trying to understand what they are,” said Fernandes.

Fernandes, a major shareholder of AirAsia with an 18.6% stake, also took what appeared to be a jab at Malaysia Airlines Bhd, saying: “Unlike AirAsia, some of the full-service carriers in the industry are still confused about their target market.

“And that is the problem, which is why they are destroying capital. They really should stick to what they are. If you are focused, this is a great industry to be in. People have to fly, disposable income is growing in Asia, and people want to have more holidays and short breaks,” he said.

“So, we like a crisis. We always grow better in times when other companies are worrying about the future. We see an opportunity to grow,” he added.

For one thing, the airline is looking to build an Asean holding company and create an Asean stock.

“We are making representations to various leaders and stock exchanges, and it is going well. That would provide much more liquidity to our stock. We want to be seen as one airline economically, but have different AOCs (air operator’s certificates),” said Fernandes.

Shukor Yusof, founder of aviation research firm Endau Analytics Sdn Bhd, described 2017 as a “true test” of an airline’s mettle.

“Everyone (airlines) was doing well in 2016 as low fuel prices helped keep costs down, but the true test will come next year,” he said. Shukor sees currency exchange movements as a key factor that will affect airlines’ profitability.

“We are not disputing that passenger growth would go higher, but volume itself is not necessarily going to help you make more money. And with the stronger US dollar, airlines’ yield is going to be affected by it,” he explained.

Shukor also pointed to the competitive fares and increasing capacity from Malindo Airways Sdn Bhd, which will be another crucial factor that will affect the Malaysian aviation sector.

“The market hasn’t been paying much attention to Malindo Air, but it is going to be very competitive and AirAsia is going to feel most of the pressure coming from their (Malindo Air’s) expansion,” he said.

In a recent interview, Malaysia Airlines’ group managing director and CEO told The Edge weekly that the second half of next year would probably see the greatest battle in low-cost travel history take place in Malaysia as about 40 aircraft come onto a market.

Meanwhile, Affin Hwang Capital Research aviation analyst Aaron Kee expects AirAsia’s earnings in FY17 to normalise from its peak this year.

“Yield is going to be low as oil prices trend higher. We have a ‘hold’ call on AirAsia and we look forward to the injection of RM1 billion capital from its founders and the disposal of the group’s aircraft leasing arm,” he said.

“As for AirAsia’s long-haul affiliate AirAsia X Bhd (AAX), it has turned around its loss-making position and for 2017, a sustained turnaround story would rejuvenate investors’ interests,” Kee added. AAX’s share price had doubled year-to-date to close at 36 sen last Friday.