How Soon will AAX Turn Around?

Predicting Better Times

If you read what CEO Azran has to say, you may want to have a re-look at this stock. After all it has  lost almost all its shine off its IPO price of RM1.25 . Currently it is trading at just below 80 sen, for a loss of 45 sen.(36% loss )

Let us look at this latest article on AAX from THE STAR On-line.

"Could it be time to relook at AirAsia X Bhd? This long-haul, low-cost affiliate carrier of the AirAsia Group will be turning around in the second half of the year. Very likely in the third quarter to Sept 30 too.

That’s not all. The viability of AirAsia X flying to favoured destination London appears much stronger than before.

For the better part of this year, the hype and bluster on AirAsia X has died down significantly, following the announcement of two straight quarters of losses.

Long before that, the cancelling of the popular London and Paris routes in 2012 had already cast aspersions on the low cost carrier’s model.

Perhaps flying long haul for a low cost carrier was never viable in the first place.

Not surprisingly, its share price has been heading south, down 16.5 sen to 83 sen on a year to date basis.

It’s also 25.6% or 42 sen down from its initial public offering (IPO) price of RM1.25.

Even during the day the company was floated in July 2013, its share price never performed. The stock finished the day just 2 sen above its IPO price.

Were many already lacking faith for low cost long haul flights at that point?

Over the week, rumours of a merger between Malaysian Airlines Systems Bhd (MAS) and AirAsia X intensfied, as many speculated that a privatisation of MAS would fuel some kind of a tie-up.

On Thursday, Khazanah issued a statement quashing the rumours, saying that the media reports were unfounded and speculative.

Launched in 2007, AirAsia X competes with the likes Singapore Airlines’ Scoot and Qantas Airways’ Jetstar. Its biggest shareholder is the Tune Group with a 17.83% stake while AirAsia Bhd owns a 13.76% stake.

AirAsia X currently serves 19 destinations across Asia, which mainly consist of Japan, Taiwan, China and Australia. It also flies to Jeddah and Kathmandu,raking in a profit in the second half.

During the Farnborough Airshow in London, AirAsia X chief executive officer Azran Osman-Rani confidently said that AirAsia will be turning around in the second half of the year.

Analysts say there is a strong likelihood that this will happen in the upcoming third quarter results.

What’s more, now that AirAsia X has signed a memorandum of understanding (MoU) with Airbus to buy 50 ‘energy efficient’

A330Neos for US$13.8bil with an additional 50 purchase rights, this allows AirAsia X to once again revisit flying to London - the unspoken compulsory route needed for traveller endorsement.

The deliveries will take place between 2018 to 2024.

The key feature of the A330neo is that it is able to save fuel consumption by 14% compared with the normal A330. This makes it the most efficient, medium range wide-body aircraft in the market.

Apart from expanding AirAsia X’s fleet size, the new A330NEO will be used to replace some of its existing aircraft which will be 12 years old by 2020.

On turning around, Azran first explained that the low cost carrier model for long haul flights is viable.

“The losses had nothing to do with an unsustainable business model but was due to the typical start up costs related with setting up a new business,” he says.

“For every new route AirAsia X goes into, there will be an average of a 12-month start up losses incurred. AirAsia X will be turning around because we are reaching the end of that 12 month period for many of our routes,” he explains.

Some may say that AirAsia X is walking on egg shells with its borrowings of RM1.66 bil and cash position of RM75.08mil as of March 31. However, the airline business is a lot more capital intensive than other sectors.

Azran says that when a company starts a new business, it would have to invest in new capacity, stimulate demand and throw in promotions to fill up the flight. All these were typical start up costs invested by AirAsia X in the last two years.

AirAsia X has been expanding aggressively in the last one year.

To its credit, it has carried th most number of passengers to North Asia in 2013. The north Asian markets consist of China, Korea, Japan and Taiwan.

Looking at its first quarter to March 31, 2014, the statistics for the expansion are very telling.

Its average seat kilometre (ASK) which is the number of seats per kilometre, increased 60.12% to to 6.22 million from 3.89 million in the previous period.

Heavy discounting was seen in average passenger fares, which dropped to RM467.11 from RM623.53 previously.

The total number of passengers carried over the three month period increased 66.9% to 1.08 million from 647.366 passengers.

Thus, load factor improved to 85.8% from 84.2% previously.

This resulted in AirAsia X recorded losses of RM11.28mil from a previous profit of RM50.2mil for its first quarter to March 31, 2014. This was on the back of a 40% increase in revenue to RM749.48mil.

The carrier consumed 930,616 barrels of jet fuel for this period, a 72.4% increase from 539,676 consumed previously.

“The increase of AirAsia X’s capacity in its Australian routes as well as capacity expansion by its competitors had led to major losses in the fourth quarter of 2013 and the first quarter of 2014,” says MIDF analyst Chua Boon Kian.

He points that tourist statistics during the first quarter showed a healthy growth trend in arrivals, particularly from South Korea, which registered a 37% year-on-year increase and 19% jump from visitors from Australia.

“If Malaysia Airlines exercises capacity restructuring by the end of FY14, AirAsia X will be able to recoup some of its earlier losses through the recovery of fare yield in the second half of 2014,” he said.

Thus, Chua maintains a “buy” stance on AirAsia X with unchanged target price of 96 sen, premised on an FY15 price earnings ratio of 10 times.

Cheap flights to London again?

AirAsia X had previously flown to Paris and London, offering connections from its Australian routes, but halted serving the routes in 2012.

During the Airshow, AirAsia X co-founder and director Tan Sri Tony Fernandes said that with the orders for the A330NEO,this is a huge sign that it will only be a matter of time before an AirAsia X operates in Japan and India.

With AirAsia X in India, Fernandes added that AirAsia X can then fly to Africa and London, with Bangalore being a big hub.

Meanwhile from Japan, it can start flying to South America.

“Now that we have the A330NEO, it certainly makes London a whole lot more viable. We learnt from our old mistakes. The last time we didn’t have the support and it wasn’t aggressive enough. The rule of thumb is to have 20/30 short haul planes as a feeder, to make the long haul attractive and use it as a base,” says Azran.

Chua says that the longer range capability of A330NEOs will be more fuel-efficient for AirAsia X to resume its European route and the possible opening up of the US west coast route by 2018. “As the Asean region’s income per capita continues to grow, we believed that demand for leisure travel, especially for long haul destinations, should grow simultaneously,” he says.

This year, AirAsia X will take delivery of seven aircraft, hence bringing its fleet size to 23 Airbus A330-300s by the end of this year.

AirAsia X will take delivery of between seven and eight planes yearly.

Azran adds that AirAsia X started operations in Thailand earlier this year. For the first three months, it has already recorded a load factor of 88%. AirAsia X’s Indonesian affiliate will start operations later this year."