AirAsia seen riding out unfamiliar rough patch

Posted at 03/07/12 4:07 PM

KUALA LUMPUR - After a decade of unbroken success, expansion and accolades, recent events have brought budget airline pioneer AirAsia and its flamboyant boss Tony Fernandes down a little closer to earth.

Fernandes, who built AirAsia into one of aviation's biggest successes, will this month cease unprofitable London and Paris routes served by long-haul unit AirAsia X in the first step back for his fast-growing low-cost network.

Malaysia-based AirAsia's 2011 profits were halved to $186 million due to rising fuel costs and global uncertainty, competitors are proliferating, and the company faces allegations of poor service and deceptive practices.

But despite the unfamiliar negative news, the route pullback and a resulting refocusing on Asia could leave Fernandes's empire even stronger, more focused, and still a step ahead of its competition, analysts said.

"Their prospects remain very strong," said Shukor Yusof, an aviation analyst with Standard & Poor's in Singapore, citing continued healthy forward bookings and effective management.

"It is still the leading low-cost carrier in this part of the world and will be for some time yet."

Fernandes, 47, took over near-dead AirAsia in 2001 and, with his motto "Now everyone can fly," built it into Asia's largest no-frills carrier, tapping into the wanderlust of the region's emerging middle class.

Routes spread quickly in Southeast Asia and the 2007 launch of AirAsia X extended the reach to China, India and later Europe.

But the days of global expansion seem over, for now. Besides London and Paris, Mumbai routes were chopped in January and Delhi flights stop this month.

Analysts said the group, which currently serves about 80 cities worldwide in more than 20 countries, appeared to have discovered the limits of the budget airline model.

"What AirAsia X has found out is that once flights get up to nine, ten hours or more, you struggle to make money with the low-cost model (due to fuel costs and the need for enhanced passenger services)," said Brendan Sobie of the Centre for Asia Pacific Aviation.

The European foray was useful for marketing.

Fernandes, who already owned the Lotus -- now renamed Caterham -- Formula One team, bought English Premier League team Queens Park Rangers last year, allowing him to emblazon AirAsia's logo across player jerseys.

"People in Europe know about (AirAsia) now. It was good for marketing. Now, when they come to Asia they know they can fly around on AirAsia," said Sobie.

But the pullback means a greater focus on the profitable Asian market.

"We intend to concentrate capacity in our core markets of Australasia, China, Taiwan, Japan, and Korea where we have built up stable, profitable routes within an infrastructure that supports low-cost services," AirAsia X CEO Azran Osman-Rani said recently.

AirAsia X, which plans an IPO possibly this year, will now focus on medium-haul flights within Asia, while AirAsia continues with routes up to four hours' flight from its Kuala Lumpur hub.

Shukor said no-frills travel makes up about 15 percent of passenger traffic in Southeast Asia but will reach "up to 35 percent" by 2020.

Competing low-cost carriers (LCCs) seeking to emulate AirAsia's success include Singapore Airlines' Scoot, the Philippines' Cebu Pacific Air, and Indonesia's Lion Air.

But they will struggle against a refocused AirAsia, Shukor said.

"(AirAsia has) still got the 'first-mover' advantage and the know-how and the template for how to make an LCC work. Lion and the others will have a hard time keeping up with them. They are wannabes, really," he said.

Questions remain for AirAsia, however.

Analysts said the impact of a share swap and partnership with flag carrier and onetime bitter rival Malaysia Airlines (MAS), announced in August, remained to be seen.

Aimed at rescuing loss-making MAS, it would eliminate direct competition on many routes. But MAS is seen as struggling badly and could turn out to be a "drag" on AirAsia, Shukor said.

AirAsia also faces persistent complaints over sudden cancellations of underbooked flights, confusing booking procedures, and unexpected charges.

Australian regulators in January filed a lawsuit alleging AirAsia concealed the final price of flights on its website. The company has said it took "corrective action."

However, Sobie said little lasting impact on the bottom line was expected as budget travelers remain a resilient crowd.