BORN TO LEAD

AirAsia is going through a profit trough, but it’s a temporary glitch, says the airline’s CEO, Aireen Omar.

by TOM BALLANTYNE FROM KUALA LUMPUR  

September 1st 2015

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For the AirAsia group 2014 was its toughest year since its bells and whistles launch in December 2001. Political unrest in Thailand, weakening regional currencies and fleet over-capacity were draining profits from the darling of the region’s budget carriers. Read More »

Adding to the group’s troubles was loss-making AirAsia X, struggling franchises in the Philippines and Indonesia and start-up costs of a franchise in India last year.

Then, the worst of all happened. On December 28, an Indonesia AirAsia A320 fell out of the sky over the Java Sea, killing all 162 passengers and crew onboard.

'We are particularly optimistic about AirAsia Japan and very enthusiastic about the value it will add to our network. It allows us to go further. From North Asia you can go as far as Russia. Who knows? Maybe there is potential for A330s to go further, to the U.S'

Aireen Omar CEO AirAsia

AirAsia co-founder, Tony Fernandes, and his team were rightly praised for their handling of the QZ8501 tragedy, but from the outside, AirAsia, run by CEO, Aireen Omar, and its subsidies, looked decidedly shaky.

But if anyone believed the company was crumbling, they should think again. Sitting at the heart of operations at AirAsia Berhad in Kuala Lumpur, the graduate of the London School of Economics with a Masters in Economics from New York University, sets you straight.

She said the problems in the Philippines and Indonesia will be resolved despite market skepticism. Some analysts believed the extra millions of dollars in loans extended to the two unprofitable airlines won’t be recovered for years – if ever.

Omar begs to differ. Speaking to Orient Aviation in temporary offices at the capital’s newest airport facility, Kuala Lumpur International Airport 2 (KLIA2) last month, the global financier turned airline CEO said finding a resolution to the problems in the Philippines and Indonesia is being driven personally by Fernandes.

“He is very focused on it. I am quite confident that eventually the debt will be repaid. Thailand used to be in that position, but it has recovered. It has recovered very quickly (Omar spoke to Orient Aviation before the Bangkok bomb attack on August 17),” she said.

“We believe the same can be done with the Philippines and Indonesia. It will take a little bit longer and it may take more assets because each country is unique, but I am quite confident Tony will turn it around.”

It isn’t the only battle AirAsia has on its hands. The carrier is in disagreement with the Malaysia airport authority about the impact of its forced move from the low-cost terminal at KLIA to a new facility, KLIA2. It claims the airport authority’s terminal was not ready to accept the carrier. It has also taken legal action to be compensated for a runway that AirAsia said is poorly built and damaging the airline’s aircraft that use it.

In the case of the hasty transfer to KLIA2, AirAsia was given little more than two months to move. Normally such a re-location could take nine months or more. The airline group said it has suffered, and continues to suffer losses, as a result and has sought $100 million in compensation from the airport operator.

Omar believed the issue would take some time to resolve. She is so exercised by the situation the airport operator has imposed on her carrier that she hinted the group could move its main hub beyond Malaysia.

It may seem unthinkable, but Omar said decision-making at Malaysia Airports has been slow and meetings to resolve issues have been repeatedly deferred. “They need to start thinking more commercially, more competitively. Otherwise, they will lose out to other airports in the region, which are just dying to get more airlines to hub at their airport,” she said.

AirAsia has been thinking about its position at KLIA for more than a year as a result of its forced move to KLIA2. Her reasons? “Number one, it’s not fit for a low-cost carrier operation and, number two, it’s an airport that is not ready to be opened because of the poor conditions”, she said.

“If you look at Senai airport in Johor (the state borders Singapore) that’s a privately run airport and they are so commercial. They know what it takes to bring in revenue to the airport. They know who they need to work with to make sure the airport continues to have that traffic support,” she said.

Pressed to say if the airline group could actually move elsewhere, Omar told Orient Aviation: “Well, if they continue to be like this you never know.” She laughed and added: “Maybe there will be more aircraft deployed in Thailand. The Thai airport authorities, especially at Don Mueang (Bangkok’s LCC airport), are very open,” she said.

“Indonesia airport authorities also are clearly keen to attract more LCCs and they understand what is needed to facilitate that. For me, it will be sad for that day to come because we started in Malaysia. We grew in Malaysia. The brand grew from Malaysia.”

Of more immediate concern to Omar is controlling costs so the airline can deliver low fares, improve operational efficiency and expand the network across the region.

The AirAsia group’s operating model is not always understood, either by the industry or the flying public. It requires each affiliate airline to be majority owned by local investors. Each of the subsidiaries has its own CEO, but Omar said no-one acts independently of the interests of the total group.

The heads of each airline gather regularly at meetings usually chaired by Fernandes. Said Omar: “That’s really important. All the CEOs report to him. He sets the immediate goals and the strategy for the next five years. We decide if we need to update our technology, locate new destinations and market the new routes. It’s a joint effort of the whole group.”

The regional heads of all key roles, from chief commercial officers, route revenue managers and maintenance and branding, also meet regularly to synchronise operations and avoid network cannibalisation in overlapping countries.

'China is very, very important. We have a commercial team of about 100 people across the country. We don’t only fly to the primary cities like Beijing or Shanghai or Guangzhou. We fly to secondary cities such as Chengdu, Xiamen and Wuhan and we will continue to grow. Within a four hour radius there are so many cities in China you can try to capture, whether from Kuala Lumpur, Penang, Johor and Kota Kinabalu or any of our other hubs'

Aireen Omar CEO AirAsia

AirAsia branded carriers operate a fleet of 188 Airbus A320s: 82 in Malaysia, 44 with Thai AirAsia, 29 at Indonesia AirAsia, 18 with AirAsia Zest (in the Philippines), 10 with Philippines AirAsia and five with AirAsia India.

There also are 21 A330-300s with long-haul LCC AirAsia X and its offshoots in Thailand, Indonesia and the Philippines. The group order book has 41 current model A320s to be delivered and 300 A320neos on order, which are to begin arriving with AirAsia carriers late next year.

AirAsia X has ordered 55 A330-900neos and 10 A350-900s. All of these are not only for growth, but to replace ageing aircraft. To address over-capacity, AirAsia has deferred some deliveries and will take only five new jets this year. They will go to its Thai and India subsidiaries and new brand, AirAsia Japan. The Japan carrier, born out of a failed short term joint venture with All Nippon Airways, is awaiting approval of its operating licence and has plans to start flying next year.

The decision to defer deliveries was made, explained Omar, when it was realized “potentially that there may be some excess capacity in the market. We thought it might not be a good idea to take all the deliveries that were scheduled. But over capacity is not a problem in every market”.

Operating as a group, AirAsia is extremely flexible. It can move aircraft from one group member to another depending on market conditions and demand. “It’s all about timing. Lion (Indonesian LCC Lion Air) is dumping capacity everywhere. That’s probably not the right way of doing it,” she said.

One benefit of the controversial airport move was that if forced AirAsia to streamline operations. Working round what Omar called “the airport’s deficiencies” meant spending more time on ensuring passengers were transferred efficiently.

“I can’t believe how many aircraft hours I have been able to retrieve, so we can introduce even more routes. We are operating more efficiently by improving aircraft utilization and scheduling,” she said.

Omar said AirAsia is waiting keenly for single ASEAN (Association of Southeast Asian Nations) skies to be fully introduced because it would bring more efficiency to the group. ASEAN Open Skies officially began this year, but so far, it does not include regulatory standardization between member countries.

As a result, when aircraft are moved between countries, airline groups’ fleets have to meet different regulatory standards for licensing, training and all other aspects of their operations across national borders.

“I am eager to see Open Skies being 100% open, but it won’t come overnight. It may not be in the next two, three or four years, but they will eventually arrive where Europe is today,” she said.

Omar said AirAsia’s playground is ASEAN and beyond. “We want to offer the most frequency to any of the destinations that we fly and connect, not just between capital cities in the region, but also secondary cities to capital cities and secondary cities to secondary cities,” she said.

“That has always been the aim. With our other affiliates growing and with AirAsia X expanding we will reach into markets we have been unable to reach. We are feeding each other within the group. That has stimulated a lot of the population in Asia to travel more. It has triggered demand even from the second tier cities which people had never thought of doing.”

Delivery deferrals or not, the network keeps expanding with a growing number of hubs across the region. They include Kuala Lumpur, Penang, Kota Kinabalu, Johor and Kuching in Malaysia; Jakarta, Medan, Bandung, Surabaya and Bali in Indonesia; Bangkok, Phuket, Krabi and Chiang Mai in Thailand; Manila and Cebu in the Philippines and Delhi and Bengaluru in India.

The opportunities are endless, Omar said. “We are very excited that we can go to more places that are uncharted. There is demand for international air travel. Even in this region, there are destinations where there is demand for international connectivity, but no airline is able to meet that demand because of cost,” she said.

“We will be able to do it because we have created that demand. It’s a matter of linking up the points. We have created so many destinations and hubs that we can do it.”

She is particularly optimistic about AirAsia Japan. “We are very enthusiastic about the value it will add to our network. It allows us to go further. From North Asia you can go as far as Russia.

“Who knows? Maybe there is potential for A330s to go further, to the U.S.,” she said.

“It’s a big market that we can capture. There are many possibilities you can play with there by deciding to utilize A320s or A330s in the region. But even with the A320 we can reach points in Korea, China, Russia and the Philippines from Japan.

“Within the four hour radius you can fly to Malaysia, Thailand, Indonesia and the Philippines and their established networks, so for AirAsia Japan it is easy to connect the dots. Everything else is already set up. Because we work as a group each destination is shared within the group and the cost also is shared within the group. The unique cost of operating into a certain destination is further reduced because it is shared.”

Like all airlines, AirAsia places great emphasis on expansion in China, where it already operates more flights that any other non-Chinese carrier, either in the budget or full-service categories.

“Everybody wants a piece of Chinese tourism growth,” said Omar. “We have more than 20 destinations in China. This year we are introducing more routes in the Mainland. We are linking our destinations directly with the hubs we have created in Malaysia, Thailand and Indonesia.

“China is very, very important. We have a commercial team of about 100 people across the country. We don’t only fly to primary cities like Beijing or Shanghai or Guangzhou. We fly to secondary cities such as Chengdu, Xiamen and Wuhan and we will continue to grow. Within a four hour radius there are so many cities in China you can try to capture, whether from Kuala Lumpur, Penang, Johor and Kota Kinabalu or any of our other hubs.”

Omar does not see the emergence of a growing local Chinese LCC sector as a threat. “We will be competing with them, but we have a very strong base and they are just starting. It will probably stimulate more travel because they will be strongly based in China and we are strong in ASEAN. Their passengers may end up feeding our networks and vice versa. It’s another growth opportunity,” she said.

Financially, AirAsia’s Malaysian arm is improving after a rocky 2014, when it recorded its first quarterly net loss since 2008. It reported a $105.5 million loss for the three months to December 31. In its first quarter this year, ending March 31, it was in the black with a net profit of $40.8 million.

Omar said the airline hedges about 50% of its fuel and the lower fuel price has been a big help in improving profitability. Fuel accounts for 40% of the airline’s costs. She expected the continuing lower fuel price will bring greater benefits this year, although she is concerned about the Malaysian currency, the ringgit, which has been depreciating since last year. Thai affiliate, Thai AirAsia recently announced a 26% surge in revenue to June 30, and a net profit of $36.6 million.

It is a different story at Indonesia AirAsia, which lost $69.9 million last year and is facing another dip this year, following the December crash into the Java Sea of its Flight QZ8501. In the wake of the accident, Indonesia AirAsia experienced 26% fall-off in passengers and a 19% decline in capacity, although Omar said the carrier has recovered quite quickly.

“Because of the way we handled it, a lot of loyal customers supported and encouraged us to come out of it and be even better. We are committed to becoming a much better airline and grow even better.” AirAsia India lost $3.5 million in the first quarter of this year. The Philippines brand is also unprofitable although AirAsia forecasts it will be making money by year end.

The biggest headache for Omar is AirAsia X, whose net loss has widened to $135 million dollars compared with a $23 million loss a year earlier. It reported a second quarter loss, to June 30, of $32.4 million. Analysts forecast it will have net losses of $96.3 million and $28.2 million, respectively, this year and in 2016. It will, however, continue to seek out new routes, including Hawaii.

Omar has no doubt that despite the issues the group has had to overcome in the last year, its future is bright. “I am confident we will do well this year. Oil prices have come off quite considerably, although the ringgit has depreciated. The benefits of the lower oil price will be dulled for us and not totally be enjoyed,” she said.

“We have created new routes this year without having additional aircraft. The team was able to achieve this by being more efficient in scheduling, aircraft utilisation and in improving operations.

“We have linked up to new markets and strengthened all our hubs. The routes we will introduce later this year will be very exciting. Maldives is one of them, as well as many parts of China. On the Mainland, we are launching flights not just from Kuala Lumpur, but from Johor, Kota Kinabalu and Penang. And we will introduce a new hub at Langkawi. That is where we are going to create more international connections, directly into Langkawi.”