Fuel cost burdens airlines

By Joy Lee, The Edge

KUALA LUMPUR: High fuel cost continues to weigh on airlines as low-cost carrier AirAsia Bhd saw its 2QFY11 net profit shrink 48% year-on-year (y-o-y) while national carrier Malaysian Airline System Bhd (MAS) languished in the red.

AirAsia posted net profit of RM104.3 million for 2QFY11 ended June 30, from RM198.9 million in the previous corresponding quarter. Revenue, however, rose 15% to RM1.1 billion from RM933.4 million previously, supported by a 15% growth in passenger volume.

According to notes accompanying its quarterly results, fuel expenses rose 39% y-o-y resulting in a 12% y-o-y increase in cost per available seat kilometre (ASK) to 13.38 sen from 11.96 sen previously.

Its Thailand subsidiary made an impressive showing, though, posting profit after tax of  384.4 million baht (RM38 million) for 2QFY11, eight times its profit after tax of 39.4 million baht in the previous corresponding quarter, boosted by improved yields despite an 11% increase in cost per ASK.

AirAsia Indonesia, however, saw its profit after tax halved to 41.7 billion rupiah (RM14.5 million) from 80.4 billion rupiah a year earlier with cost per ASK up 14% y-o-y.

As for MAS, its losses narrowed in 2QFY11 ended June 30 with a net loss of RM526.7 million compared with a net loss of RM534.7 million in 2QFY10. Its losses include a derivative loss of RM56 million which was smaller than RM217 million in 2QFY10.

Both airlines had earlier introduced fuel surcharges to offset higher fuel prices. Although oil prices have come off their peaks, AirAsia CEO Tan Sri Tony Fernandes said the budget airline would not remove its surcharge for the time being due to high volatility in fuel prices.

“Our aim is to get rid of it but until there is some stability at the US$100 level, we will keep it in,” Fernandes said during a tele-conference yesterday.

AirAsia’s net gearing, which has been a concern, has also been reduced to 1.48 times from 1.57 times previously as cash and cash equivalents rose to RM1.8 billion as at end-June from RM1.5 billion in the previous corresponding quarter.

Fernandes is optimistic yields could improve as its peak period is coming up. AirAsia is also looking at increasing its ancillary income via duty free shopping soon, which is expected to be a “good earner”.

He added that there is still a lot of upside for AirAsia’s domestic operations despite the local market coming to maturity. 

The outlook for AirAsia’s regional operations was certainly more bullish as Fernandes said the airline is short on planes and is trying to accelerate the delivery of aircraft and may resort to leasing planes to expand in Vietnam. 

Fernandes is also eyeing the opportunity to set up a much-desired hub in Singapore in order to cement its expansion in Asean. The low-cost carrier could be looking at more joint ventures in other Asean countries.

Full-service carrier MAS is looking at reviewing its network to adjust its capacity. In the notes to its results, MAS said the International Air Transport Association (IATA) reported that the outlook for the airline industry remains bearish as fuel prices could remain high, coupled with fears of the sovereign debt crisis in Europe and the possibility of a recession in the US. 

MAS said its current forward booking profile indicates key challenges for the Europe, US and Japan markets while forward booking trends for other major regional destinations remain normal. 

“In response to the tough operating environment, MAS is moderating its short-term capacity growth. The management team shall have a serious review of its current network and shall adjust deployed capacity accordingly,” it said.

MAS’ much talked about cash and cash equivalents were still at a comfortable level at RM1.5 billion as at end-June.

MAS has tied up with AirAsia as part of its turnaround efforts. The two airlines signed a collaboration and shareholders agreement two weeks ago, under which Khazanah Nasional Bhd will take up a 10% stake in AirAsia while Tune Air Sdn Bhd will hold 20.5% equity interest in MAS.

Following the share swap between MAS and AirAsia, an executive committee was set up to oversee the management of MAS until the national carrier appoints a new managing director to replace Tengku Datuk Azmil Zahruddin. The exco is chaired by MAS’ current chairman Tan Sri Md Nor Yusof and comprises Datuk Mohamed Azman Yahya, Mohamed Rashdan Mohd Yusof, AirAsia deputy CEO Datuk Kamaruddin Meranun and Fernandes. 

“I think within the next two to three weeks, Kamaruddin and myself will be leaving the exco. I believe the search for a CEO is coming to a conclusion,” Fernandes said.

The collaboration is expected to save both airlines as much as RM1 billion annually, which Fernandes noted would be easily achieved.

On the possible increase of parking and landing charges by Malaysia Airports Holdings Bhd (MAHB), Fernandes said AirAsia and MAS have written “strong” letters to MAHB to put their case forward.

“We think the case is very weak for MAHB to raise its charges. I am quite optimistic this won’t happen,” he said.

Fernandes also remarked that AirAsia expects a delay in the completion of the KLIA2 terminal and has opened more hubs in Penang, Kota Kinabalu and Kuching in anticipation. He expects the new airport to be ready in 2013.