c


 c 


 


Air Asia is, arguably, one of the successful low cost carriers (LCC) having extensive network
routes in Asia. Starting in 2002 with 6 routes served in Malaysia, as of Dec 2008 it has rapidly
extended its coverage to 110 routes throughout Asia and Australia thanks to its investments in
Thai Air Asia (49%), Indonesia Air Asia (49%) and recently Air Asia X (16%) for its long-haul
flights.

Air Asia and its associates carried over 18.3 million passengers in 2008, a staggering increase
from a low base of just 1 million passengers when it started its service in 2002. For the company
alone, 11.8 million passengers were flown in 2008, up by 22% year over year.

Even though a strong increase in passenger number and excellent operational performance in
many fronts, Air Asia posted a net loss after tax of RM 472 million in 2008 as a result of
unwinding all the remaining fuel hedge contracts and some interest rate swap contracts.

Facing with weak global economy outlook and adverse environment impacting the aviation
industry, its market cap was shed to RM 2.3 billion from RM 3.3 billion recorded a year earlier.

 

Low cost carrier business model has proven to be successful in many parts of the world, for
instance, Southwest Airlines in United States and Ryanair in Europe. It drives the fare as low as
possible while maintain safety requirement by removing all the frills, streamlining its operation
with single aircraft fleet and maximizing aircraft utilization.

In addition, it does away with selling ticket via travel agencies by offering customers with
efficient and user-friendly internet flight booking and ticket purchasing. It also avoids the hub-
and-spoke system and adopts simple point-to-point network.

Air Asia does follow the proven strategies exactly, capturing a high demand for travelling within
Asia Pacific. It operates from six hubs in Malaysia, Thailand and Indonesia. From its 75 aircrafts
under operation by Air Asia and associates as of Dec 2008, 56 carriers are Airbus A320 and the
remaining are Boeing 737-300.

It plans to phase out the Boeing 737 with brand new Airbus A320 which will help reducing fuel
consumption and maintenance cost. Its aircraft utilization is 12 hours/day/aircraft. It offers low
fare to targeted customers who are willing to do away with frills such as meals.
 

As more and more passengers are switching from full service carrier (FCC) to low cost carrier
(LCC), especially during this tough economic condition, Air Asia sees the number of passengers
grew 22% to 11.8 million in 2008. Despite the Available Seat Kilometer (ASK), barometer
measuring its capacity, increased 29% to 18,717 million, it¶s able to maintain high seat load
factor at 75.4%, down 3.2% year over year. Revenue for FY2008 grew 37% to RM 2,640 million
as a result of increase in volume (22%), air fare (11%) and ancillary income (4%).
Revenue/ASK, indicator measuring yield, increased 6.7% to 14.11 sen (4.23 US cents).

However, facing with high fuel price for the most part of the year and higher depreciation cost as
the aircraft fleet expanded, its operating cost increased significantly by 44.2% to RM 2,343
million.

Furthermore, its cost of borrowing increased substantially from RM 115 million to RM 224 million
due to increase in borrowing bringing earning before tax, forex loss and one-off expense to RM
73 million, compared with RM 193 million achieved a year ago.

A decision to unwind the fuel hedges and interest rate swaps resulted in one-time expense of
RM 641 million. The management believes unwinding is a good course for the company as the
fuel price has dropped sharply and it makes more sense to buy at the spot. As a result it posted
a net loss before tax of RM 662 million.

„







 
 

 
 
 
   

  



 



  
 
 


  !" # !" $ %

Revenue 2,640,260 1,932,756 36.6%
Cost of Sales -1,956,208 -1,338,698 46.1%
Op Expense -107,786 -83,653 28.8%
DA -279,189 -202,045 38.2%
Net Int Paid -223,643 -115,180 94.2%
EBITDA 576,266 510,405 12.9%
EBITDA margin 21.8% 26.4%
EBIT 297,077 308,360 -3.7%
EBIT margin 11.3% 16.0%
EBT 73,434 193,180 -62.0%
EBT margin 2.8% 10.0%
& '(c
)

Air Asia continued to grow in Year 2008. Total asset grew to RM 9,383 million, an increase of
46%, primarily attributed to expansion in its aircraft fleet to support its growth plan. Growth is
mainly financed by long term debt. Its net debt position ballooned to RM 6,097 million compared
with RM 3,046 million, leading to a D/E ratio of 3.47.

Last year, its CAPEX stood at RM 2,621 million. Therefore it¶s not a surprise to learn that the
free cash flow is still in a negative territory and the company has no plan to pay dividend. As of
Dec 2008, Air Asia has capital commitments for aircraft purchase and option to purchase in the
amount of RM 24,866 million.

It has a firm commitment with a purchase order for 225 Airbus A320 (175 firm plus 50 options)
to secure its growth pipeline up until 2014. As its debt level is relative high, it¶s yet to be seen
when the company will increase its share capital again to fuel its future expansion plan.

  !" # !" $

Current Asset 1,977,404 1,489,798
Non-current Asset 7,406,103 4,933,375
Total Asset 9,383,507 6,423,173

Current Liabilities 1,606,367 904,686

Non Current Liabilities 6,146,780 3,419,270
Total Liabilities 7,753,147 4,323,956

Shareholder¶s Equity 1,630,360 2,099,217

* +,

In its FY2008 balance sheet, Air Asia recorded deferred tax asset of RM 672 MB (about 7% of
total asset) which can be used to offset its tax liability from operation. This deferred tax asset
can be viewed as an incentive the Malaysian government given to the company for its
investment in aircrafts for a 5-year period from 1 July 2004 to 30 June 2009. The following
statement is extracted from the 2007 Annual Report.

³The Ministry of Finance has granted approval to the Company under Section 127 of Income
Tax Act, 1967 for income tax exemption in the form of an Investment Allowance (³IA´) of 60% on
qualifying expenditure incurred within a period of 5 years commencing 1 July 2004 to 30 June
2009, to be set off against 70% of statutory income for each year of assessment. Any unutilised
allowance can be carried forward to subsequent years until fully utilised.´

With this deferred tax asset, Air Asia does not have to pay income tax from its operation until it
fully utilized this asset. However, it¶s worth acknowledging that this tax incentive for its
investment in aircraft fleet is going to expire mid of this year, meaning no more subsidizing from
the government for its huge CAPEX in the future years.

- (

. 



Thai Air Asia is deemed as a jointly controlled entity whereas Indonesia Air Asia is an
associated company. As a jointly controlled and associated company, Air Asia applies equity
accounting method. These two companies still lose money and total loss exceeds its investment
capitals. Share of loss in Thai Air Asia and Indonesia Air Asia was RM 35.3 million and RM 64.2
million, respectively, as at 31 Dec 2007.

Therefore, it does not record any profit/loss in the financial statements. However, both Thai and
Indonesian entities performed quite well in FY2008. Excluding the un winding of fuel hedges,
they made operating profit of RM 8.8 million and RM 2.4 million, respectively. Market share of
Thai Air Asia and Indonesia Air Asia for 2008 was 40% and 8% respectively. Although the future
prospect in Thai and Indonesian market looks good, it will be for quite some times before these
two entities could contribute to Air Asia¶s bottom line.


c
&c
c/ ' 
'

c

 
'

&c

Despite very gloomy outlook as a result of global economic meltdown, Air Asia continues to
expand its aircraft fleets to capture new markets. This year, 2009, 14 Airbus A320 will be
delivered with additional 23 expected to be delivered next year. It plans to launch at least 15
new routes in 2009 with emphasis on Singapore, India and China.

It forecasts the number of passengers carried by the Group in 2009 will reach 22 million, a huge
jump from 18 million in 2008, benefitting from the economic turmoil as people switch from full
service carrier to low cost carrier. From the management guidance for year 2009, it expects to
maintain revenue/ Available Seat Kilometer (ASK), level with strong promotion campaign and
increase in ancillary income.

As for the cost, it will benefit from lower fuel price and higher cost efficiency from its new Airbus
A320 fleets. Therefore it¶s cost/ Available Seat Kilometer (ASK), is expected to reduce.

Air Asia is, no doubt, in its growth phase with firm growth plan to capture high demand from
value conscious passengers. However, to support its growth, high CAPEX is unavoidable. Its
current debt to equity (D/E) ratio of 3.47 is considered high and continues to rise.

Some point in time, in our opinion, it will be unable to increase its leverage and thus share
capital increase is inevitable. To invest in Air Asia, investors have to take quite a long term view
seeing it through the next 5 years when it completes its expansion plan throughout Asia and
other regions. Yes, now everyone can fly and we think Air Asia can fly even higher.
&00

Referring to the 2008 Airline Research & Analysis (ARA),³With no sign of any respite amidst the
global economic downturn, Asia Pacific airlines are braced for another extremely difficult year
ahead.´

With regards to the above statement, we have listed a few suggestions which in our view would
help to increase Air Asia income for the next year to come.

Recommendations for Air Asia;

j Quicker turnaround time - The longer aircraft on the ground means that the less
productive it will be. By shortening the turnaround time, Air Asia was able to gain more
profits. It was gained by removing frills service and removing chair booking and
extensive crew drilling on performing quick turnaround. (Currently, Air Asia¶s aircraft
utilization is 12 hours/day/aircraft.)
j Lower distributions costs - Due to high rate of aircraft utilization practices, Air Asia then
will able to utilize its aircrafts at higher rate. Higher rate of utilization signify that higher
profit will be gained by the firm and also lower the cost as the distributed fixed cost get
smaller.
j Revive their current / less profitable routes. Focus on higher demand routes-by adjusting
prices for routes or destinations that have a higher demand when compared to others.
j Air Asia to improve its cargo business and fully utilized its cargo capacity by targeting
clients that are more price sensitive and less time sensitive.
j Collaboration with other airlines for airplane transit.
j Air Asia to focus to only 1 airplane type where they can develop a technology in
operating and maintaining aircraft that suppress the cost lower.
j Avoid landing at the high charging airports instead try to get the closest substitute
airports that charged more fairly.
j Improve operational scheduling (www.i2.com)-engaged a proper system that will help Air
Asia in its scheduling activities related to its facility in advance. For example, scheduling
flight in advance will result in higher aircraft utilization.
j Rent the plane ± (refer to Virgin Air¶s action)
j Improve their image plagued which has been labeled by frequent breakdowns and near
misses in order to be more efficient and capture a bigger market.
!
c'

1. www.airasia.com
2. http://airasiafansclub.blogspot.com/2009_07_12_archive.html
-more recent updates on AirAsia Bhd
3. Driving down cost: how to manage and cut costs ± intelligently, By Andrew Wileman
http://books.google.com.my/books?id=JcKJ9AtL_ekC&pg=PA113&lpg=PA113&dq=Airlin
es+approach+to+cut+cost&source=bl&ots=_aiyV27Iit&sig=4CrIyjeeNv3D_O4W5dhFVLT
savU&hl=en&ei=Bl_QStnjDabs6gOv4MH1AQ&sa=X&oi=book_result&ct=result&resnum
=2&ved=0CBAQ6AEwAQ#v=onepage&q=&f=false

http://books.google.com.my/books?id=JcKJ9AtL_ekC&printsec=frontcover#v=onepage&
q=&f=false

4. http://www.docstoc.com/docs/1898574/mission-statement-of-air-asia-airline
5. http://www.centreforaviation.com/search/search.php?query=airasia+analysis&allsite=1&
sharewraps=1
6. http://www.google.com.my/search?hl=en&client=firefox-
a&channel=s&rls=org.mozilla:en-
US:official&ei=xl7QSumjFZbe6APi8IzzAQ&sa=X&oi=spell&resnum=0&ct=result&cd=1&
ved=0CA4QBSgA&q=Renting+out+plans+to+cut+cost+by+Virgin+air&spell=1
7.