AirAsia Optimistic Despite Red Ink

Madhu Unnikrishnan
November 29th, 2020 at 12:14 PM EST

  • AirAsia’s core airline business, setting aside the firm’s growing portfolio of non-airline digital businesses, reported a negative 165% operating margin for the third quarter, excluding a host of one-off charges associated with hedges, depreciation, and so on. Note that Q3 is an offpeak season in the ASEAN region, a market that entered the crisis with lots of tourism for sure, but also too many airlines and too much capacity. AirAsia’s groupwide revenues for the three months were down 87% y/y, aided by a revival in domestic traffic. But operating costs dropped only 46%, with fuel becoming a negligible expense with so little flying. Labor costs declined only 53%.

    Of AirAsia’s six major country markets, Thailand saw the greatest domestic revival, with AirAsia’s capacity there now back to pre-crisis levels more or less (overall ASK capacity for Thai AirAsia, including cross-border flying, shrank 56% y/y). The unit opened a new base at Bangkok’s main airport where the cargo market is more active. AirAsia generally performs well in the Thai market, preying on the now-bankrupt Thai Airways. But others like VietJet, foreclosed of international opportunities at the moment, are allocating a significant number of the new planes they’re receiving to Thailand. It’s a market perhaps ripe for consolidation — AirAsia itself was reported to have discussed a deal with Nok Air.

    Malaysia remains the group’s largest market, and historically the bedrock of its profitability. Unfortunately, a recent Covid spike derailed what had been a decent domestic recovery. It will thus operate just 31% of its normal domestic Malaysia capacity this quarter. But always the optimist, AirAsia sees just a short-lived setback, expecting domestic Malaysian demand to “bounce strongly in December.” It’s bullish on Indonesia too, where it’s operating 47% of normal Q4 capacity. Same for the Philippines, despite stricter internal travel regulations that have it flying just 13% of normal. Rivals are retreating in Indonesia and the Philippines however, resulting in market share gains and greater pricing power.

    The story is bleaker in Japan, where a joint venture running just a handful of routes was shuttered and placed into bankruptcy. AirAsia India is a cash suck as well, and exit discussions are underway — one possible outcome is a full sale of its stake to partner Tata Group (which is also behind Vistara and a potential buyer of Air India; see Media section). For now, AirAsia India is running close to 70% of its normal domestic capacity. The group said again last week that it’s actively exploring opportunities to establish a local presence in Vietnam, where at least two of its past JV attempts collapsed. It’s at times wanted to plant its flag in China as well, but nothing new on that.

    It’s certainly spending a lot of time and attention on its digital businesses, including the online travel agency It’s trying to become a cargo and logistics giant in the region, facilitating last-mile delivery of items transacted via e-commerce. It’s building a finance company providing services like convenient payment options. Its BIG loyalty program is a business in itself. It’s even opening fast-food restaurants and brokering medical services. The larger idea is to create a “super app” trading platform for its own services as well as those of third parties. The inspiration is Amazon, the e-commerce megalith predicting buyer behavior and driving sales with the power of data. AirAsia, after all, has a lot of data about a lot of people given how many of them it’s flown over the past two decades (it currently claims 40m website visitors a month).

    But will its digital business ambitions distract from running an airline? The LCC will, to be sure, have lower costs on the other side of this crisis. It says fixed costs are down by half. The fleet will be smaller too, having finished 2019 with 244 planes but expecting just 221 by year end 2021. AirAsia, remember, is one of the most important Airbus customers, with large numbers of A320/21 NEOs on order. A separate at-risk order by sister airline AirAsia X is vital to the future of A330 NEOs. If AirAsia X were to disappear, AirAsia’s network would feel it.

    On the other hand, the survival prospects of rival Malaysia Airlines are equally uncertain. AirAsia itself has immediate cash needs to address. It’s applying for various bank loans, selling planes, and working with investment bankers and potential investors on raising more capital. One option it’s exploring: Selling parts of its business empire to outside investors. Turkish Airlines is a new partner of a different sort, agreeing to market its flights through

    It might be a while before Asians start booking trips to Turkey and Europe again. But AirAsia says it’s prepared to rely on just domestic demand until vaccine salvation arrives, hopefully in mid-2021. It’s also hopeful of the travel bubbles emerging in the region. It’s offering deals like unlimited flight passes to stimulate demand. It’s confident that mass tourism will return before long. It sees the fare environment improving and competition rationalizing. And ultimately, AirAsia thinks its strong brand and low-cost leadership will ensure its future success.   
  • Colombia’s Avianca, bankrupt like its regional rivals Aeromexico and Latam, disclosed a negative 94% operating margin for the third quarter. Passenger air travel was largely banned in Colombia for much of the period, restarting only in September. In Ecuador, a much smaller market, operations were more active but still limited throughout the quarter. How then did Avianca generate $297m in revenue? That was down only 83% y/y despite such limited passenger traffic. The answer, predictably, lies with cargo, which accounted for 92% of the company’s Q3 revenues.

    Operating costs, easier to cut while in bankruptcy, declined a hearty 69%. Depreciation, a non-cash expense, was by far its largest expense. Labor, another major expense, plummeted 70%. And that was before last week’s news that pilots agreed to another drastic multi-year wage cut — they’ll get job protections in exchange. Part of Avianca’s pilot workforce, remember, staged a seven-week strike in late 2017. That strike, combined with overzealous aircraft ordering and tough macroeconomic conditions, left Avianca with a precarious balance sheet long before the crisis.

    Things improved with an out-of-court financial restructuring that began in the second quarter of 2019 — United was among those providing it with new capital. Focus then turned to improving margins — always decent but never great — with measures like narrowbody seating densification, new pricing tactics, a new regional unit, fleet simplification, loyalty plan growth, and expansion from Bogota but retreat from Peru. Greatly anticipated was a planned north-south joint venture with United and Copa.

    Then came the Covid crisis, which undid all the hard work of the prior restructuring. This time, in May, it was forced to file for bankruptcy in a U.S. court. Like most Latin carriers, it failed to win any meaningful government aid, until finally winning some state support for its bankruptcy financing. The support was ultimately withdrawn amid political opposition, but it didn’t really matter. With capital abundantly available in private markets, Avianca managed to secure some $2b in new loans, with United again participating. Recall that United’s predecessor Continental made a killing with its investment in Copa, hence an understandable eagerness to invest in Avianca.

    What about the joint venture? CEO Anko van der Werff, speaking at a Skift Aviation Forum earlier this month, sounded reassuring, saying the project was on hold but still top of mind. Copa sounded a little less committed in its Q3 earnings call but by no means ruling it out. In any case, Avianca has every intention to emerge from bankruptcy a stronger and leaner airline. And with that $2b in DIP financing, it has plenty of time to get its affairs in order.

    Upon emergence though, it will face a changed competitive landscape with LCCs becoming more aggressive. Chile’s JetSmart, for one, part of the Indigo group of ULCCs, intends to enter the domestic Colombia route before long. Viva Air and Copa’s Wingo compete in the market as well. So might a new startup called Ultra Air, a brainchild of Viva’s founder William Shaw.
  • Newly opened markets on the Arabian Peninsula (the UAE and Bahrain) offer hope that El Al can build more of a Middle Eastern regional network. For now, though, Israel’s flag carrier is fighting for mere survival. El Al did manage to secure new investment from a private individual who purchased a controlling 43% stake. Another 28% of its shares are still publicly traded. The government owns 14%. The rest is held by its former controlling shareholder group.

    But unlike most airlines around the world, El Al did not reactivate flying last quarter, for passengers anyway. Q3 RPK traffic was literally down 100% from last summer. And yes, summers are when it typically earns its highest margins. Only with help from cargo did revenues fall not 100% y/y but 94%. Operating costs, though, fell only 75%, hence a negative 277% Q3 operating margin. The airline hasn’t yet secured a government backed bank loan, prompting it to consider issuing bonds as a means to raise cash. It did however successfully issue shares, some of which the government purchased. Many of the airline’s employees have temporarily transferred to the country’s armed forces. As they do return, they’ll be earning less.

    Flights have recently resumed to a few destinations, with a much-anticipated Dubai route opening next month. A strengthening shekel-dollar exchange rate and cheap fuel provide some tailwind. But not enough to ease worries about the ability for El Al to stay in business. The company itself warns of the risk as it asks for more government help.  
  • If only the year were just three months long. And if only those months were July, August, and September. For Aegean, the third quarter is like Christmas for a toymaker. And even this year, its Q3 results were among the best of any airline worldwide. Better said, its results were among the least bad of any airline. It still lost money. But operating margin was just negative 22%, similar to KLM’s figure, if worse than those of Ryanair and Wizz Air.

    Aegean cut ASK capacity 58% y/y. But it also cut operating costs 50%. Revenues, unfortunately, dropped 70%. But it managed to capture 30% of last summer’s revenues without much help from cargo, and with intra-European leisure travel still depressed by inconsistent, uncoordinated, and often changing travel rules adopted by different governments. Greece was mostly open to tourists through the summer, hence the brisk pick-up in demand from near nothing in the spring. As usual though, Aegean’s summertime fun ended in the fall, this time more forcefully than usual as Greece and the rest of Europe experienced another deadly wave of Covid infections.

    After a major spike from mid-October to mid-November, cases in Greece are now declining. But they’re still much higher than the numbers seen during summer. The country is currently in lockdown through Dec. 7. Compounding the country’s difficulties: A 24-hour strike by public sector workers that affected some flights. Aegean is hoping more than any airline that a vaccine comes in time to save next summer season. In the meantime, it’s exploring ways to buttress its cash position. It’s still taking NEO deliveries, including the recent arrival of its second A321. But it will only operate about a fifth of its normal capacity this winter. Ever since buying Olympic Air in 2013, Aegean has been the only major Greek carrier. Local rival Sky Express, however, is looking to use the downturn to set itself up to grow with a small but growing fleet of NEOs. 
Madhu Unnikrishnan
November 29th, 2020 at 12:14 PM EST

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