Monday, May 30, 2011

AirAsia X IPO

I still stand firm with my intention to boycott AirAsia...and that includes to not subscribe to its IPO of AirAsia X.

I am impressed, though, at how well the writer of the Star making use of the Singapore Airlines' plans to start a long-haul budget carrier to relate to the so-called credibility of AirAsia X's business model.

These ignorant, greedy-for-recognition people are still claiming they're the originator of a long-haul budget carrier? Sigh. Google for 'Sir Freddie Laker", will you?! Or check out the Wikipedia article about him.

Singapore Airlines' plans to start a long-haul budget carrier have added credibility to AirAsia X's business model and augurs well for the latter's proposed initial public offering (IPO) exercise.

“SIA would have studied this plan extensively before deciding to embark on it. The plans will definitely help us with our IPO and will give us credibility - there is a market for running a long-haul low-cost airline,” AirAsia X Sdn Bhd chief executive officer Azran Osman-Rani told StarBiz.

AirAsia X is most likely to appoint its IPO advisers next month to raise between RM900mil and RM1bil.

“What is important now is that we do not lose our four-year lead as an airline we cannot lose our first-mover advantage. Now is not the time to scuttle and not grow; key issues that need to be addressed include route approvals and key infrastructure like KLIA2 (the new low-cost carrier terminal) being up and running on time,” he said.

Azran said it was vital for AirAsia X to fully capitalise the next 12 months (before SIA's new airline starts operation) and grow as quickly as it could.

According to data compiled by the Centre for Asia Pacific Aviation, SIA recorded a passenger growth of some 11% over the past decade, having transported 16.6 million passengers as at the end of its fiscal year on March 2011. Meanwhile, Changi airport grew 32% over the decade, recording 42 million passengers as at end last year.

Changi's growth was not led by SIA, which had seen its market share erode from 50% to 35% in the last three years. Other airlines, notably low-cost carriers, had helped Singapore's airport grow.

While Changi grew 13% to 42 million passengers last year (year-on-year), KL International Airport grew 14.8% to 34.1 million passenger in 2010 from a year ago.

A local analyst pointed out that Changi's traffic growth rate was lagging behind Jakarta and Kuala Lumpur, and if the momentum continued, Changi would be a smaller airport in the next five years and could lose its prominence as the hub of the region.

“Malaysia needs to realise that we have a head start (in LCC space). AirAsia has shown that you can succeed where there is competition. For instance, there were concerns when Tiger Airways was launched but AirAsia has continued to grow and succeeded,” said Azran.

SIA wanted to establish a new no-frills, low-fare airline operating wide body aircraft on medium and long-haul routes. The move was to help the group serve a largely untapped new market and cater to the growing demand among consumers for low-fare travel, following an extensive review and analysis.

To be operational in a year, it will be wholly-owned by SIA but operated independently and managed separately from SIA.

“As we have observed on short-haul routes within Asia, low-fare airlines helped stimulate demand for travel, and we expect this will also prove true for longer flights,” SIA CEO Goh Choon Phong said in a statement.

Analysts have mixed views on SIA branching out into the long-haul low cost model.

Kim Eng Securities said in a report that SIA was well-suited to run a budget airline as the airline has been very cost conscious despite its premium branding.

“Other than technical know-how and operating experience, having SIA as a parent brings several advantages, such as bulk purchasing and cheap funding,” the report said.

While some overlap on routes could be expected, budget airlines could create their own market of new travellers and SIA was unlikely to risk its profitable branding on its own premium product, Kim Eng added.

However, OSK Research expects SIA's long-haul budget airline to be value destructive to SIA's premium branding and would potentially dilute yields. “A key to succeeding in the low-cost business is generating passenger volume and we believe this could succeed for shorter haul routes as revenue and high margins are primarily driven by ancillary income initiatives,” it said.

Although Australia's Qantas Airways has successfully differentiated its LCC product with subsidiary Jetstar, there were airlines that have attempted similar feats such as Oasis Hong Kong, but failed due to their inability to shift to a low-cost base structure.

“SIA may face this hurdle although we think the group stands a better chance of succeeding compared with Malaysia Airlines given its tight cost discipline,” OSK Research said.

From the Star, "AirAsia X IPO gets a boost".

Just over half a decade ago it was hard to predict that travellers would be able to fly long haul destinations like London, Paris, Christchurch, Melbourne, Tokyo and even Tehran at a fraction of the cost that premium airlines charged.

Today that has become a reality. Hopefully in the near to medium term more destinations are added to budget-carrier AirAsia X's (AAX) network so that travellers can fly far and wide on this long haul low-cost carrier.

Route expansion is a vital component for AAX and key to its sustainability. Without government approvals for new routes, its growth will be hampered. It needs both primary and secondary routes and this is what potential shareholders will scrutinise if they were to invest in this airline which is planning an initial public offering (IPO).

AAX will be the first long haul low-cost carrier to be listed on a stock exchange but the IPO has been postponed to next year. Originally the plan was to list in the second half of this year. This airline has access to key Asia-Pacific markets, Europe and eventually Middle East and the United States.

Soaring crude oil prices that has pushed jet fuel prices to US$140 a barrel is a factor to the delay and hence its route expansion.

"To have a successful IPO you need to show the prospective shareholders that your financial results are very promising. It is no secret that soaring fuel prices are crippling profits margins and that remain a challenge.

"AAX also needs to let its operations mature to show good results so that it would lead to a better story telling," said an analyst with Maybank Investment Bank.

Analysts are also predicting a turbulent year for airlines this year due to soaring jet fuel prices and they see a u-turn in prices in the near to medium term.

Passenger numbers may be strong but the imposition of higher fuel surcharges and fares to combat rising cost will cause travellers to delay travel plans.

The International Air Transport Association (which has 230 airlines as its members) released data showing a 2% traffic loss by Asia-Pacific carriers in March compared with February. This led to a sharp 2.3% fall in load factor to 74.2%.

So, delaying the IPO may be apt, said an analyst.

AAX has yet to appoint investment bankers. It may do so soon and the plan is to list on Bursa Malaysia and have a dual listing on a foreign exchange, possibly bourses in Hong Kong, the US or Europe.

How much they will raise will depend the valuations and over 1bil ringgit (US$328mil) in valuation is not surprising.

AAX CEO Azran Osman-Rani had said the amount raised would be similar in size to that of its sister airline AirAsia in 2004, which received 863mil ringgit from the sale of 700.51 million new and existing shares.

The listing will be a test case and it would be closely watched by global airlines simply because it is rare that a long haul low cost carrier can sustain for so many years and still create waves when so many others have failed miserably.

The idea of the long haul low-cost carrier was conceptualised and announced on Jan 5, 2007 amid widespread belief that such a model was doomed for failure. It also came about at a time when the world's first low-cost long haul carrier Oasis of Hong Kong (which offered flights from Hong Kong to London via Gatwick) collapsed.

But the promoters of AAX which included the flamboyant Tony Fernandes just went ahead despite the scepticism.

Fernandes said: "No one has looked hard enough at the model. That's how new businesses are built. In time you shall see. They can succeed but we aren't going to tell all now. Time will tell."

What AAX did was to replicate AirAsia's proven short haul model, despite scepticisms that it was not workable for long haul operations.

AAX capitalised on the AirAsia branding, its scale, had access to AirAsia's feeder traffic and operations and catered for the demand of the middle class population since premium class travel was expensive.

"It was an opportunity and they saw it," said an analyst.

Fernandes and his long time friend Kamaruddin Meranun are founding members of AAX and AirAsia - an airline which has created a strong name for itself in the global aviation market place.

AirAsia was designed to cater to markets that were within the four-hour flying range.

AAX's inaugural flight was to Gold Coast, Australia in November 2007. It had to then lease aircraft but there has been no turning back though the fight for routes remained its biggest challenge.

It is still fighting to fly into the controversial KL-Sydney and KL-Jeddah routes, which are primary routes but it has been told to add more secondary points before having access to these routes.

A year after AAX was formed, Fernandes got Virgin Group boss Sir Richard Branson to invest in AAX, Today, AeroVentures Sdn Bhd hold 52% in AAX, AirAsia 16%, Virgin's interest is held by Corvina Holdings (10%), Orix Corp of Japan (11%), and Manara Malaysia Ltd (11%).

AAX flies to 15 destinations - Gold Coast, Melbourne, Perth, New Dehli, Mumbai, Hangzou, Tianjin, Chengdu, Taipeh, Tokyo, Seoul, Tehran, London, Paris, and Christchurch.

The recent earthquakes in Japan and Christchurch did not deter the airline's efforts to connect people even though it affected its load factor as demand was lower.

On the radar screens are destinations like Busan, Sydney, Jeddah, Osaka, Fukuoka, Nagoya, Istanbul, Dubai, Abu Dhabi and the US.

AAX boss Azran Osman-Rani has resigned to the fact that "we just have to wait patiently for the rights."

AAX operates a fleet of 11 aircraft, of which nine are A330s and two A340s. To cater for future growth it has committed and paid deposits for 30 aircraft, comprising 17 A330-300s, 10 A350s and three A330-200s.

It has delayed taking delivery of aircraft this year but will take two in the middle of next year. Some of these aircraft are more fuel efficient compared with others that are flying across the globe now.

Those who travelled on this airline loved the pricing the airline offerred although for the leg room in the economy class was slightly smaller than that of premium airlines. However, its XL seats are a favourite among travellers that prefer some kind of comfort at a fraction of the cost of a business class seat on a premium airline.

The airline flew 1.92 million passengers last year and hoped to carry 2.7 million in 2011.

Does the long haul low cost model work?

The proof is in the financial results and for financial year ended Dec 31, 2010, AAX recorded a net profit of RM81mil, which translated into a 14% return on equity and its core operating profit was RM52mil.

The challenge of getting routes and managing margins due to high jet fuel prices are real but the biggest winner are Fernandes and Kamarudin.

He will certainly be laughing all the way to the bank for he has three IPOs planned this year - AAX, Thai AirAsia and Indo AirAsia. Of the three, getting AAX listed will not just be a major coup but he would once again get to prove the skeptics wrong.

From Yahoo! News, "COMMENTARY: AirAsia X's IPO an eye-opener".

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