AirAsia Investment Note – The Market

Market Positioning

  • Competition Market: Short-haul Low-cost Carrier within 4 hours flight radius from the hub
  • Market: Malaysia, Thailand, Indonesia, Philippines, India, Japan, China
  • LCC Market leader in the Globe: Southwest (US), RyanAir (Europe) & EasyJet (Europe)
  • LCC Market leader in Asia: IndiGo (India), Cebu Pacific (Philippines), VietJet (Vietnam), SpiceJet (India) and privately-held Lion Air Group (Indonesia)

 

Performance Benchmark (Global)

Southwest RyanAir EasyJet Average (Top 3) AirAsia
Passenger Carried (Million) 152 120 73 N/A 57
Aircraft Fleet 723 341 257 N/A 217
Staff Size 53,536 13,026 10,000 N/A 16,067
Founded 1967 1984 1995 N/A 2002
ASK (Million) 239,022 157,569 87,724 N/A 80,200
Load Factor 84% 94% 93% 90% 85%
Average Revenue Per Passenger $135 $59 $85 $93 $51
RASK USc 8.55 4.98 7.08 6.87 3.43
CASK USc 6.97 3.83 6.32 5.71 2.68
Cask Ex-fuel 5.45 2.4 4.63 4.16 1.73
Operating Profit Margin 18% 23% 11% 17% 17%
Core OPEX over Sales 69% 77% 83% 76% 77%

Excluding the Full-Service Carrier (FSC), there’s around 30 LCC in the world carried more than 1 million passengers on an annual basis. Southwest is the largest LCC in the world by carried 152 million passengers while AirAsia ranked 4th largest LCC in the world by carried 57 million passengers.

While AirAsia can maintain a profitable operating profit margin at 17% which is the average industry operating margin, AirAsia remains the cost leader in keeping the operating expenses low to offer low-cost fares to passengers and achieving the industry load factor benchmark of 85%.

Performance Benchmark (Asia)

AirAsia IndiGo JetStar Cebu VietJet SpiceJet Nok
Passenger Carried (Million) 57 44 24 19 14 12 9
Aircraft Fleet 217 131 95 57 41 42 32
Staff Size 16,067 14,604 Unknown 4,123 2,435 5,360 1,400
Founded 2002 2006 2004 1996 2011 1983 2004
ASK (Million) 80,200 54,583 48,703 25,989 16,498 12,916 6,264
Load Factor 85% 85% 83% 82% 88% 91% 85%
Average Revenue Per Passenger $51 $67 $117 $65 $86 $66 $59
RASK USc 3.43 5.16 5.77 4.76 4.35 6.06 6.06
CASK USc 2.68 4.56 5.10 3.82 3.89 4.30 7.53
Cask Ex-fuel 1.73 2.82 Unknown 2.60 2.43 2.68 6.21
Operating Profit Margin 17% 11% 12% 20% 12% 29% -19%
Core OPEX over Sales 77% 80% Unknown 75% Unknown 83% 105%

In Asia, AirAsia is the largest LCC by passenger carried. The main contenders in Southeast Asia are the Indonesia-based privately-held Lion Air Group which have 272 aircrafts by the end of 2016. AirAsia achieved the best unit cost (CASK) compared to Asia rivals and gave them the advantage of offering lower fares on expanding more routes and destinations.

 

Target Market

Country AirAsia Market Share

(Passengers carried)

Air Passengers Market Size 2016

(million)

Population

2016

(million)

Population

2035

(million)

LCC Competitors
Malaysia 49% 68 31 38 Lion Air Group
Thailand 22% 122 69 67 Nok
Indonesia 8% 90 261 305 Lion Air Group
Philippines 11% 46 103 131 Cebu Pacific
India 4% 131 1324 1585 IndiGo, SpiceJet
Japan Nil 141 127 117 Vanilla Air, JetStar, Spring, Peach
Vietnam Nil 52 93 108 VietJet
China Nil 490 1379 1408 Spring

 

Malaysia – A Small Cash Cow

Malaysia is a cash cow market (dominating at 49% market share) for AirAsia, but it has the smallest population among the target market and Malaysia also experiencing slightly slower growth regarding passengers carried 3-years-CAGR of 7%. The future of AirAsia is out of Malaysia, namely Thailand, Indonesia, Philippines, India, Japan, Vietnam and China.

 

Thailand – Nice-to-have Market

Zooming into AirAsia’s second largest market by profit – Thailand. Although Thai AirAsia achieving passengers carried 5-years-CAGR of 20%, the population is not increasing (is shrinking by 2035) and not big enough like other major Asian countries. Two of it’s LCC rival in Thailand – Thai Lion and Nok are facing operational difficulties. Thai Lion has low utilisation of current fleet and excessive order of aircraft. Nok is suffering a 19% operating loss margin and carried 9 million passengers in 2016 (Thai AirAsia carried 17 million passengers in 2016).

 

Indonesia – Tough Market

Indonesia is AirAsia’s third largest market yet facing intense competition from Lion Air Group. Indonesia AirAsia achieves a slow growth: passengers carried 5-years-CAGR of 5%. In the back of Lion Air Group aggressive fleet expansion plan, this will be a tough market for AirAsia on commanding a bigger market size. In 2012, Indonesia AirAsia deployed a total of 22 aircraft fleets and since then increase and reduce throughout the years. In 2016, Indonesia AirAsia still maintaining the fleet size at 22 aircraft fleets. Regarding market size, AirAsia achieved peak at 11% in 2014, reduced to 9% in 2015 and further reduced to 8% in 2016. In FY2016, the operating profit is only 3%, but the 1Q17 and 2Q17 did showing positive results that Indonesia operation had the turnaround. Despite the pullback from the Indonesia operation, this market will require some time for its competitors to be rational on the aggressive expansion. At the meantime, AirAsia strategy will be focusing on profitable international route from Thailand and opening of unique routes to stay away from Lion Air Group in the meantime.

 

Philippines – Too Early To Say, Keep In View

Philippines AirAsia commenced first flight in 2012 and later acquired Philippines’ Zest Airways. In 2016, they achieved an 11% growth in passengers volume while Cebu Pacific grew only 4.1%. This market is yet to see fruition as it still at early stage of growth.

 

India – Big Market For Many Players

India AirAsia is the star market for AirAsia in the next decades with a whopping 1.324 billion population, almost double the size of Southeast Asian populations. The competition is intense too with 2 LCC, IndiGo carried 44 million passengers, and SpiceJet carried 12 million passengers. India AirAsia only managed to carry 2.45 million passengers in 2016 on the back of result that they first commence flight in 2014. Investors should take a close eye on how IndiGo and SpiceJet are performing to decide whether AirAsia can rely on this market as the catalyst market. SpiceJet is a smaller LCC rival and currently achieving only a 2% passenger carried 5-years-CAGR. IndiGo is the India’s largest LCC which achieving 28% passengers carried 5-years-CAGR. As of 2016, IndiGo has 131 aircraft fleet, and India AirAsia has 8 aircraft fleet. However, IndiGo has a much higher CASK and lower operating profit margin at 11%-13% which gives AirAsia an advantage to leverage on the strength of low CASK on offering lower fare as compared to IndiGo.

 

Japan – Unknown Market With Intense Competition Among LCC

Same like Thailand, the Japan population is shrinking from 127 million (2016) to 117 million (2035). At the same time, this market has more prominent LCC such as Vanilla Air, JetStar, Spring and Peach. Japan AirAsia had yet to commence the flight but expecting to commence within 2017.

 

China – Soon-to-be Largest LCC Market In The World

China is having a large population of more than 1.379 billion people but still having a low LCC adoption rate of 10.4% in 2016. This indicates there’s huge room for LLC to grab the market share. As of 2016, 488 million passengers travelled through airlines in China while the 7 only public-listed China airlines (excluding Cathay Pacific) command about 83% of the passengers volume at 407 million passengers. At the meantime, Vietnam, Indonesia, Malaysia and Thailand are having at least 50% LCC adoption rate. The competitors are entering into this lucrative market as well. Spring Airlines is the largest LCC in China with 74 fleets to date and carried 14 million passengers in 2016 which is still in the early growth stage. Investors should keep all eyes on the execution of the joint venture progress between AirAsia with state-backed financial firm Everbright Group and Henan State Government. However, AirAsia is expecting a long 5 to 10 years to produce significant results from this market.

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