Key Takeaways from AirAsia (AIRA:MK) Investor Day 2017

9 October 2017, Malaysia – We attended AirAsia (AIRA:MK)’s inaugural Global Investor Day where we caught up with AirAsia Group’s CEO, Tony Fernandes as well as the CEOs of AirAsia’s associate airlines. We also did a tour of their new corporate HQ, RedQ – situated adjacent to Kuala Lumpur International Airport 2 (KLIA2)

Here are our key takeaways on what was featured as well as our verdicts on what is achievable or overambitious:

8% PASSENGER GROWTH TARGET FOR NEXT 10 YEARS

AirAsia Group is on track to carry 72m passengers in 2017, implying strong growth of 27% y/y. Management targets to more than double the Group’s number of passengers carried to 150m by 2027, implying a CAGR of 8%. This is an ambitious but not inconceivable target as long as AirAsia keeps its cost structure competitive and continues to broaden its traffic rights and access to the less penetrated markets. The Asia Pacific airline sector has been growing at 1.5x the region’s real GDP growth and 10.2% y/y ytd. To grow ahead of the sector’s traffic growth, AirAsia Group needs to stimulate new travel demand by keeping fares low and gain market share, especially in the North Asian region. Air travel penetration in ASEAN + 2 remains low at 0.3 flights per capita versus 1.3 flights per capita for EU and 2.5 flights per capita for North America.

Crucial Perspective Verdict: Achievable

AIRASIA GROUP TO EXPAND FLEET TO 500 AIRCRAFT BY 2027

AirAsia is confident that there will be sufficient travel demand in Asia to fill its target fleet of 500 aircraft by 2027 (from 182 aircraft currently in service) with more new aircraft to be deployed to the higher growth markets. It is interesting to note that the implied target fleet capacity growth of 11% CAGR is larger than AirAsia’s target passenger growth of 8% CAGR.

Crucial Perspective Verdict: Overambitious

AIRASIA PHILIPPINES TARGETS IPO IN MID-2018

AirAsia Philippines is gaining market share on domestic routes and targeting for an Initial Public Offering (IPO) in mid-2018. This planned IPO has been postponed several times in recent years due to AirAsia Philippines’ lack of consistent profitability and limited investor appetite. Investors will need to see stronger and sustainable profits from AirAsia Philippines in order for the IPO to attract sufficient interest. AirAsia Philippines only made a small operating profit of PHP400m (or M$29m) in 2Q17. 

Crucial Perspective Verdict: Overambitious

BACKDOOR LISTING OF INDONESIA AIRASIA

Indonesia AirAsia will continue to focus on growing its international route network. The reverse takeover of Rimau Multi Putra Patrama (CMPP:IJ) helps to expedite the long overdue listing of Indonesia AirAsia and is expected to be completed by year end. Indonesia AirAsia has targeted for IPO for numerous years and a backdoor listing expedites this process and will enable Indonesia AirAsia to gain direct and broader access to financing and grow more quickly in the longer term. Management guides that the total gain from the transaction will be around M$230.4m (M$207.5m reversal of impairment that was previously recorded plus M$22.9m forex gain).

Crucial Perspective Verdict: Achievable 

LIKELIHOOD OF SPECIAL DIVIDENDS 

Asia Aviation Capital (AAC) sale is likely to be concluded soon, with AirAsia retaining a stake in it. AirAsia could potentially distribute part of the sale proceeds related to AAC as a special dividend to shareholders. However, this needs to be balanced against the future capital requirements of the newly formed joint venture airlines AirAsia Vietnam, AirAsia China, AirAsia Japan, AirAsia India, as well as AirAsia Indonesia, AirAsia Philippines, AirAsia Thailand and AirAsia Malaysia. AirAsia Berhad’s net debt-equity is already at 1.35x.

Crucial Perspective Verdict: Achievable

AIRASIA INDIA TARGETS TO LAUNCH INTERNATIONAL OPERATIONS FROM 2018

Domestic travel demand is strong and AirAsia India’s passenger load factors are in the high 80s and targets to operate international flights from 2018. Management believes it is well-positioned as the lowest cost operator among the India-based carriers. More capital is needed to fund AirAsia India’s expansion in our view.

Crucial Perspective Verdict: Achievable in late 2018 

AIRASIA AIMS TO BE THE ‘ALIBABA OF TRAVEL’

Just as Ryanair is targeting to become the ‘Amazon of Travel’, AirAsia aims to be the ‘Alibaba of Travel’ to boost profits. Management emphasised AirAsia’s strong focus and investments in digital technology to drive unit cost reduction, enhance customer experience and boost more revenue from ancillary services, improve overall operating efficiency. Mobile bookings are expected 35% of all direct bookings by end 2017 , more personalised communication with passengers based on data gathered will be developed and all relevant aircraft data is to be captured electronically. Targets to raise ancillary income from M$48 to M$60 per passenger with the various initiatives.

Crucial Perspective Verdict: Overambitious

EXTENDING ITS REACH IN CARGO AND GROUND HANDLING

AIrAsia plans to move up the air cargo transport value chain by developing warehousing and logistics capabilities to leverage on the burgeoning E-commerce growth in the region. Targets to consolidate and grow its ground handling business (including the recent purchase of AirAsia X’s ground handling equipment) with the aim of servicing third party airline customers as well.

Crucial Perspective Verdict: Achievable

LONG-AWAITED AIRASIA JAPAN TO START IN END OCTOBER 2017

Limited details were provided.

Crucial Perspective Verdict: Indeterminate

USEFUL AIRASIA ANALYSIS THAT WAS NOT FEATURED DURING INVESTOR DAY

Indonesia AirAsia’s target to double its aircraft fleet by 2020 seems too aggressive as it has had a weak financial track record so far and only started to turn profitable in 2016.

Thai AirAsia is seeing strong traffic growth on Chinese routes. The carrier also plans to add more domestic flight frequencies from Bangkok to Chiang Mai and Phuket. Thai AirAsia X will be a key beneficiary of ICAO’s removal of its red flag on Thailand, enabling the airline to expand more aggressively on lucrative routes to Japan and South Korea.

AirAsia X plans to launch flights to Jeju island in South Korea. Forward bookings are strong, implying passenger load factors are expected to be in the 80+% range, around 3ppts higher y/y in 2H17. However, average fares are expected to remain under pressure.

REDQ – AIRASIA’S NEW CORPORATE HQ

RedQ 2

REDQ

 

REDQ Snooze Pods

Crucial Perspective Verdict: Nice especially the Snooze Pods

DAVID FOSTER PERFORMS WITH AIRASIA GROUP CEO, TONY FERNANDES

David Foster performs with Tony Fernandez

Crucial Perspective Verdict: Tony should stick to his day job.

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