MalaysiaaviationoutlookPart2:AirAsiaand

AirAsiaXfocusonimprovingyieldsasgrowth
slows
17Mar2015

CAPA

MalaysiaAirAsia(MAA)andsisterlonghaulLCCMalaysiaAirAsiaX
(MAAX)areshrinkingtheirfleetsin2015whileadoptinganewcapacity
andpricingstrategy.Bothcarriersaretryingtorestoreyields,which
plummetedinlate2013and2014duetointensecompetitionand
overcapacityintheMalaysianmarket.

MAAisstilladdingsomecapacitybyimprovingaircraftutilisationlevels.
Butpassengernumberswilllikelyremainflatasthefocusonyields
resultsinareductioninloadfactor.

MeanwhileMAAXhascutcapacityacrossitsschedulednetworkaspartof
arestructuringaimedatrestoringprofitability.MAAXwashighly
unprofitablein2014whileMAAwastheonlyprofitableairlineinMalaysia.
MAAwasalsotheonlyprofitableairlineamongtheeightcarriersinthe
AirAsia/AirAsiaXportfolio.

ThisisthesecondinatwopartseriesofreportsontheMalaysianmarketandtheoutlookfor2015.Thefirst
reportfocusedonflagcarrierMalaysiaAirlines(MAS),includingitsupcomingrestructuring,andthe
recentreductioninoverallpassengernumbersinMalaysia.ThereportwillfocusonAirAsiaandAirAsiaX.

Seerelatedreport:MalaysiaaviationoutlookPart1:growthslowsbutcompetitionisstillintense
asMASrestructures[http://centreforaviation.com/analysis/malaysiaaviationoutlookpart1growthslowsbutcompetitionis
stillintenseasmasrestructures213525]

AirAsiaXinterimCEOBenyaminIsmaildiscussesplansforconsolidationin2015
andthepossibilityofresumingexpansionin2016:12Mar2015

AirAsia X CEO Update

from CAPA PLUS

03:43

Source:CAPATV[http://www.centreforaviation.tv/]
MalaysiaAirAsiarecordstheslowesttrafficgrowthinitshistory
AirAsiaGroupsMalaysiansubsidiary,MAA,ended2014withafleetof81A320s,anincreaseofnineaircraft
comparedtotheendof2013.Butseatcapacitywasupbyonly3%andASKsby4%asaircraftutilisationrates
dropped.

MAAcarried22.1millionpassengersin2014,anincreaseofonly1.3%comparedto2013.Thismarksbyfarthe
slowestgrowthratesincetheairlinelaunchedattheendof2000.In2010to2013annualpassengergrowth
rangedfrom9.4%to12.6%.

MalaysiaAirAsia(MAA)annualpassengertraffic:2008to2014

Source:CAPACentreforAviationandcompanyreports

AirAsiaXGroupsMalaysiansubsidiary,MAAX,ended2014withafleetof22aircraft,comparedto19attheend
of2013.Seatcapacityincreasedby33%.ASKswereupby31%,drivenprimarilyfromcapacitywhichwas
addedinlate2013.

MAAXcarried4.2millionpassengersin2014,anincreaseof33.8%comparedto2013.Excludingtheinitialstart
upperiodthismarkedthefastestgrowthsincetheairlinewasestablishedin2007.

MalaysiaAirAsiaX(MAAX)annualpassengertraffic:2010to2014

Source:CAPACentreforAviationandcompanyreports

AirAsiacrossesthe50millionannualpassengermark
The26.4millionpassengerscarriedbyMAAandMAAXcombinedrepresentabouta42%shareofthe
approximately63.2millionpassengersthatflewto,fromorwithinMalaysiain2014.Asoutlinedinthefirstreport
inthisseries,totalpassengertrafficinMalaysiawasupbyabout5%in2014.

MAAandMAAXalsoaccountedfor53%ofthe50.1millionpassengersthattheAirAsiaandAirAsiaXGroupsflew
in2014.AlltheAirAsiabrandedairlinescombinedcarried50.06millionpassengersin2014,anincreaseof9%
comparedto2013.ThismarksthefirsttimeinthehistoryofAirAsiathattotalpassengergrowthfailedtoreach
thedoubledigits.

TherearecurrentlynineAirAsiabrandedcarriers,includingtwowhichlaunchedin2014(AirAsiaIndiaandThai
AirAsiaX)andonewhichlaunchedinJan2015(IndonesiaAirAsiaX).AsCAPApreviouslyhighlighted,AirAsia
becameonlytheeleventhairlinebrandgloballyandthefirstinAsiaoutsideChinatosurpassthe50million
annualpassengermilestone.

Seerelatedreport:AirAsianears50millionannualpassenger/200aircraftmilestones,having
transformedAsianaviation [http://centreforaviation.com/analysis/airasianears50millionannualpassenger200aircraft
milestoneshavingtransformedasianaviation203232]

AirAsiaandAirAsiaXGrouppassengertrafficandfleetsizebycarrier:2014vs2013
Carrier 2014pax 2013pax %growth end2014fleet end2013fleet
MalaysiaAirAsia 22.139m 21.853m 1% 81A320s 72A320s
ThaiAirAsia 12.214m 10.500m 16% 40A320s 35A320s
IndonesiaAirAsia 7.850m 7.853m 0% 30A320s 30A320s
MalaysiaAirAsiaX 4.231m 3.161m 34% 22A330/340s 19A330/340s
PhilippinesAirAsia* 3.031m 2.224m 36% 18A319/320s 17A319/320s
AirAsiaIndia 345k N/A N/A 3A320s N/A
ThaiAirAsiaX 251k N/A N/A 2A330s N/A
IndonesiaAirAsiaX N/A N/A N/A 2A330s N/A
AirAsiaJapan* N/A 183k N/A N/A N/A
TOTAL 50.06m 45.77m 9% 198aircraft 173aircraft
Notes:*PhilippinesAirAsiaiscombinedwithZestAirAsia.Thetwoaffiliatesareexpectedtomergein2015.
*FirstiterationofAirAsiaJapansuspendedoperationsin2013
FleetsizebasedonendoftheyearfiguresprovidedbyAirAsiaBerhadandAirAsiaXBerhad
IndonesiaAirAsiaXhadtwoaircraftattheendof2014butdidnotflyanypassengersin2014duetoanunexpectedlastseconddelayin
launchingservicestoAustralia
Source:CAPACentreforAviation

MalaysiaAirAsiaprofitsareonthedecline
OftheeightAirAsiabrandedairlinesthatwereinoperationduring2014,onlyonewasprofitableMAA.The
originalAirAsiacarrierreportedan8%dropinoperatingprofitsfor2014toMYR854million(USD261million)as
revenuesincreasedby6%toMYR5.416billion(USD1.655billion).MAAsnetprofitdroppedby77%toonly
MYR83million(USD25million)butthiswasdrivenprimarilybyforeignexchangecharges.

MAAsannualoperatingprofithasdroppedfourconsecutiveyears.The2014resultwastheweakestsincethe
2008globalfinancialcrisis.

MalaysiaAirAsiaannualoperatingprofit(inMYR):2008to2014

Source:CAPACentreforAviationandcompanyreports

MAAsprofitabilityandmargins,whichhavetraditionallybeensomeofthehighestintheglobalairlineindustry,is
expectedtodeclinefurtherin2015duetothelaunchofthegroupsnewaircraftleasingsubsidiary,AsiaAviation
Capital.InrecentyearsalargeportionofMAAsprofitshavecomefromleasingaircrafttoitsaffiliates.The
AirAsiaGroupinlate2014begantheprocessoftransferringtheA320soperatedbyitsaffiliatestoAsiaAviation
Capital.

AsiaAviationCapitalaimstoown15aircraftbytheendof1Q2015and45aircraftbytheendof1H2015.
EventuallyAsiaAviationCapitalwillmanagealltheAirAsiaGroupaircraftexcepttheaircraftatMAA,whichwill
remainonitsbalancesheet.TheAirAsiaGroupstatedinits4Q2014resultspresentationthatAsiaAviation
CapitalexpectstogeneratenetincomeofUSD30millionin2015withanEBITmarginof36%.Theseprofits
wereessentiallypreviouslybookedbyMAA.

AirAsiaGroupfleetwillnotgrowin2015asMAAcutsback
Asoftheendof2014,91oftheAirAsiaGroups172A320swereoperatedbyfouraffiliates.Bytheendof2015
therewillbe97A320soperatedbyfiveaffiliates.TheAirAsiaGroupplanstokeepitstotalgroupfleetflatin2015
at172aircraftbutMAAisshrinkingitsfleetbysixaircraftto75A320s.

ThegroupisalsoshrinkingitsPhilippinesbasedfleetbyfouraircraftwhiletheotheraffiliatesgrowbya
collectively10aircraft.TwoadditionalhavebeenallocatedtotheseconditerationofAirAsiaJapan,whichplans
tolaunchservicesbytheendof2015,whileAirAsiaIndiahasbeenallocatedthreeadditionalA320sforatotalof
sixaircraft.ThaiAirAsiahasbeenallocatedfiveadditionalaircraftwhileIndonesiaAirAsiasfleetwillremainflat.

TheadditionalJapanaircraftarecomingdirectfromAirbuswhiletheIndiaaircraftarecomingoutofthefleetin
Malaysia.TheThaiaffiliateistakingthreeexMAAA320sandtwoaircraftdirectlyfromAirbus.

ThegroupoverallhasfiveA320deliveriesin2015butissellingthreeofitsexistingA320sandreturningtwo
A320sthathadbeenleasedbyZest.Thegroupwasoriginallycommittedtotaking17A320sin2015butelected
in2014todefereightofthesedeliverieswhilealsosellingfourofitsdeliveryslots.

AirAsiaGroupfleetplanfor2015

Source:AirAsiaGroup4Q2014resultspresentation

MAAtoimproveaircraftutilisationratesin2015
WhileMAAplanstoreduceitsfleetbysixaircraftin2015capacityisstillexpectedtoincreasein2015asaircraft
utilisationratesimprove.MAAhasnotprovidedseatcapacityorASKguidancefor2015butmostlikelygrowth
endupinthemidsingledigitsforthesecondconsecutiveyear,whichisarelativelylowfigureforthenormally
ambitiouscarrier.

AsCAPApreviouslyoutlined,MAAendedupwithexcessaircraftin2014afterplanstosellseveralA320sfailedto
materialise.AsMAAcontinuedtotakedeliveryofnewaircraftthefleetgrewatamuchfasterclipthancapacity,
impactingutilisationrates.MAAwillhaveanopportunitytorestorein2015itsnormalaircraftutilisationlevels
andthereforereduceitscostbaseastheexcessaircraftaremovedtoaffiliates.

Seerelatedreport:AirAsia2QprofitsdropasitsMalaysianunitgrappleswithexcessaircraft.But
outlookimproving[http://centreforaviation.com/analysis/airasia2qprofitsdropasitsmalaysianunitgrappleswithexcess
aircraftbutoutlookimproving183392]

MAAfocusesonyieldimprovements
WhileMAAisexpectedtostillincreasecapacityslightlydespitethereductioninfleetsizetheremaynotbean
increaseinpassengernumbersastheairlinehasadoptedanewpricingstrategyfocusingonyieldsatthe
expenseofloadfactors.Thisfocusbeganin4Q2014,drivinga17%increaseinunitpassengerrevenueanda
13%increaseinaveragefares.

Buttheairlinesseatloadfactordropped7pptto78%,markingthefirsttimetheMAAfourthquarterloadfactor
dippedbelow80%inseveralyears.Passengernumberswereflatin4Q2014despitean8%increaseinseat
capacity.

MalaysiaAirAsiaoperatinghighlights:4Q2014vs4Q2013

Source:AirAsia4Q2014resultsannouncement

TheuptickinaveragefaresmarkedthefirstyearoveryearincreaseforMAAaftersixconsecutivequartersof
declines.Buttheaveragefarefor4Q2014wasstillwellbelow4Q2012levelsandalsobelowfourthquarterlevels
foreveryyearfrom2005through2011.

TheAirAsiaGroupbelievestheincreaseinfaresandyieldsisan
indicationthatrationalityhasreturnedtotheMalaysianmarket.But fornowitisAirAsia
itsmaincompetitorsintheMalaysianmarket,MalaysiaAirlines
(MAS)andLionGroupaffilaiteMalindoAir,havenotyetsignificantly
actingalone,resulting
adjustedtheirpricingstrategy.AtleastfornowitisAirAsiaacting inthespillingoflow
alone,resultinginthespillingoflowyieldingpassengerstoother
carriersasthemarkethasresisteditsfareincreases.The7ppt
yieldingpassengersto
decreaseinloadfactorin4Q2014wasthelargestyearoveryear othercarriersasthe
loadfactordecreaseforMAAinatleasteightyears.
markethasresistedits
MAAplanstocontinuewithitsnewyieldfocusstrategyin2015. fareincreases
TheAirAsiaGroupstatedinits4Q2014resultspresentationthatit
expectsaseatloadfactorof74%in1Q2015,whichwouldrepresentanother7pptyearoveryeardecrease,asit
isfocusingondrivingyields.

Thegroupistakingagamblethatitscompetitorswilleventuallyfollow.AirAsiahasparticularlybeenhopingfor
anadjustmentincapacityandpricingatMASsincetheflagcarrierenteredarestructuringphaseinAug2014.
ButasCAPAoutlinedinthefirstinstalmentinthisseriesofreportstheaggressivepricingstrategythatMAS
initiallyimplementedin2H2013,whenitfocusedongrowingpassengertrafficandimprovingloadfactorsatthe
expenseofyields,hassofarbeenmaintained.ThenewMASmanagementteamcouldeventuallymake
adjustmentsbutthisishardlyguaranteed.

MAAsinitialhopesforcapacityreductionsatMASarealsounlikelytoberealised.AsCAPAhaspreviously
outlined,thenewMASstrategyenvisionsafocusonregionaloperationswithinAsiaPacific.Asaresultcapacity
cutsthatarelikelytobeimplementedin2H2015willconsistmainlyorperhapsentirelyofreductionsinMAS
longhauloperation.CompetitioninMalaysiasshorthaulmarket,whichistheexclusivefocusofMAAasitdoes
nothaveanyrouteslongerthanfourhours,couldintensifyfurtherasMASincreasesitsfocusonthismarketand
Malindocontinuestoexpands.

Seerelatedreport:MalaysiaAirlinesrestructuring:costcutsmustbedeeptoimproveshorthaul
competitiveness[http://centreforaviation.com/analysis/malaysiaairlinesrestructuringcostcutsmustbedeeptoimproveshort
haulcompetitiveness184815]

MAAXisalsounlikelytobenefitfromcapacityreductionsatMASasMAAXfocusesonthemediumhaulmarket
withinAsiaPacific.ItsonlyrouteoutsidetheregionistoJeddah,adestinationMASisunlikelytodropinits
upcomingrestructuring.

MalaysiaAirAsiaXstartstoseefinancialimprovements
MAAXalsohasadjusteditspricingstrategytofocusonimprovingyields.Theairlinebeganrestructuringits
networkandadjustingcapacityplansinNov2014afterreportingdismalfiguresfortheninemonthsendingSep
2014.MAAXincurredoperatinglossesofMYR308million(USD95million)throughthefirstninemonthsof2014
comparedtooperatingprofitsofMYR71million(USD23million)forthesameperiodof2013.Itsoperating
marginforthefirstninemonthsof2014wasnegative15%evenMASperformedbetterthanMAAXonthis
metric.

Seerelatedreport:AirAsiaXjoinsAirAsiainslowingexpansioninchallengingMalaysiamarket
cutsAustraliacapacity[http://centreforaviation.com/analysis/airasiaxjoinsairasiainslowingexpansioninchallenging
malaysiamarketcutsaustraliacapacity197766]

MAAXwasbackintheblackonanoperatingbasisin4Q2014withanoperatingprofitofMYR90million(USD27
million)comparedtoanoperatinglossofMYR40million(USD12million)in4Q2013.RASKoryieldimprovedby
24%althoughaveragebasefaresdroppedby6%,anindicationthatconditionsinMalaysiasmediumhaul
markethaveremainedhighlycompetitive.

MAAXstillincurredanetlossin4Q2014ofMYR168million(USD50million),27%widerthanitslossfrom
4Q2013,duemainlytoforeigncurrencycharges.ForthefullyearMAAXincurredanetlossofMYR519million
(USD159million)comparedtoMYR88million(USD27million)in2013.ItsannualoperatinglosswasMYR219
million(USD67million)comparedtoanoperatingprofitofMYR31million(USD10million)in2013.

Annualrevenueswereup20%toMYR819million(USD244million).In4Q2014revenueswerealsoup20%,
includinga4%increaseinrevenuesfromscheduledservicesanda173%increaseinrevenuesfromcharters
andwetleases.Ancillaryrevenueswerealsoup12%comparedto4Q2013.

MAAXexpectsfurtherimprovementinyieldsin2015
MAAXstatedinits4Q2014resultspresentationthatitisnowpursuinghigherbasefaresaspartofaneffortto
optimisecapacitytoimprovepricing.MAAXaimstoimproveaveragefaresby16%in2015andisalsotargeting
a20%increaseinancillaries.

ServicestoAdelaideandNagoyahavebeendroppedwhilefrequenciestoexistingdestinationshavebeen
reduced,primarilytoAustralia.MAAXstatedthatotherturnaroundinitiativesincludepursuingstrategic
partnershipswithindustryplayersandexploringnewlesscompetitiveroutes.

Theairlinealsocontinuestotrytoboostyieldsbygrowingthirdpartydistributionviaonlinetravelagenciesand
GDS.AsCAPApreviouslyoutlined,MAAXalsohaslinedupseveralchartercontractsduringoffpeakperiods
whentheairlinehasexcesscapacityduetofrequencyreductions.

MAAXhasbeenoperatingchartersinrecentyearsusingitstwoA340300sandoneA330200s.Butallthreeof
theseaircraftarecomingoffleaseinthecomingmonths.MAAXdecidedin2014tocontinueitscharteroperation
byusingA330300sfreedupfromcapacitycutsacrossitsschedulednetwork.

MAAXtoslightlyreducefleetin2015
MAAXsfleetwillshrinkbyoneaircraftin2015from22aircraftto21aircraftasitstakestwonewA330300sbut
returnsitstwoA340300sandoneA330200.ThetotalAirAsiaXGroupfleetwillgrowbyfiveaircraftto31
A330300sasitsThaiaffiliateaddsfiveaircraftanditsnewIndonesianaffiliateaddsoneaircraft.

AirAsiaXGroupfleetplan

Source:AirAsiaXGroup4Q2014resultspresentation

ThelonghaulLCCgroupisfocusingexpansioninThailandandIndonesia,wherecompetitiononmediumhaul
routesisnotasintense.IntheMalaysianmarketAirAsiaXexpectsASKstobeupbyabout5%in2014
comparedto2013levels.Themarginalincreaseincapacitywillbedrivenbyflightsaddedin2014,particularlyto
NorthAsia,asAirAsiaXisreducingcapacitytoAustralia.

MAAXalreadystartedtoslowdownitsrateofexpansionin2H2014.MAAXASKsforthefullyearwereupa31%
forthefullyearin2014butbyonly8%4Q2014.

ThereductioninfleetandcapacityatMAAXissensibleastheairlinepursuedexpansionin2H2013and2014
whichprovedtobeoverambitious.MAAXonlyoperatedafleetofnineaircraftattheendof2012.Asaresultthe
21aircraftplannedforend2015stillrepresentsamorethandoublingofthefleetoverthelastthreeyears.
MAAXsrateofgrowthpeakedin4Q2013,whenAirAsiaXASKswereup49%comparedto4Q2012.

AirAsiaXquarterlyASKs:1Q2012to4Q2014

Source:CAPACentreforAviationandcompanyreports

AirAsiaXfocusesonconsolidationfor2015
AirAsiaandAirAsiaXfounderTonyFernandessaidatamediaeventinSydneyon12Mar2015thatMAAXwill
addbackcapacitytoAustraliabyreinstatingdoubledailyflightstoMelbourne,PerthandSydney.MrFernandes
alsosaidMAAXislookingtoresumeservicestoAdelaideandlaunchservicestoAuckland,suggestingthe
recoverystrategyforthelonghaulLCCshouldbetoexpandandaddflightsratherthanshrink.

MAAXpreviouslyservedChristchurchinNewZealandbutdroppedtherouteaspartofa2012network
restructuringthatalsoincludedthesuspensionofservicestoLondon,Paris,MumbaiandDelhi.MrFernandeshas
sincerepeatedlystatedthegrouphasambitionstoreturntoEuropealthoughformerMAAXCEOAzranOsman
Rani,whowasreplacedinFeb2015,alwaysdownplayedthepossibleresumptionoflonghauloperationsand
wantedtheairlinetofocusonmediumhaulrouteswithinAsiaPacificuntilitturnedthecornerandtooknew
generationwidebodyaircraft.

ExpectedcapacitycutstoEuropebyMASandlowerfuelpricescouldpotentiallyleadtoafasterreturntoEurope
forAirAsiaX.ButMAAXsnewinterimCEO,BenyaminIsmail,hasmadeitclearthatcapacityreductionsand
costcuttinginitiativesarestilltheshorttermpriorities."Forthemomentforthisyearit'sallaboutconsolidation,"
MrIsmailsaidina12Mar2015CAPATVinterview."Tomakesureweputourselvesbackintheblackinterms
ofprofitability[and]ensuretheroutesweoperateareoptimisingintermsofprofitability."

Giventherecentlossesandcurrentefforttoraisemorecapital
ishardlyinacondition MAAXishardlyinaconditionwhereitshouldagainbepursuing
strategicexpansion.Italsodoesnothavetheaircraftto
whereitshouldagain reaccelerateexpansionfollowingdeliverydeferralswhichwere
bepursuingstrategic announcedinNov2014.
expansion MrIsmailhastalkedaboutthepossibilityofdeferringmoreaircraft
butalsohassignalledthepossibilityofresumingexpansionin2016,
includingrelaunchingservicestoEurope,ifMAAXsucceedsatturningaroundandbuildingupitscashpositionin
2015.MrIsmailtoldCAPATVthatMAAXhasthesparecapacitytopotentiallyresumeservicetoNewZealandin
late2015butitisalsolookingatwaitinguntilearly2016forlaunchingAuckland.Healsoseesopportunitiesto
potentiallyresumeservicestoIndiaanduseIndiaasastopoverforEurope.
Malaysiamarketoutlookmaybrightenin2H2015...ifairlinesarerational
ThecurrentAirAsia/AirAsiaXstrategyfortheMalaysianmarketoffocusingonimprovingyieldswhilereducing
theMalaysiabasedfleetmakessense.WatchingMASmaintaincapacityandanaggressivepricingstrategyover
thelastseveralmonthsisfrustratingbutAirAsianeedstorideoutthestorm.

MASwillfinallytransitiontoitsnewstructureinJul2015andstartimplementingitsrestructuringplan.AirAsia
maynotgetthecapacitycutsithopesforfromtheMASrestructuringasMASisexpectedonlytotweakits
regionalnetworkwithinAsiaPacific.ButthecompetitivedynamicsintheMalaysianmarketarelikelytochange
asMAScompletesitslongoverduetransitiontothenewcompanyandthenewmanagementteamtakesover.

MarketconditionswillremainhighlychallenginginMalaysiain2015,particularlyinthefirsthalfoftheyear.But
theoutlookcouldstartimprovingin2H2015,particularlyifAirAsiamaintainsitsnewmoreconservativeapproach
tocapacityandpricing.Nowisnotthetimetoresume"strategic"expansion,evenifothersarounddoso.AirAsia
stillretainsitsfirstmoveradvantageandthisshouldcarryitthroughinthenearterm.

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