KUALA LUMPUR: AirAsia Bhd, Southeast Asia’s largest low-cost airline, has made a presentation to the government to facilitate low-cost carrier (LCC) growth by having a low-cost carrier terminal (LCCT) in Kota Kinabalu.
Sources close to AirAsia said the presentation was made a few months ago.
The presentation demonstrated how the LCCT and LCC business model would benefit the economy and spur growth in the aviation industry, said the source, adding that outbound and inbound travel in Sabah and Sarawak was increasing and would be a big market for AirAsia.
AirAsia operates 504 weekly flights to and from the Kota Kinabalu International Airport (KKIA).
“The LCC business model allows AirAsia to grow at a fast rate because all that is required is a simple terminal and simple airport facilities. All these would translate into low operating cost and low charges.
“This will allow AirAsia to offer low fares and stimulate demand, and generate more revenue for airports. The catalytic impact would be higher contribution to the country’s economy,” the source told Business Times.
Other cities around the world that have LCCTs include London, Brussels and Tokyo.
When AirAsia moved from Terminal 2 of KKIA — where it had been operating for 12 years — to Terminal 1 (main terminal of KKIA) last year, it incurred a higher operating cost as the passenger service charge (PSC) was raised to RM65 from RM32.
“Because of the higher PSC, the total cost of travel increased and this affected demand significantly for AirAsia,” said the source.
AirAsia cut the number of flights from Kota Kinabalu by five per cent after it moved to Terminal 1, which is 4km away from Terminal 2.
It cut the Kota Kinabalu-Bali and Kota Kinabalu-Jakarta routes because of low passenger volume.
“AirAsia had no choice. It needed to make money on these routes, which went into the red because of the higher cost.”
AirAsia has been successful in reducing operational cost through service savings (no-frills cabin service), outsourcing and electronic tickets.
The carrier is able to offer fares that are 40 to 60 per cent lower than its full-service competitors.
Cost advantages arising from the nature of its operation include higher seating density and higher daily aircraft utilisation flying out of secondary airports.
“The formula for low cost is to increase the affordability of air travel. By doing that, budget airlines will be able to attract more people, which will increase the load factor.
“This, in turn, gives the airlines more money, which they could use for expansion, increasing frequencies and developing more routes. All these would create more growth for the country.
“However, if travel becomes unaffordable and the load factor decreases, the airlines will suffer and cut back on expansion. As growth level declines, there will also be loss of revenue for the government,” said the source.
Meanwhile, MIDF Research has a “buy” call on AirAsia, with a target price of RM3.34, as it is a beneficiary of robust travel demand.
AirAsia Bhd, which is the largest contributor to the AirAsia Group, displayed impressive operating numbers in the third quarter of this year, with demand growth of 11 per cent year-on-year, outpacing capacity growth of two per cent.
MIDF transport and logistics analyst Tay Yow Ken said this had led to a higher load factor of 89 per cent, increasing the probability that the fourth quarter load factor could breach the elusive 90 per cent milestone.
“In addition, more rational pricing strategies by competitors have eased pressure on average fares, lending support for AirAsia’s yields to improve.
“While cognisant of the fact that the bulk of AirAsia’s expenses and almost all of its borrowings are denominated in US dollar, we believe the recent share price drop could have been overdone.
“Our positive view stems from foreign exchange hedges which are in place, such as 58 per cent of its aircraft operating leases which are hedged at 3.24, and 30 per cent of revenue are denominated in foreign currency, granting AirAsia a natural hedge. Besides, low jet fuel prices would offset most of the effects of the weaker ringgit,” Tay told Business Times.
The current average jet kerosene price of US$52 (RM229) per barrel is 20 per cent lower compared with US$65 per barrel last year.
Most analysts have a “buy” call on AirAsia after the recent selldown, with RHB Investment Bank having a target price of RM3.60.
AirAsia closed at RM2.64, down 2.9 per cent, on Bursa Malaysia yesterday.