AirAsia Won’t Always Be Able to Fly More Cheaply Than Its Budget Rivals

  • Skift Take
    For 16 years the Malaysian carrier has grown by keeping its costs lower than its competitors have. But AirAsia may see its wings clipped as it faces a price war led by savvy new regional players, such as Malindo Air, a Malaysian airline launched in 2013.

    Budget airlines are all about cheap flights — AirAsia really brings new meaning to the term.

    Its non-fuel costs are the lowest in the entire industry. At 1.73 U.S. cents per available seat kilometer, they’re less than half of Ryanair Holdings Plc’s 3.59 cents and about one-sixth of the amount paid by the big three U.S. carriers, according to data compiled by Bloomberg.

    In deciding whether the stock deserves the one-third run-up it’s enjoyed so far this year ahead of annual results due later Tuesday, it’s worth asking how that’s possible — and more to the point, whether it’s sustainable.

    Some of AirAsia’s cost edge comes from features that are common to almost all budget carriers. It buys just one type of aircraft — Airbus SE’s A320 series — and does so in vast numbers. One in 13 of the orders for the new version of the A320 are destined for AirAsia.

    That has several advantages. As such a crucial customer, AirAsia’s co-founder Tony Fernandes can influence the design of new aircraft so that they’re tailored to suit his needs. When it comes time to pay the bill, he can enjoy a hefty discount off the sticker price, to the extent that almost a fifth of AirAsia’s revenue comes from operating lease income — essentially, renting planes to other airlines in the AirAsia group.

    The simplicity of having a single plane means the Malaysian carrier doesn’t need to train and equip separate maintenance and flight crews for a myriad different models. The avoidance of long-haul routes means aircraft can be turned round multiple times in a day, helping them to pay for themselves quicker and reducing the risk that flight crews will have to put up in a costly hotel overnight.

    Single-class cabins filled with passengers who pay handsomely for their airport check-in, seat allocation and warmed-through nasi lemak means that complexity is minimized. It also maximizes ancillary sales, which make up roughly another fifth of revenue.

    That only explains the difference between a full-service and a low-cost carrier, though. How is AirAsia undercutting even the likes of Ryanair?

    The biggest reason is infrastructure. Just 16 percent of AirAsia’s operating costs in 2016 went on “user charges”: airport fees, ground operations and air traffic control. At EasyJet Plc, the figure is close to 40 percent, and even at Ryanair, which obsessively seeks out low-cost regional airports, it’s around 30 percent.

    That makes sense in a southeast Asian market that’s still only just beginning to experience low-cost travel. Airports in relative backwaters like Bintulu, Pontianak or Hat Yai aren’t going to charge what would be demanded in their respective capitals of Kuala Lumpur, Jakarta or Bangkok, so airlines that funnel traffic to those destinations are able to reduce their cost base.

    Another advantage is geographic. Relative to Europe and the U.S., major destinations in Asia are relatively far apart and low-cost carrier routes are concomitantly long. The average AirAsia passenger flew about 1,300 kilometers in the 12 months through September, compared to 1,100 kilometers at EasyJet.

    That matters because taxiing, take-off and landing consume an outsized portion of fuel. Shorter hops where more time is spent climbing and descending are some of the least fuel-efficient flights out there.

    At just 0.95 cents per available seat kilometer, AirAsia’s fuel costs are among the lowest in the industry. EasyJet pays about 1.4 cents, while Ryanair’s array of short-haul destinations give it an eye-watering 2.14 cents.

    The bigger issue is how long this model can continue. Not all elements of AirAsia’s cost base are cheap. In contrast to the penny-pinching that’s set Ryanair’s staff at the throats of management in recent months, AirAsia’s employee costs are relatively high for a budget carrier, accounting for about 14.4 percent of revenue.

    Non-cash expenditure on that massive fleet doesn’t come cheap, either. Depreciation charges amounted to almost 13 percent of revenue in the 12 months through September, more than double the median among the 91 airlines for which Bloomberg has data.

    Most importantly, there’s the question of how long those ultra-low airport and traffic charges can continue. AirAsia has done magnificently from getting in at the ground level of its region’s discount-travel boom, but at present, its profits depend in large measure on airports resisting the lure of higher rents.

    Once Asia’s airports wake up to the cash machine the growth of low-cost aviation represents, the sky on that line-item could really be the limit.

    ©2018 Bloomberg L.P.

    This article was written by David Fickling from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to

    Photo Credit: An aircraft operated by AirAsia X taxis past a Malaysian Airline aircraft on the runway. The budget airline's biggest money-saving secret is that it has kept its fees paid to airport fees, ground operations, and air traffic control, much lower than its rivals like Ryanair and Easyjet have. Bloomberg / Goh Seng Chong
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