ANALYSIS: AirAsia eyes better days at KLIA

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AirAsia believes that its competitors (read Malaysia Airlines) are "starting to become rational again,” and this view appears to be borne out by capacity figures at Kuala Lumpur International airport (KLIA).

Flightglobal’s Capstats database shows that 2014 will see capacity growth of 5.3% to 33 million seats over the previous year. While impressive, this could be well below the 8.7% average capacity growth rate since 2007, and well below 2013’s growth of 14.8%.

Even more significant than the numbers are the views of Malaysia’s airline king: AirAsia chief executive Tony Fernandes.

“There have been improvements in terms of fare movements,” said Fernandes in AirAsia’s second quarter results statement. “Our average fare is on a positive upward trend as competitors have started to become rational again. We foresee capacity in Malaysia reducing and there will be re-alignment of business strategy by competitors to ensure sustainability.”

Capstats shows that capacity through KLIA fell in July 2014 compared with the same month a year earlier. This is the first time that outbound July-July capacity at KLIA has declined since 2006.

July-to-July outbound capacity at KLIA

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It is worth noting that 2006 saw the advent of a major restructuring at MAS. Capstats shows that from 2005 to 2006 the flag carrier cut outbound capacity by 14.5% to 24.8 million seats.

This previous MAS restructuring pushed monthly outbound capacity at KLIA down to nearly 1,000,000 seats in the summer of 2006.

Capacity growth at KLIA

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Eight years later MAS faces an even greater existential crisis. Quite apart from the tragedies of MH370 and MH17, its strategy of competing with AirAsia on price alone appears to have exhausted itself.

The challenges facing Malaysia’s government, which will effectively nationalise MAS when state investment firm Khazanah takes over and delists the struggling carrier, are those that other governments are all too familiar with: unprofitable routes, a bloated workforce, distracting business units, costly contracts, and an inefficient fleet.

Though painful, capacity cuts at MAS (along with other big changes) will be one of several important steps necessary to make it a viable enterprise.

If MAS's capacity cuts deepen, the real beneficiary will be AirAsia, which can look forward to a nice profitability bump for the second half of 2014.