AirAsia X has taken the decision to "pay for growth", pumping in capacity at the expense of yields, in an aggressive effort to dominate the region’s long haul low cost market.
In an interview with Flightglobal, AAX chief executive Azran Osman-Rani says the long-haul low-cost unit's poor 1Q performance was no surprise considering the 60% year-on-year capacity increase.
The carrier posted an operating loss of M$38 million ($11.8 million) for the quarter ended 31 March. Its revenue per ASK fell 18% to 3.67 US cents, while CASK including fuel rose 2% to 3.83 US cents.
"Some of our earning pressures are a result of our own doing, as we pay for growth,” says Azran. “It's deliberate with our IPO strategy that money raised will fund growth.
"We felt that growth is strategically very important in the short term, so we embarked on big 12-15 month year-on-year growth, because this is a business where being number one in your market segment is critical."
Though the long-haul low-cost market is under-penetrated in the Asia Pacific, and there is plenty of room for growth, it is essential to have a first-mover advantage, he says. It is key to build scale against competitors such as Cebu Pacific, and Thailand’s upcoming NokScoot.
AirAsia X annual capacity growth
The plan is to stay ahead of the pack and grow to a fleet of 30 aircraft by 2015, double the size of its competitors.
"In South East Asia, we're the largest LCC group. If you're less than half of the big player in a market, you get crushed. If you're a late comer, and by the time you enter, the guy there is 2-3 times your size, it's almost game over from day one," explains Azran.
Choosing to expand its operations now, will also pay off, since it means securing desirable slots ahead of the competition: "If you get slots before all the other new wannabe LCCs get there, it inhibits entry. They may not get good slots, or none at all."
These considerations were behind AAX’s consolidation in 2011, when it pulled out of loss-making India and Europe services, before adding seven aircraft to its fleet in 2013, growing ASKs by 17%. This year, it will also take delivery of seven A330s, bringing about a 40% jump in ASKs.
The plan is to add seven A330s to its fleet annually through to 2019, which would gradually bring down the capacity growth rate.
AAX expects it to take about 12 months for new markets to be sufficiently stimulated for it earn average fares above the break even point.
Though 2014 may prove to be yet another loss-making year, the carrier expects better RASK in its third quarter, and a double digit positive growth in RASK in the fourth quarter.
“When you add a certain amount of capacity, you get yield pressure. As capacity trends down, yields go up," says Azran.
He adds that AirAsia X’s losses are purely a function of its investment in growth, whereas other carriers making losses may lack economies of scale or have a high cost structure.
Additional capacity has allowed AAX to increase frequencies on routes, improving connectivity.
AirAsia X route network - April 2014
In 1Q 2014, 47% of passengers on AAX were connecting passengers, up from 43% in the same period last year. Of the 47%, 80% were connecting from AirAsia's short-haul carriers. It is however seeing more long-haul AAX to AAX connections as the increased frequencies have offered better connection options.
The recent move to KLIA2 also means the airport has the infrastructure to better pair connecting flights, and hence increase traffic. The carrier's network meanwhile, will remain focused on building presence and gaining market share in North Asia and Australia.
AAX posted a pre-tax loss of M$53 million on Australian routes in the first quarter, while its services to North Asia saw a profit of M$15 million. The carrier's only destinations outside North Asia and Australia are Kathmandu, Colombo and Jeddah.
Azran says its losses in Australia are expected since it doubled capacity. This has however paid off since it has overtaken MAS in terms of passengers carried. It is now the dominant carrier on Malaysia-Australia routes.
"We don't want to be in markets where we're a small fish in a big pond, which is why we pulled out of India and Europe. It's better to stick to a few core markets and be the market leader," says Azran.
AAX is also working to launch two subsidiaries this year - Thai AirAsia X and Indonesia AirAsia X. TAAX is scheduled to launch with a Bangkok-Seoul service in July, while application for an air operator's certificate is underway in Indonesia. Like AAX, both units will focus on routes to North Asia and Australia, to further build and leverage on the group's scale.
"The current losses are short term pains. We believe we've got the cash, we can weather the storm and we will come out of it stronger and with a scale advantage," says Azran.