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Started 16 years ago with only two commercial planes, AirAsia (Bursa: 5099) now flies 174 commercial aircraft covering 225 routes connecting 109 destinations in 18 countries. By the end of this year, shareholders will be proud to know AirAsia will be operating 202 aircraft.
With the motto: “Now everyone can fly”, AirAsia has flown 369 million people since its beginning. I (and many of you) have certainly contributed to this statistic. Last year alone, AirAsia flew 56.6 million passengers.
It is well-known that Tony Fernandes, group CEO of AirAsia Berhad, bought the troubled and debt-ridden airline for one ringgit in 2001. But he has since transformed AirAsia into the most successful low cost carrier (LCC) operator in Asia that is worth RM10 billion today. It commands almost half of the market share for both domestic (47%) and international (49%) flights in Malaysia. AirAsia has also won many awards including the world’s best low-cost airline by Skytrax for eight consecutive years. According to Brand Finance, AirAsia’s brand is worth approximately US$535 million and is one of the most valuable airline brands in the world. Despite these outstanding achievements, investors are valuing this fast-growing company at only five times earnings.
To make matters worse, the share price of AirAsia recently took a sharp beating, plunging from RM3.59 to RM2.89 within three days, after news broke out that Fernandes and the chairman of AirAsia, Kamarudin bin Menarun, are planning to retire in the next three years. One shareholder brought this matter up at the AGM and hopes Tony Fernandes will stay and work for AirAsia for the next 20 years.
Fernandes then clarified, “What Kamarudin is trying to say [in the interview article] is, we have deep management. If tomorrow someone hits us with the bus, and there are many people who like to drive that bus, AirAsia would continue… Unfortunately, the press sensationalizes a little bit but we have no intention to retire.”
While shareholders of AirAsia may heave a sigh of relief, the sentiment among investors at this year’s meeting seems to suggest that the market is still under-appreciating AirAsia’s hidden value. There may be a reason for this: AirAsia is not an easy company to understand because it is not simply an airline company. AirAsia also owns many other adjacent businesses such as:
As the company continues to pioneer new ventures (e.g. Travel360, Touristly, etc.), the same shareholder perceptively pointed out that analysts may not appreciate the continued forays. The new ventures have great potential but stock analysts usually lump all their profits (and losses) together which impacts AirAsia as a group. Before he finished his remarks, Fernandes interjected him, “Can you please become a CIMB analyst? You’re a lot smarter than them!”
The truth is Fernandes was disappointed with CIMB for downgrading AirAsia based merely on rumours (that Fernandes and Menarun are retiring in three years) without clarifying the matter with management. Besides, AirAsia deserves a better valuation despite its new ventures but over time he hopes analysts will learn to appreciate them. In the meantime, AirAsia will explore various options to unlock the value of its ventures and the board may consider paying special dividends after doing so.
The same shareholder asked another question on AirAsia’s collaboration with POS Malaysia for logistical work that could potentially increase the utilization of belly cargo space. Before answering his question, Tony Fernandes fired a question back: “Actually what did you do? Would you like a job at AirAsia? Rozman [Deputy CEO of AirAsia Berhad], please hire this man.”
Regarding his question, Fernandes patiently explained that AirAsia has built a wide logistics network that no stock analyst has yet realized. Indeed, the company is in discussion with POS Malaysia and Singapore Post to build a logistics company. He believes the new venture could prove more valuable than the airline itself. He also joked, “If we look at Amazon, they are talking about starting an airline to fulfill all their deliveries. We have an airline. We have belly space [to fulfill deliveries]. By the way, I hope you notice my belly space has gone down. It is part of my cost reduction that AirAsia doesn’t burn as much fuel going forward.”
Moreover, AirAisa has many unique routes that DHL or FedEx do not possess and is in a great position to become a major logistics distribution channel. In the next few months, shareholders can expect an announcement about this new initiative. The same shareholder asked about the potential market size for the logistics business. Fernandes said he cannot disclose too much but if he (the shareholder) were to join AirAsia, he will show him everything!
Investors who attended the meeting will certainly agree with me that Tony Fernandes is terrific at marketing AirAsia and has a very good sense of humor. While we are on this, the physical copy of AirAsia’s Annual Report 2016 is extremely heavy and bulky but he quipped, “Some of you were saying the annual report is very heavy, actually it can be used as a weapon. It can also be used to stop a door.”
While his joke worked up the crowd, I was amazed by his next statement, “We keep winning awards which is great for our brand and we make money from that. But we are the only company that continues to make money from the annual report.”
I couldn’t wrap my head around that at first but I finally understood why AirAsia’s annual report is 320-pages thick: It has so many advertisements inside.
Anyway, here are 21 other things I learned at AirAsia’s 2017 AGM:
1. The board presented their full year 2016 results via a pre-recorded video at the AGM. It is a very well-done video clip by AirAsia’s investor relations and every shareholder should watch it. Fernandes commented, “If you see from the video, you can see the difference between me and Aireen [CEO of AirAisa Malaysia]. I looked like a truly low-cost man. No makeup, no script. While she was very well prepared, looked very beautiful and she did very well in the video.”
2. AirAsia recorded total sales of RM6.8 billion in 2016. Of which, nearly three quarters were derived from its website AirAsia.com. Although AirAsia has a strong relationship with WeChat and search engines like Google, Fernandes said they will continue to focus on building the brand of AirAsia.com because it allows them to capture customers’ data and understand them better.
3. AirAsia is probably one of the few airlines in the world that has been rewarding its shareholders with dividends since 2010. They always say it is a bad idea to invest in an airline but AirAsia seems to be defying the odds despite losing a plane.
|Basic Dividend per Share (in RM Sen)||3||5||6||4||3||4||12|
|Special Dividend per Share (in RM Sen)||-||-||18||-||-||-||-|
4. The key competitive advantage of AirAsia lies in its ability to keep its operating costs low thus ensuring lower fares for customers. Fernandes pointed out the most important metric for a low-cost carrier like AirAsia is the cost per available seat kilometre (CASK). AirAsia’s CASK has been coming down over the past five years which is a good trend to see.
5. Another key competitive advantage of AirAsia is its network of well-connected air routes. AirAsia has franchise rights to operate in India, China and many Asian countries. Recall that AirAsia operates 225 routes connecting 109 destinations in 18 countries. Out of these 225 routes, 66 routes are served by AirAsia only.
6. Another intangible asset that AirAsia possesses is data. AirAsia has a huge data pool and the fact that companies likes Uber and Expedia are working with AirAsia is due to the troves of valuable customer information AirAsia has. The data allows AirAsia to understand its customers better, know what their preferences are, and offer personalized options. For example, if someone searches a destination on Google, AirAsia would be able to automatically prepopulate its website with the destination when the user clicks on the link. Since its implementation, conversion has increased from 4.4% to 8.8%. Essentially, the data will allow AirAsia to sell more seats and ancillary services like food, duty free products, etc.
7.. AirAsia reported its highest ever profit of RM2 billion in 2016. This was mainly due to a declining CASK. However, investors must note that this is due to cheaper fuel costs that all airlines currently enjoy. If we exclude fuel costs, the CASK for AirAsia has actually been increasing over the years.
Fernandes said CASK will continue to be under pressure as the company intends to become the market leader in terms of pilot salaries. By doing this, AirAsia can prevent a shortage of pilots as the company continues to grow rapidly. According to him, many pilots who joined Emirates or Qatar Airways after leaving Malaysia Airlines are now looking at the pay packages offered by AirAsia. (So if you are a pilot, maybe it’s time to reconsider AirAsia. Who knows, you might get a pay jump.)
Though CASK excluding fuel is under pressure, AirAsia will find ways to improve it by:
8. With many initiatives, AirAsia is probably three to four years ahead of the curve. During its initial years, Fernandes acknowledged AirAsia was very focused on marketing and branding but he wants the company to be seen as a digital and technology company moving forward. Very soon, passengers at AirAsia will be able to order food from their mobile phones so flight attendants no longer need to push the food trolley down the aisle anymore. Also, they are working towards boarding their passengers with fingerprint technology.
9. AirAsia will focus on growing its top line than bottom line. Fernandes said it is a good opportunity for AirAsia to gain market share now while their competitors (i.e. Malaysia Airlines and Malindo Air) are in a weak position. This can be seen from an exceptionally high load factor of 89% in 2016.
10. The management strives to build a long-term business. Several shareholders who own AirAsia and its sister company, AirAsia X, were upset with the latter’s performance when it announced poor quarterly results which caused the share price to crash by more than 20% within a few days. Fernandes reminded them to focus on the long-term foundations of the business. Investors are not paying the management to do “guesswork” but to manage the company as sensibly as possible. While AirAsia X reported a highly volatile quarterly result, it has no intention to play around with its fuel hedging and aims to smooth out its earnings on a quarterly basis. He said if AirAsia X gets it wrong, it may send the company into bankruptcy.
11. AirAsia has no intention to merge with its sister company AirAsia X. Fernandes clarified that there is no discussion about a merger between the two companies as rumours have otherwise suggested. AirAsia’s business model focuses on short-haul flights and quick turnarounds; it does not make sense to merge with a long-haul carrier like AirAsia X. They are two different models and if you look at the struggles SIA is going through managing four different airlines — Scoot, Tiger Air, Silk Air and Singapore Airlines — there is no benefit at all to merging.
12. However, Fernandes intends to consolidate its airline subsidiaries in other countries. He explained that he’d like to see AirAsia own 100% of its foreign entities: AirAsia Thailand (currently 45% owned), AirAsia Indonesia (48.9% owned) and AirAsia Philippines (40% owned). By doing so, shareholders can collectively own one single entity. But he explained that it is not going to be easy to consolidate them as it requires regulatory changes in the respective countries.
13. For its overseas expansion, AirAsia will compete with local airline operators through low fares and its connectivity in Asia. These are hard lessons gleaned from their early mistakes made during the expansion. The management learnt that it is better to compete by offering international routes which AirAsia has a strong advantage in. In Vietnam, for example, AirAsia competes with VietJet Air by offering 21 destinations to China which the latter is not be able to do so. AirAsia India is also competes in this way and the financial results are now beyond the management’s expectations. Fernandes explained that AirAsia India only has nine aircraft but it has a lower CASK than IndiGo even though the latter has a fleet of 150 aircraft. AirAsia India plans to increase their fleet size to 20 and Fernandes is confident the company will achieve a lower cost structure and thus offer lower fares. AirAsia Malaysia CEO Aireen Omar also added that the majority of Indian carriers focus on flying their passengers to the Middle East, the United States and Europe while AirAsia competes by flying customers to Asia.
14. Fernandes believes AirAsia Philippines has a lot of potential that will turn into a “beautiful diamond”. He is confident AirAsia Philippines will catch up quickly with Cebu Pacific as the latter only has 40 aircraft.
|Total Revenue (in RM millions)||4,946||5,290||5,415||6,298||6,846|
|Revenue from Philippines (in RM millions)||-||-||592||768||940|
|Proportion of Total Revenue||-||-||10.9%||12.2%||13.7%|
15. On fuel hedging, AirAsia usually hedges its fuel cost according to its booking curve. Simply said, if AirAsia sells air tickets in advance, they will then hedge those sales. This will allow them to lock in profit without being affected by the volatility of oil prices. When hedging goes wrong, it can be costly for the company. Eight years ago, the company nearly went bust for betting too much on hedging. Singapore Airlines is also one company that suffered from huge hedging losses in 2015 (S$457 million) and 2016 (S$927 million). Therefore, AirAsia does not believe in taking large hedges (beyond its booking curve) as it is akin to gambling since no one can predict oil prices. However, when oil prices plunged to a record low, AirAisa opportunistically took a large hedge in 2016/17. As oil prices continue to recover, Fernandes thinks that it is better to return to their original policy of hedging according to its booking curve. So when oil prices increase, AirAsia will pass it down to customers by altering the surcharges.
16. On foreign currency hedging, AirAsia hedges its foreign-denominated loans for twelve years as soon as an aircraft is delivered to them. However, not all the foreign loans are fully-hedged (in 2016, 59% of loans were hedged) as there are natural hedges at play when AirAsia leases some aircraft in U.S. dollars. Similar to fuel hedging, AirAsia may take calculated risks whenever there is an opportunity. Fernandes doesn’t foresee that the ringgit will continue to weaken to five ringgit to one U.S. dollar, so AirAsia is keeping some of its hedging short-term. Anyway, AirAsia is fully hedged from any sharp fluctuations in U.S. dollar LIBOR for its floating rate aircraft financing loan. Ideally, Fernandes said that he’d love to do natural hedging (borrowing in local currency) but there isn’t enough debt liquidity in Malaysia for them to tap into.
17. The potential sale of Asia Aviation Capital Limited is progressing well and shareholders can expect an outcome very soon. Fernandes clarified that the rumors that caused the share price to plunge dramatically over the last few days are unfounded. They are still negotiating with the buyer as it is a large sale and they want to get a good price for shareholders.
18. AirAsia adopts overbooking practices. The incident of United Airlines forcing a passenger off its plane caused global outrage but Fernandes explained that AirAsia would avoid such a situation as it would not allow an affected customer to even board the plane. In fact, they will resolve the issue with the affected customer prior to their flight.
19. AirAsia has no shareholding in Tune hotel. A shareholder wanted to know about the progress on the hotel business as he noted that expansion has slowed down. Fernandes simply answered that AirAsia has no stake in Tune hotel.
20. Fernandes’s biggest fear for AirAsia is a news article. AirAsia has gone through so much ups and downs over the last sixteen years including a period of high oil prices and the ill-fated crash of AirAsia flight 8501. But he pointed out that one news article can easily send its share price “upside down”. Regardless, the management will continue to focus and trusts shareholders will not be distracted by quarterly results and sensational news articles. Politics also occasionally worry Fernandes like the uncertainty over North Korea’s nuclear ambitions but it is something beyond their control. At the end of the day, they can’t manage the share price because it is an open market and they can only focus on managing the business as best they can.
21. AirAsia is relatively highly leveraged. Its net gearing ratio was 2.29 in 2015 but improved to 1.33 in 2016. Moving forward, the management plans to maintain a net gearing level between 1.5 to 2. If you’re valuing AirAsia, remember to take into account its net debt position of RM8.8 billion (as at 31 December 2016).
Towards the end of the meeting, the shareholder who Fernandes joked about hiring (or maybe not…) asked a last question about smart airports and highlighted the example of AirAsia China aiming to be a digital airline working with smart airports. The shareholder wanted to know the definition of a smart airport. Fernandes candidly replied, “Smart airport is the opposite of a Malaysian airport.”
Once again, the whole room burst into laughter. Basically, Fernandes explained everything has to do with data. For example, passengers can check themselves in with the use of fingerprint technology at a smart airport. Airlines can estimate the waiting time at immigration, the distance to reach the boarding gate and advise passengers accordingly via their smartphones.
And here’s one final flourish from Tony Fernandes and AirAsia, shareholders/proxies who attended the 2017 AGM received a RM500 AirAsia flight voucher! A very nice door gift.
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