Showing posts with label Air Asia. Show all posts
Showing posts with label Air Asia. Show all posts

Tuesday 2 October 2012

The Malaysian Airline Business


The Malaysian Airline Business

Now that the "low-cost" airline has successfully crippled the "national flag carrier", it does look like the small fly may eat the big bug, in small snatches.

Introducing the low cost airline cannot be to "increase competition" of the Malaysian aviation industry. You have two totally different products: one "full cost" and the other "low cost". In no way should "full cost" be thought of as "high cost" and "low cost" to be "better value". It is just the way the competitor has cleverly maneuvered itself into the public psyche that created this perception. If pricing is cost-plus, then one should be getting probably almost the same value for the services rendered.

As a corollary, it is also true that "low cost" means "low price" (which the airline is now trying to reposition itself) but not necessarily "better value." The apparent disgust that the low cost operator treats its customers must be something that the average consumer must constantly deal with which in more technical parlance means the loss of consumer rights. It is OK for the operator not to deliver as promised, but woe betide the consumer who happens to try to alter a little bit of the contract. It is this lopsidedness that is the peculiar feature of the "business model" of the low cost flyer, and not its much touted greater "operational efficiency". If you set a computer system to deal with customers who have not way to communicate back to the system, and if you program the computer system to generate a certain amount of profit from every customer, then obviously you are going to get that profit as programmed. Once the "parameters" change, as we see the low cost flyer pulling out of Europe, then you know that it is out of its depth to cope with a more challenging environment.

It is not rocket science to know that to get the average price down, every flight must operate at a certain high capacity. It is this targeting that we see to be promotional strategy of the low cost flyer, as well as the constant attempt to juggle flights in order to pack passengers into a certain targeted "high capacity" which is otherwise termed as operational efficiency.

The national carrier becomes disoriented when the low cost flyer enters the story. How does one compete with a "low cost" competitor? This is the wrong question. The correct response is how to redefine the full-cost market now that the competitor is going to soak up all the cheap customers. It is not surprising if the first impact the national carrier feels is that more than half of its customers are all gone. If we work on the simple Pareto rule of 20% business class and 80% economy class and if the normal capacity on the economy class is 60% and if half of the 80% is lost to the competitor, then you have a mix of 20% business class and 20% economy class. It is instant death to the national carrier.

The objective of the national carrier must be to concentrate on how to get back its economy class passengers. By imitating the competitor in its treatment of customers, the national carrier takes the risk of alienating itself from its customer base. Its computer system is not geared to dealing with online booking and changes to online booking. It simply does not know how to handling this cut-throat business of low price. Instead, the national carrier should build up a new market for traditional full-service flying and at the  same time overhaul its operating system to lower cost by automating more of its internal operations. Instead, the national carrier tries to become a low cost flyer and in the process simply cannot compete as the low cost competitor is king in the business of low cost flying. It automates all its external communications with the customers, an area where the old method should have given it an edge. The national carrier has fallen into a trap, all on its own doing.

At the end of the day, probably one of the most vital factors that determines which airline survives in this globally competitive business is its management of its cost of fuel - supposedly a major cost element. If this is set right, all the other costs are small in comparison. If the fuel cost is too high, then it has to weather it. The low cost flyer simply pass this down to the average consumer in the form of a "fuel surcharge" which really is one of the most appalling abuses of consumers in the market place. Unable to get a team to get its fuel cost right, the response to saving the national carrier is to send in a marketing and accounting team to manage the accounts, and probably not the operations. The operations can only deteriorate with neglect.


So how does one then "rationalise" the national carrier with the low cost flyer? It is as if the low cost flyer has business class travellers to bring to the table, while it will certainly try to soak up the remaining of the economy class passengers from the national carrier. There is also room for further cannibalism by the small of the big. What other experience and expertise does one have that the other does not have.

The Malaysian airline business may just be one episode that shows the general fragility of the national economic fabric. There is a lot of communications and clever talk, but all those who could do are sidelined and relegated to the dungeon to work in the galley to keep the ship going.

Thursday 30 August 2012

AirAsia - Return on Retained Earnings

AirAsia
Year DPS EPS Retained EPS
2002
2003 0 2.1 2.1
2004 0 4.8 4.8
2005 0 8.6 8.6
2006 0 21.1 21.1
2007 0 24.6 24.6
2008 0 -11.3 -11.3
2009 0 15.1 15.1
2010 0 15.8 15.8
2011 2.3 27.1 P 24.8
2012
Total 2.3 107.9 105.6
From 2003 to 2011
EPS increase (sen) 25.0
DPO 2%
Return on retained earnings  24%
(Figures are in sens)

Saturday 23 June 2012

Investor's Checklist: Business Services

Understand the business model.  Knowing if a company leverages technology, people, or hard assets will provide insight as to the kind of financial results the company may produce.

Look for scale and operating leverage.  These characteristics can provide significant barriers to entry and lead to impressive financial performance.

Look for recurring revenue.  Long-term customer contracts can guarantee certain levels of revenue for years into the future.  This can provide a degree of stability in financial results.


Focus on cash flow.  Investors ultimately earn returns based on a company's cash-generating ability.  Avoid investments that aren't expected to generate adequate cash flow.

Size the market opportunity.  Industries with big, untapped market opportunities provide an attractive environment for high growth.  In addition, companies chasing markets perceived to be big enough to accommodate growth for all industry participants are less likely to compete on price alone.

Examine growth expectations.  Understand what kind of growth rates are incorporated into the share price.  If the rates of growth are unrealistic, avoid the stock.  



Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Tuesday 24 August 2010

Low dividend payout by AirAsia if any

Tuesday August 24, 2010

Low dividend payout by AirAsia if any
By LEONG HUNG YEE
hungyee@thestar.com.my


PETALING JAYA: While analysts approve of AirAsia Bhd’s move to pay dividends, they expect the dividend payout will not be significant yet.

The budget carrier, which has been listed since 2004, do not have a dividend policy. However, the group is now considering to pay dividend to its shareholders.

HwangDBS Vickers Research said that although the dividend payment was positive for AirAsia’s shareholders, it did not expect yield to be attractive, considering AirAsia’s huge capital commitment as it was still at its expansion phase.

A local analyst said although AirAsia could afford to start paying dividend, it need not do so as no one expected the airline to pay dividend.

“Its cashflows are okay but the questions is not about the decision to pay, but by what quantum. It (quantum) makes a difference, for example paying one sen – which still constitutes a dividend although it’s not material – and a payout which gives a decent yield such as 10 sen,” he added.

A bank-backed analyst concurred that AirAsia could afford to pay dividend based on its current cashflow but it would not be as significant yet. He added that investors could invest in dividend stocks such as British American Tobacco if dividend was what they were after.

“AirAsia is a growing company. Investors invest in AirAsia for its growth story. They could pay half a sen to one sen in dividend and it may be more symbolic in the next three years,” he added.

The analyst also said AirAsia needed to restructure its Thai and Indonesian units as both were currently leveraging on its balance sheet.

Another analyst said AirAsia was currently on an expansion phase and would required large capital commitment. Hence, its dividend yield would not be as attractive.

“I don’t think it will be that much. In terms of yield, it may not be that attractive,” she said.

Yesterday, a local daily reported group CEO Datuk Seri Tony Fernandes as saying the group was planning to propose a dividend policy by the third quarter of this year.

AirAsia has been mulling over a dividend for some time. In June, Fernandes said AirAsia was in a much better position to consider paying dividends to its shareholders after solving some issues within the group.

Although it has announced its intention to pay its maiden dividend, the carrier has not given any indication on when the first payout will be.

As at June 30, AirAsia has a short and long-term borrowing of RM7.58bil and a deposit, bank and cash balances of RM858.1mil.

“The borrowings are mainly in the form of term loans which are for the purchase of new Airbus A320-200 aircraft,” it said in notes accompanying its latest quarterly results.

For the quarter ended June 30, AirAsia posted a net profit of RM198.9mil for the three months to June 30, a 43% jumped from RM139.2mil in the previous corresponding period, on a turnover of RM940.6mil.

http://biz.thestar.com.my/news/story.asp?file=/2010/8/24/business/6906547&sec=business

Friday 16 July 2010

AirAsia Ancillary Income To Grow

AirAsia Ancillary Income To Grow

Low-cost carrier AirAsia intends to increase the contribution from ancillary income to a fifth of its total revenue this year, and the airline is on track to meeting its ancillary income target of RM50 per passenger within two years, up from last year’s base of RM29.1. AirAsia’s ancillary portfolio encompasses products and services such as baggage supersize, in-flight food and beverage, merchandising and duty-free, courier, airspace advertising and AirAsia RedTix and these not only contributes to the airline’s bottom line, but it also provides a buffer against rising fuel prices. From January to April this year, AirAsia have achieved ancillary income of RM45 per passenger and its baggage supersize service, a key driver of ancillary income is estimated to contribute RM240m to overall ancillary revenue this year.

12.7.2010

http://www.sharesinv.com/articles/2010/07/12/malaysia-daily-bulletin-104/

Friday 14 May 2010

Investor's Checklist: Hard-Asset-Based Businesses

Companies in the hard asset based subsector depend on big investments in fixed assets to grow their businesses.  Airlines, waste haulers and expedited delivery companies all fall into this subsector.  In general, these companies aren't as attractive as technology-based businesses, but investors can still find some wide-moat stocks and good investments in this area.

Industry Structure

Growth for hard asset based businesses inevitably requires large incremental outlays for fixed assets.  After all, once an airline is flying full planes, the only way to get more passengers from point A to point B is to acquire an additional aircraft, which can cost US $35 million or more.

Because the incremental fixed investment occurs before asset deployment, companies in this sector generally finance their growth with external funding.  Debt can be used to finance almost all of the asset's cost, so lenders generally require the asset to provide collateral against the loan.  With this model, high leverage is not necessarily a bad thing, provided that the company can make enough money deploying the asset to cover the cost of debt financing and earn a reasonable return for shareholders.

Subsector:  Airlines


(With this in mind, airlines are generally the least attractive investment of all the companies in this subsector.  Airlines must bear enormous fixed costs to maintain their fleets and meet the demands of expensive labour contracts, yet they sell a commodity service that's difficult to differentiate.  As a result, price competition is intense, profit margins are razor-thin - and often non-existent - and operating leverage is so high that the firms can swing from being wildly profitable to nearly bankrupt in a short time.  If you don't think this sounds like a recipe for good long-term investments, you're right - airlines have lost a collective $11 billion (excluding the impact of recent government handouts) between deregulation in 1978 and 2002.  Over the same time period, 125 airlines had filed for Chapter 11 bankruptcy protection and 12 of them filed for Chapter 7 liquidation.)

Hallmarks of Success for Hard-Asset-Based Businesses

Cost leadership:  Because hard-asset based companies have large fixed costs, those that deliver their products most efficiently have a strong advantage and can achieve superior financial performance, such as Southwest in the airline industry.  To get an idea about how efficiently a company operates, look at its fixed asset turnover, operating margins and ROIC - and compare its numbers to industry peers.

Prudent financing:  Remember, having a load of debt is not itself a bad thing.  Having a load of debt that cannot be easily financed by the cash flow of the business is a recipe for disaster.  When analysing companies with high debt, always be sure that the debt can be serviced from free cash flow, even under a downside scenario.

Investor's Checklist:  Hard-Asset-Based Businesses

  • Understand the business model.  Knowing a company leverages on hard assets will provide insight as to the kind of financial results the company may produce.
  • Look for scale and operating leverage.  These characteristics can provide significant barriers to entry and lead to impressive financial performance.
  • Look for recurring revenue.  Long-term customer contracts can guarantee certain levels of revenue for years into the future.  This can provide a degree of stability in financial results.
  • Focus on cash flow.  Investors ultimately earn returns based on a company's cash-generating ability.  Avoid investments that aren't expected to generate adequate cash flow.
  • Size the market opportunity.  Industries with big, untapped market opportunities provide an attractive environment for high growth.  In addition, companies chasing markets perceived to be big enough to accommodate growth for all industry participants are less likely to compete on price alone.
  • Examine growth expectations.  Understand what kind of growth rates are incorporated into the share price.  If the rates of growth are unrealistic, avoid the stock.

The Five Rules for Successful Stock Investing
by Pat Dorsey

Saturday 6 February 2010

Crowded skies squeeze Asia's budget carriers

Crowded skies squeeze Asia's budget carriers
Written by Reuters
Friday, 05 February 2010 21:01

SINGAPORE: Asian airlines, particularly budget carriers, may be taking off on a high-risk strategy -- ordering hundreds of aircraft to offer new routes and more flights, just as growth in low-cost travel is seen slowing, according to Reuters.

Over the next five years, budget carriers from Malaysia's AirAsia to Singapore's Tiger Airways will take delivery of over 500 planes, meaning a capacity increase of 15 percent a year -- double what some observers are forecasting.

The real prospect that some budget carriers, and the full-service airlines they compete with, may not survive the dogfight could, in turn, mean billions of dollars of cancelled orders for Boeing and Airbus.

Asia has become the largest market for the two big planemakers, accounting for a third of outstanding orders.

"Not all airlines will survive," said Terence Fan, assistant professor at Singapore Management University. "Mid-double-digit growth is a lot to achieve, and the aviation industry has had a lot of ups and downs."

"We're already seeing Thai Airways, for example, reduce its short-haul flights from Bangkok because of competition from low-cost carriers," Fan added.

Fan, who last year published a paper on Europe's passenger airline industry, noted around 130 airline start-ups there in the 10 years to 2006. Only about 50 survived, and that number has since fallen further.

While Ryanair and Easyjet have thrived and become major players in Europe, others such as SkyEurope, described by consultancy Skytrax as the best low-cost carrier in Eastern Europe, have gone bankrupt, Fan said.

Asian low-cost carriers have grown rapidly over the past decade and now account for 14 percent of intra-Asia travel, according to Airbus estimates.

Indonesia's Lion Air, for example, has outstanding orders and options for over 100 Boeing 737-900s, each with a list price of around $80 million. AirAsia will boost its Airbus A320 fleet to 175 planes by end-2015 from 70 now.

SLOWING GROWTH

But, while budget carriers achieved compounded growth of 38 percent between 2001-09, the overall intra-Asia market expanded at just 6 percent, Airbus figures showed.

Boeing said this week it expects new orders for commercial aircraft to fall short of deliveries, with no increase in demand until 2012.

Boeing had gross orders from airlines for 263 planes last year, but net orders of 142 planes after cancellations. Airbus had gross orders of 310 planes and net orders of 271.

Alex Glock, Asia Pacific managing director for Brazilian planemaker Embraer, said the golden years for low-cost carriers ended with the global financial crisis, when many suffered falling demand, much like the full-service airlines.

In the last two years, the number of low-cost carriers in Asia Pacific fell to 17 from 20, and the number of flights dropped to 11,956 from 12,034.

Glock sees regional demand growing at an average annual rate of 7 percent, following a spike in the next two years as traffic returns to pre-recession levels.

"Even though low-cost carriers grew more than the regional average, the growth spurt has passed," he said.

Many of Asia's budget airlines are also losing money.

In India, a host of low-cost and conventional airlines have emerged to challenge state-owned Air India and Indian Airlines and, in Macau, Viva is seeking financial assistance from the government to stay afloat.

Even so, analysts expect low-cost carriers to do better than the overall industry by opening new routes and picking up market share from second-tier flag carriers such as Indonesia's Garuda.

"This sector will continue to gain market share particularly in Asia's emerging economies. The region is dynamic, has huge populations with vast physical distances and enjoys rising incomes," said Tan Teng Boo, CEO of Malaysian-based Capital Dynamics, which manages $300 million.

But Tan said he does not own airline shares.

"The airline business, though glamorous, is very tough. The industry has loads of players and airlines don't have pricing power. It's essentially a commodity business with very high capital requirements and low margins." - Reuters

http://www.theedgemalaysia.com/business-news/159247-crowded-skies-squeeze-asias-budget-carriers.html

Sunday 3 May 2009

Understanding the business model: Hard-Asset-Based Businesses

Companies in the hard-asset-based subsector depend on big investments in fixed assets to grow their businesses. Airlines, waste haulers (Waste Management, Allied Waste, Republic Services), and expedited delivery companies (FedEx, UPS) all fall into this subsector.

In general, these companies aren't as attractive as technology-based businesses, but investors can still find some wide-moat stocks and good investments in this area.

Industry Structure

Growth for hard-asset-based businesses inevitably requires large incremental outlays for fixed assets. After all, once an airline is flyinng full planes, the only way to get more passengers from point A to point B is to acquire an additional aircraft, which can cost $35 million or more.

Because the incremental fixed investment occurs before asset deployment, companies in this sector generally finance their growth with external funding. Debt can be used to finance almost all of the asset's cost, so lenders generally require the asset to provide collateral against the loan. With this model, high leverage is not necessarily a bad thing, provided that the company can make enough money deploying the asset to cover the cost of debt financing and earn a reasonable return for shareholders.

With this in mind, airlines are generally the least attractive investment of all the companies in this subsector. Airlines must bear enormous fixed costs to maintain their fleets and meet the demands of expensive labour contracts, yet they sell a commodity service that's difficult to differentiate. As a result price competition is intense, profit margins are razor-thin - and often non-existent - and operating leverage is so high that the firms can swing from being wildly profitable to nearly bankrupt in a short time. If you don't think this sounds like a recipe for good long-term investments, you're right - airlines have lost a collective $11 billion (excluding the impact of recent government handouts) between deregulation in 1987 and 2002. Over the same time period, 125 airlines had filed for Chapter 11 bankruptcy protection, and 12 of them filed for Chapter 7 liquidation.

But despite the terrible performance for airlines in general, a few carriers have fared very well. Southwest, for one, has been profitable for 30 consecutive years - an amazing achievement considering the cyclicality of its business and the dismal operating environment for the industry in 2002. Southwest's superior financial performance is largely because of its main strategic advantage: a low cost structure driven by its practice of flying one type of aircraft for all its no frills, point-to-point routes. In an industry with less-than-desirable fundamentals, Southwest has achieved superior financial results by deploying a different and dominant, business strategy.

Other characteristics of hard-asset-based businesses make this segment worth watching. The idea of limited or shrinking assets, for example, can go a long way to provide stability in the competitive landscape for these companies. Because of the NIMBY (not in my back yard) principle, it is very difficult to get approval for new landfill sites. As a result, it is highly unlikely that new competitors will enter the landfill side of the waste management business. That puts a company such as Waste Management, which owns 40 percent of the total U.S. disposal capacity via its 300 landfills, at an advantage.

The majority of hard-asset-based companies fall into the narrow- or no-moat buckets. With few, if any, competitive advantages for many of these companies, investors should look for a pretty steep discount to a fair value estimate before buying shares.

Hallmark of Success for Hard-Asset-Based Businesses

Cost leadership: Because hard-asset-based companies have large fixed costs, those that deliver their products most efficiently have a strong advantage and can achieve superior financial performance, such as Southwest in the airline industry. Firms don't usually advertise their cost structures per se, so to get an idea about how efficiently a company operatees, look at its fixed assets turnover, operating margins, and ROIC - and compare its numbers to industry peers.

Unique assets: When limited assets are required to fulfill the delivery of a particular service, ownership of those assets is key. For example, Waste Management's numerous, well-located landfill assets represent a significant competitive advantage and brrier to entry in the waste management market because it's unlikely that enough new landfill locations will get government approval to diminish its share of this business.

Prudent financing: Remember, having a load of debt is not itself a bad thing. Having a load of debt that cannot be easily financed by the cash flow of the business is a reccipe for disaster. When analyzing companies with high debt, always be sure that the debt can be serviced from free cash flow, even under a downside scenario.

(Some Malaysian companies in this hard-asset-based businesses are Air Asia, MAS, Maybulk and Transmile.)



Ref: The Five Rules for Successful Stock Investing by Pat Dorsey