Found this article reported in Malaysian Insider: http://themalaysianinsider.com/index.php/home/42-lead-stories/505-airasia-still-profitable-on-us200-a-barrel-oil-ceo-says
My thoughts and comments follows:
AirAsia still profitable on US$200 a barrel oil, CEO says
KUALA LUMPUR, June 16 — AirAsia, the region's biggest budget airline, can remain profitable even if world oil prices hit US$200 (RM654) a barrel, chief executive Datuk Tony Fernandes said today, allaying concerns that it may be hit by rising fuel costs.
AirAsia has no plans now to raise fares or fuel surcharge, but it will stick with plans to grow its regional route network, expand onflight sales to boost income and seek lower charges from airports, he said.
"We are comfortable even with oil at US$200 (a barrel). There is a silver lining. We have taken a very different approach in that we will market ourselves out of this problem," Fernandes told reporters on the sidelines of a two-day global economic forum.
"We think that just putting your head in the sand and crying about oil and cutting routes is not the solution."
After surviving the 2003 SARS epidemic, which he described as "a lot worse" than the current oil crisis, Fernandes said AirAsia can benefit from a consolidation in the airline industry.
"The silver lining is that everyone is going to be in a lot of pain. There will be more rational competition...there will be less people wanting to open a budget airline now," he said.
He acknowledged, however, that AirAsia may have to revise fares if oil prices breach US$200 a barrel.
Airlines have been struggling to contain costs this year as oil prices stay above US$130 a barrel. Scores of startup carriers have gone out of business and several major carriers have raised fuel surcharges, cut capacity and deferred plane orders or shed jobs.
Fernandes said AirAsia will launch four more new routes over the next two months.
To ease the fuel price burden, he said the company will expand its food menu and sell more in-flight products and services to its 22 million annual passengers.
"You can use your mobile phones on the plane soon, send SMS," he said.
"We are going to sell more things, more duty free (products). We will sell washing machines if we have to. There are many things we haven't done. In a crisis like this, you become more innovative," Fernandes said.
AirAsia will also benefit once the lucrative Kuala Lumpur-Singapore route, the fourth-busiest route in the region, is fully liberalised in January, he said. The carrier now only has limited flights on the route, which is dominated by national carriers Malaysia Airlines and Singapore Airline.
AirAsia reported an 86 percent jump in its January-March net profit from a year ago to RM162 million, buoyed by higher passenger demand and large foreign exchange gains.
It said it has hedged part of its fuel requirement for April-June, which will lead to US$10 million in cost savings for the quarter. But Fernandes ruled out plans to further hedge the company's fuel requirement.
"Only a lunatic will hedge fuel — it's too volatile. We will just have to ride it until there is some stability," he said. "You have to build a business that is sustainable at whatever price and the only way... is to have topline growth and good growth." — AP
To be honest, my initial reaction when I read this is "You Got to be Joking"! This must surely be a "Big Talk" by the CEO in response to sagging AIRASIA prices (closed 87.5 sen, close to all time low). Only time I suppose will prove whether he is right or wrong.
There is some logic to what he says. In times like this, I can accept that there will be more rational competition within the industry, and from a business owner perspective, this should be beneficial in terms of ability to price higher as a general comment.
But I also seriously wonder what Tony means by "profitable". We all know that Reported Profit is not the same thing as Cash Flow. And the definition of Profits can mean different things depending on which side of the fence the Accountant sits. Ultimately, Cash is King and this is not necessarily the same thing as Profit. And I noticed that the $162M Profit reported here - this time whilst acknowledging Foreign exchange gain - still did not acknowledge the Tax Credits. And Tax Credits is not real Cash. Excluding both, it's still not $162M but $23M. (see my earlier article on where $23M is derived - http://fusioninvestor.blogspot.com/2008/05/edge-on-airasia.html). I don't sense Tony (or the Journalist) is being completely honest here in attributing the profit growth, and this to me is worrying. Why? Because when management starts lying to the public, the biggest danger is not when they don't fool the public, but when they end up lying to themselves and start believing their lies, and then make new decisions based on the half-truths. Of course, not all lies told are intentional. But this is a source of concern, because they might not be facing up to the full truth.
Second is the policy of not hedging during "volatile" times. Today is June, and he says he is still hedged from Apr to June. I wondered why he didn't say this (not hedging during volatile times) a lot earlier like late last year. I mean when did he come to the realization that oil is now volatile? This month? Last month? I think anyone - who tracks crude oil price closely and observe crude oil price charts - should see a price break-out above $80 happening as early as September last year. Break-outs are by definition "volatile" times, since when this happens, the market price breaks out, and becomes much higher than all previous prices before then. If this phenomena is not volatile then, then, I don't know what is (volatile). So, wouldn't one reasonably expect that this "realization" should have happened by September last year? But did he stopped hedging by September last year?
Perhaps $80 is still not "high enough". Ok. What about by December last year (5-6 months ago) when it broke out above $100? Surely it must be considered volatile already by then. After all, just months before that, it was trading at half the price (only $50-$55)? So, I am really curious as to when he came to that realization that crude oil first became"volatile". And my query is did he stopped hedging by December last year? If not, why not?
Or is this "stop hedging decision" a new decision just made this month? For the purpose of promoting this news article? I'm not an AirAsia fan, so, I might not have noticed it and perhaps, he might just be reiterating what is already a policy previously.
The other concern I have is the nature of the business itself. There is no doubt that times are tougher now. Higher global and domestic inflation arising from increase in global commodity and food prices, with multiplier / chain-reaction effects. Air travel will either reduce or suffer a smaller growth rate - okay, not as bad as 2003 SARS perhaps, but adversely affected nonetheless. (Don't tell me the current crisis are all planned and known in advance last year.) But unlike 2003 SARS, the business, global and operating environment (e.g. price of crude oil, etc.) today is very different and volatile. Back in 2003, crude oil "peak" is only $40. Today the peak is $140. Has airfares increased proportionately? Or are we still seeing heavily discounted fares in the industry? Or has the competition gone worse in terms of pricing?
Further interest rates are set to rise with higher inflation. I don't think AirAsia financing needs and costs are going to come down any time soon. Instead, with further new planes coming in and further expansion plans, they will eventually need further increase in financing, and one can only expect AA's financing costs to go up relatively higher than its competitors with better looking balance sheets. AirAsia's relatively newer fleet too will be hit hard with higher depreciation costs relative to its competitors with older plane fleets, at the a time when air travel revenues are likely to face a squeeze rather than growing fast.
To me, this is a very risky business plan. As Tony acknowledge, the prudent plan is to scale down expansion plans, cut down new aircraft purchases or defer buying. The obvious risk is that AA ends up with a lot more planes and excess capacity than it really needs or can utilize reasonably. This is a comparative analysis comparing current situation, future situation against past situation in a general manner. Of course, if anyone has very specific modelling which clearly show the situation in the past, present and future (3 scenarios), then, I'll be very happy to comment. But in my own judgement, if Airasia were to find itself to become unprofitable, I am afraid, it would become extremely difficult if not impossible to get out of the hole as it is playing an extremely high stake game with such huge borrowings and expansion plans. Buffett's analogy of driving with a knife pointing at the driver's heart comes into mind, because the slightest pothole and bump is likely to kill the driver.
Anyway, only time will tell whether AirAsia will come out smelling like roses, or we'll see serious deterioration in profits.
I do like though Tony's attempts at trying everything possible to make sure that AA remains profitable, including selling washing machines. All good managers are like that - extremely determined, persistent, and innovative. The only problem is I'm not sure I want to carry that heavy washing machine home by myself ... but I'm sure Tony will think of home delivery service as well before I can think of it! But at the end of the day, Air Asia must know its core competency, and I'm again reminded by Buffett's quote that when good managers faces a business with deteriorating economics, the latter usually almost always wins.