Rivalry set to 'burn' budget carrier's revenue

BUDGET carrier AirAsia Bhd's revenue is expected to decline by as much as 12 per cent in the second quarter of 2008 from the first quarter, due to a price war with its rival Malaysia Airlines (MAS).

Aseambankers Malaysia Bhd head of research Vincent Khoo said MAS' zero fare campaign for domestic and Southeast Asia destinations has taken industry players off-guard.

"With crude oil prices at US$120 per barrel and MAS' landmark attempt to sell otherwise unsold seats at low fares, AirAsia's cashflow could be hardest hit," he wrote in a note yesterday.

Khoo said AirAsia will likely see a 10 per cent to 12 per cent decline in revenue in the second quarter, raising concerns over its profitability from passenger airlines' operations and cash flow strength. He is recommending MAS for its improving operating indicators, while AirAsia has to overcome significant cash flow and business challenges.

Khoo reiterates his "buy" rating on MAS with a RM6.15 target price and a "fully valued" rating on AirAsia, saying its "target price is under review with downside bias".

AirAsia has yet to release the results for its 2008 first fiscal quarter ended March 31. Its net profit in the October-December 2007 quarter was RM245.7 million on revenue of RM632.8 million.

CIMB Investment Bank Bhd senior analyst Raymond Yap said with 60 per cent to 70 per cent of AirAsia's profit coming from the domestic sector, MAS' zero fare promotion could affect the low-cost carrier's forward bookings and yields.

"Furthermore, AirAsia has committed itself to an aggressive A320 delivery schedule, and interest costs and depreciation will balloon in the next few years, adding to the already significant pressure of higher fuel prices and pushing margins lower.

"AirAsia's load factors have also trended down in recent quarters, and could go down lower in view of the capacity growth," he said in a report yesterday.

"We have reduced our reported net earnings (for AirAsia) by 17 per cent to 32 per cent, but core net profit has been cut 90 per cent to 100 per cent in 2008-2009. The difference between reported and core earnings is made up of deferred tax asset provisions and translation gains on US dollar debt due to expected ringgit appreciation," he added.