AirAsia risks expansion amid downturn

Kuala Lumpur: AirAsia, the region's biggest budget carrier, is making a risky bet.

As soaring fuel prices have forced other airlines to cut back, shed jobs and ground planes, AirAsia is doing the opposite: increasing flights, adding routes and boosting capital investment.

Last month, it even gave away a million free seats (although passengers still had to pay taxes and fuel surcharges). The seven-year-old company is aiming to fill the vacuum as other airlines reduce capacity, betting that more travellers will opt for budget flights amid a global economic downturn.

Analysts say that if it survives the industry slump, AirAsia could come out a winner with increased customer loyalty and a strong route network to catch the growth wave when good times return.

"They are reasonably well positioned for the long run but there's always a trade-off. It's a long term decision, which will cause some short-term pain," said Damien Horth, Asia transport analyst at UBS in Hong Kong.

Pros and cons

Of course, the strategy could also backfire badly.

Last month, AirAsia reported a 95 per cent plunge in its net profit for April-June quarter to 9.42 million ringgit ($2.9 million).

But the company chalked that up mostly to a 77 million ringgit ($23 million) foreign exchange loss from a weakened Malaysian ringgit, not weakness in its underlying business. Average load factor - the percentage of seats taken up in an airplane - dipped to a still relatively strong 76 per cent, from 80 per cent in 2007.

Chief executive Tony Fernandes remains undaunted.

"We are focussed and happy with our strategy. We won't sacrifice long-term [growth] for short-term profits," he told The Associated Press.

There are doubts, however, on whether AirAsia can fund its expansion.

It has a cash reserve of about one billion ringgit ($303 million) but outstanding debts stand at 5.4 billion ringgit ($1.6 billion), giving it a net debt position of 4.4 billion ringgit ($1.3 billion). Debts are set to grow as it receives new planes.