Thai AirAsia’s Expansion Plan
Monday, May 14th, 2012
At Thai AirAsia, staying small and maintaining flexibility in business operations is a mantra that has produced a solid track record for the low-cost airline over the past nine years.
But, according to Tassapon Bijleveld, chief executive officer, there is nothing small about the firm’s ambitions. Whatever the business plans, they must boost the bottom line and support the goal of maintaining revenue and profit growth of 20 per cent per annum. Notably, within five years, the low-cost airline has set its sights on beating Thai Airways International in the area of passenger numbers.
“Competitors in the region? We have none. We have witnessed low competition in the domestic market. Regionally, Tiger Airways would be a key competitor should it be able to solve its internal problems,” he said in an interview last week.
Established in 2003, the low-cost airline – a key business arm of Malaysia-based AirAsia – has demonstrated astonishing growth. In the first quarter of this year, its load factor increased to 87 per cent from 84 per cent in the same period a year earlier, and the airline carried 17 per cent more passengers, totalling 2.13 million compared with 1.82 million.
Under its “Now Everyone Can Fly” slogan, the airline claims a 63-per-cent share of the domestic market with weekly flights to regional destinations.
According to Tassapon, the airline sees unlimited possibilities. In Thailand, where all but 22 provinces have their own airports, Thai AirAsia now flies to only 12 destinations. Potential future destinations include Lampang, Nan and Loei. Regionally, there are many destinations within four hours’ flying time, including Siem Reap in Cambodia, Vientiane, the Maldives, Hainan and Nanning in China, and Nepal.
While rapidly expanding, the airline keeps itself small in terms of asset build-up and expenses. In the past nine years, the airline has acquired 24 aircraft through operating leases, which demand financing through cash flow, not term loans. Though this results in low assets, it also means low liabilities.
At present, fuel, maintenance and aircraft operating leases account for 80 per cent of total expenses. The fuel cost is now kept at 35-40 per cent of total expenses, as the airline can transfer additional fuel costs to passengers in a matter of one or two weeks. Brand-new aircraft help keep fuel and maintenance costs at a low level. The airline plans to expand its fleet by 26 aircraft to a total of 50 by 2016. It expects to operate 11 aircraft under leases and to purchase 15 outright. Though a term loan is required, the debt-to-equity ratio will be maintained below two times.
Being small allows flexibility. The airline has picked destinations based on the economy of the area and the potential number of passengers. Teams are dispatched to potential destinations to conduct thorough market research, chiefly to find out what activities are available for visitors. Tassapon himself travels to the destinations to confirm the studies’ findings. “Sometimes, I’m wrong,” he admitted.
Thai AirAsia will immediately cut its losses on any route that is not profitable. Tassapon says that within four months, bookings show whether a route is profitable or not. If not, the route is terminated, sometimes at a cost of hundreds of thousands of baht. A route can be reopened if the situation improves, he said.
Unlike premium airlines, which spend about Bt100 million to promote new routes, Thai AirAsia spends hundreds of thousands of baht, on top of its advertising budget of Bt3 million-Bt5 million per route.
The only low-cost airline operating domestic and regional flights from highly congested Suvarnabhumi Airport, Thai AirAsia is being persuaded to move to the old airport. Tassapon said negotiations are underway with the authorities, chiefly to ensure that Don Mueang Airport would be reopened to Thai AirAsia for a long period.
“When we moved from Don Mueang to Suvarnabhumi, we operated 12 aircraft. Now, we have 24 and the fleet is expanding. If we are asked to move back to Suvarnabhumi, that will be costly and could cause problems to our 2,000 staff,” he said. He expected an answer from the authorities by July.
Among units of AirAsia, Thai AirAsia has shown the strongest growth, beating those in Indonesia and the Philippines. To support expansion, it will issue new shares to Asia Aviation (AAV), established in 2006 to take over a 51-per-cent stake in the airline from Shin Corp. Through an initial public offering of some 2 billion shares late this month or early next month, AAV will raise its stake in Thai AirAsia to 55 per cent and repay a US$39 million (Bt1.349 billion) loan, borrowed by Tassapon and other executives of Thai AirAsia for a management buyout in 2006. Roadshows will start this week, to be followed by book building.
Tassapon is optimistic on the firm’s business outlook, and during the two-hour interview, he repeated his saying, “Buy it [the stock] now, before it becomes too expensive.”
He has even set his sights on beating Thai Airways International, the national carrier, in terms of passenger numbers in five years. In the first quarter, while THAI carried 5.16 million passengers, Thai AirAsia flew 2.13 million. Yet, Tassapon believes that Thai AirAsia’s capacity will grow faster than THAI’s.
“I won’t leave Thai AirAsia until the goal is accomplished,” he said.
