I remember an article/interview written by Warren Buffet saying how on aggregate airlines have no net profit over the lifetime of airlines. This has always stayed with me. Some business models are simply too unstable to be profitable for the long term. This was the reason I never subscribed to the Cebu Pacific IPO. Airlines are simply not good business. Of course there is the outlier in each business but look at all our airlines in the Philippines they are all basically the same.
But AirAsia seems to be suffering from a permanent structural problem, too, one that it hopes to fix by linking Southeast Asia with Japan.
An airline’s financial health is usually gauged by looking at its revenue per available seat mile. The RASM index is obtained by dividing operating income by available seat miles, which are calculated by multiplying available seats by the number of miles a carrier’s jetliners fly during a designated period. AirAsia’s RASM slid 7% in 2013.
AirAsia, founded in 2001, has continued to grow by wooing passengers from existing airlines with fares that at one point were more than 50% lower.
All the bargains AirAsia has been handing out have contributed to Malaysia Airlines’ financial crunch. AirAsia took to the skies with the marketing slogan “now everyone can fly,” but its dominance of the budget airline market lasted only a decade.
A week after Fernandes hugged Mikitani in front of Japanese reporters, Azran Osman-Rani, CEO of AirAsia X — the AirAsia group’s mid- and long-range flight operator — told The Nikkei that his carrier intends to double sales with flights to and from Japan in the next three years.
According to the CAPA — an independent provider of market intelligence, analysis and data services — budget airlines’ share of Southeast Asia’s aviation market on a number of seats basis grew to slightly less than 60% in 2013, almost double that of two years earlier.
Fare-slashing will probably continue; there is really no other option for a budget carrier. And the industry could end up cannibalizing itself.
Consider that the 2013 net profit of Philippines-based Cebu Pacific Air declined a whopping 85%. Or that Singapore-based Tigerair closed its Indonesian unit, Tigerair Mandala, on July 1.
Are you getting the picture?