AirAsia seeks to fly bulk of MAS domestic routes

AirAsia seeks to fly bulk of MAS domestic routes

Kyunghee Park, Bloomberg, Singapore

AirAsia Bhd., Southeast Asia's biggest discount carrier, said it
has proposed to operate all but three of Malaysian Airline System
Bhd.'s domestic routes as part of the government's reorganization
of the network.

The review of the domestic routes is part of the government's
plan to help Malaysian Airline recover from losses of 367.7
million ringgit (US$97.3 million) in the second quarter ended
Sept. 30.

"AirAsia can take on the bulk of the domestic routes where
Malaysian Airline can't make money," AirAsia's Chief Executive
Tony Fernandes said in an interview today in Kuala Lumpur. "Then,
Malaysian Airlines will be free to focus on medium- and long-haul
flights," without government subsidies, he said.

The Malaysian government is seeking to improve the
competitiveness of its companies as the Southeast Asian country
opens up its markets. A move to allocate domestic routes to
AirAsia will help Malaysian Airline cut costs and may avert a
proposal for the government to provide the carrier with funds to
help it recover from a second quarterly loss.

Malaysian Airline currently operates the country's
unprofitable domestic air services for state-owned Penerbangan
Malaysia Bhd., which shoulders the losses.

Malaysian Airline shares gained as much as 1.8 percent to 2.83
ringgit and traded at 2.81 ringgit as of 3:36 p.m. in Kuala
Lumpur. Shares of AirAsia rose 0.6 percent to 1.63 ringgit.

AirAsia can operate all domestic routes, except for three
destinations that are operated by De Havilland DHC6 Twin Otter,
Fernandes, 41, said. The three routes should be offered to the
lowest-bidding airline, which means about 15 million ($4 million)
to 20 million ringgit in subsidies the government will pay,
compared with at least 400 million ringgit it now pays, he said.

Malaysian Airline will submit a turnaround plan to the
government by February 2006. The government will look at the plan
and may provide funds if needed, though it wouldn't be a
"bailout," Malaysia's Prime Minister Abdullah Ahmad Badawi said
on Dec. 2.

Malaysia's Deputy Transport Minister Azlan Ibni Sultan Abu
Bakar yesterday declined to comment when the government will
review of its domestic routes.

AirAsia on Nov. 28 posted its fifth quarterly profit of 11.8
million ringgit in the three months ended Sept. 30 after the
company attracted more passengers with low fares and said it
expects full-year profit to increase from a year earlier.

AirAsia hedged all of its fuel needs for the full-year and
added a ticket surcharge from July, reducing the impact of rising
fuel prices on earnings.

AirAsia said on Oct. 24 it's covered all of its fuel
requirements for the year ending in June 2006 with West Texas
Intermediate futures on crude oil. With the latest hedge, AirAsia
pays $48 a barrel for fuel when West Texas crude is between $48
and $60 a barrel.

The airline is looking to firm up more hedging options,
Fernandes said today. He didnFt elaborate.

AirAsia, which began flying in 2002, serves 57 destinations in
Malaysia and six other Asian countries with a fleet of 33 Boeing
Co. 737-300 planes. It placed a $3.8 billion order in March for
60 A320s from Airbus SAS, with options for 40 more.

The airline on Aug. 29 said it has secured a loan of about
$1.5 billion from an undisclosed group of lenders to pay for the
new aircraft.

"We don't need to raise any money," Fernandes said. "We're
comfortable with our cash flow right now. If there's the right
opportunity to raise it, then we'll look at it. But it's not my
decision, it's the board's."

AirAsia may likely raise funds next year through one or two
separate share placements of about $300 million, UOB Kay Hian
Research Pte in Singapore said in a Nov. 30 research note.

AirAsia will focus on its existing operations in Malaysia,
Thailand and Indonesia, Fernandes said. The airline isn't
interested in flying to Singapore, he said.

AirAsia's 49 percent-owned Indonesian venture, PT AWAir
International, recently renamed Indonesia AirAsia, earlier this
year proposed to start flights between Jakarta and the city state
but the plan has been stalled.

The Singapore's aviation authority said in March it can't
decide on the request because of Indonesia's decision to restrict
service of overseas low-cost carriers.

AirAsia also partly owns low-fare airline Thai AirAsia Co.
Ltd. in a venture with Shin Corp. of Thailand.