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.