ValueGrowth Investing
Competitiveness and Pricing Power of AirAsia
valuegrowth
Publish date: Wed, 28 Dec 2016, 11:14 PM
valuegrowth
0 5
Stock market is keep changing from seconds to seconds, but business environment isn't.
Instead of keep looking at the market conditions, do your due diligent will work more.
Instead of keep looking at the market conditions, do your due diligent will work more.
When we as an investor or traveller talk about AirAsia, there are always a lot to discuss.
Among all discussion, this is one of the categories people always talking about : fare price.
We always like to say the fare price in this few ways:
- AirAsia don't have any ecomony moat, what they have is low price nia (remember to pronounce "nia" as nia~~~~~~~~, the longer better.)
- AirAsia don't have pricing power one, they cannot raise their fare price and must follow market.
- AirAsia no longer cheap liao, Malindo and MAS cheaper.
There are a lot more, you could heard it everywhere, but the key questions are:
- Can AirAsia remain competitive in pricing?
- Can AirAsia keep the price high when he wish to?
1. Can AirAsia remain competitive in pricing?
To answer Q1, it's quite simple and we could just look at readily available CASK (Cost per Available seat Kilometres). We all know that AirAsia, especially Malaysia AirAsia has the lowest CASK in the world. For detail you could look at slide #6 of this presentation slide. (http://www.airasia.com/docs/common-docs/investor-relations/airasia_presentation_2q16b-pdf.pdf)
2. Can AirAsia keep the price high when he wish to?
For Q2, we could look at Average Fare price for each quarter.
Unfortunately, it's not that simple as air ticket fare is seasonal. To solve for it we could compare it based on YOY data.
However, what happen if let say for this quarter the airline fly significantly longer than last year? We all know that the longer you fly the higher fare we have to pay for. For example, let say AirAsia X commence its flight to UK and US, its average fare would be significantly higher as the distance is much greater (KUL-London is 10,597km while KUL-Sapporo is only 5,946km).
To solve for above, instead of using raw data (average fare), I use a measure call "unit fare per kilometres", i.e Average fare divided by average sector length to eliminate the effect of flight length/distance.
Unit Fare per kilometres = Average Passenger fare / Average sector length
Come back to the question itself and also look at question (ii) above, to answer this question we couldn't just compare the unit fare to CASK, as CASK for each company is different. The better way to compare would be compare the unit fare to a market factor, especially those factor which will affect the fare price wildly and equally to all market player. The best & obvious choice is fuel cost, a factor that every player will feel equally and represent 30~60% of operation cost.
As the metric we use above is unit fare, we couldn't just use the quarterly fuel expense directly, we have to convert it to unit fuel cost, which is
Unit fuel cost per kilometres = Total fuel cost / total distance in kilometres
Unit fuel cost per kilometres = Total fuel cost / (Average sector length x Number of Sector flown)
So, are we there to compare the 2 metrics and find out the pricing power of AirAsia?
Erm, not yet. There is no meaning even if we know for 3Q16 every passenger paid RM0.125 per kilometres and every aircraft spend RM7.56 for every kilometres flown. Nothing we could tell from there.
The only way to understand the pricing power is, we should compare the change in unit fare (%) & change in fuel cost (%) for this quarter and same quarter last year. A market maker should have ability to freely adjust its degree of change in unit fare without the needs to follow the degree of change in fuel cost. If a company must change it degree of change in unit fare follow the degree of change in unit fuel cost, that actually mean it couldn't set the price as what it like to. If despite there is high drop in change in fuel cost (like what we have in FY2015 & FY2016) and an airline could reduce the unit fare price in must smaller rate (or even maintain/raise the unit fare), that it's highly likely this airline is very competitive and could price the fare as what it want.
[Human language: if AirAsia no need to drop its fare price when big drop in fuel cost, that mean it has a huge pricing power.]
So, let see at the result table below:
The result is quite obvious, when the unit fuel cost is drop at rate of 12% in 3Q15, its unit fare just drop 8%.
The craziest is 1Q16 when unit fuel drop 30%, its unit fare actually raise by 4%.
The above comparison actually illustrate why AirAsia operating results are so good for past few quarters. They doesn't have to reduce their pricing when fuel cost is much lower now.
Summary
Despite some allegation that AirAsia has lose its pricing advantage, the analysis proved it opposite. When a company could raise its product pricing without losing its customer base (erm... I am not talking about AirAsia's Customer Service), that excatly indicate AirAsia has the pricing power just like what WD-40, Intel, Microsoft and Apple have.
Note:
- Another reason I don't use CASK vs unit fare is due to CASK is based on available capacity while unit fare is based on actual passenger number.
- The comparison above also show there is no price war for current period. If you compare above with AA India, you could see why I say that.
- for question (iii) at introduction, there is nothing to worry about Malindo & MAS price for now if you understand AirAsia's pricing structure. AirAsia use a 12-tiers pricing structure, when more and more tickets are sold, the system will automatically raise the fare of remaining tickets to increase the income. Therefore, when AirAsia's ticket are much expensive than Malindo & MAS, the concealed reason is high ticket sale/load factor has push the ticket fare to highest fare bucket.
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Discussions
Be the first to like this. Showing 20 of 20 comments
There's a clear distinction between competitiveness and pricing power. Competitiveness means can a company continue to make a profit while competing with others. If AA has a low cost base or the ability to keep cost on par or lower than competitors, then yes AA has competitiveness.
On the other hand, pricing power means can a company raise price at the rate of inflation or even better, higher than inflation rate. If AA has consistently done that over the past 3, 5, 10 years, one can say they have pricing power. An increase of 4% over a quarter doesn't conclude anything.
While low cost or pricing power can create a moat for a company, moat has to be viewed on its durability. If a company cannot maintain its advantage over the next 10 years, it isnt considered a moat. When applying moat into both competitiveness and pricing power, the questions are 1) Can Airasia continue to maintain the lowest CASK in the world over the next 10 years? 2) Does Airasia has the ability to increase price at inflation rate over next 10 years when there's lack of past record to support that?
2016-12-29 09:36
VG. If you look at the past record, AA could only have this sort of " pricing power " when MAS were dying for the past 2 years. I do agree with Ricky Yeo. But, Ricky, I think you area bit too negative about AA. As long as AA is the lowest cost producer, it will always has competitive edge. After painful years of bleeding capital do you think the other players want to go for another round of price war ? yes MAS and Makindo and adding the capacity. But if the industry doesn't see the huge demand, would you think all the players want to add capacity ? I am a bit on the positive side for I think the demand will still outpace the supply. Well that is my 2 cents. Eventhough the demand is slight lower than the supply it is not the end of the world and AA shall command a better PE price than current of less than 5 ( Base n anulaized 2016 profit ). But market put a price tag of the doom.
2016-12-29 10:14
By the way VG. I don't think the IRR value as explained by you in others post would be so straight forward. 1. The aircraft life span should not be calculated as 25 years for the enginer will need major overhaul after 8-10 years. that will be a cash out flow on this. 2. Not all the aircraft at ACC has same life span. hence the IRR shall not be applied to all aircrafts with single input. 3. AAC could add more aircraft in future hence it will be more cash out flow and inflow in future. So it is immposible to use IRR for its valuation like a toll highway like EPF buying Ekovest highway.
2016-12-29 11:29
I'm not being negative, just clarifying. You and VG know more about AA than I do. I'm just telling as an observation on other industries. The thing is demand is always hard to gauge, in 2004 many economists had high confident that China's boom will be multi decades, pushing everything from shipping, commodities to record high as more capaital flows into those industries to build ships and explore new mine sites, shipyard backlog filled up, and the subsequent bust. When an industry started to improve with excess profit to be made, there will be plenty of supply of money ready to invest to get a piece of it, that's what AA needs to defend against. Again all these are business observation, you have to decide the price and value.
2016-12-29 11:54
Ricky, the definition of pricing power is "an economic term referring to the effect that a change in a firm's product price has on the quantity demanded of that product." In the low fuel cost environment, competitors are fighting each other with lower fare or by introducing more aircraft/capacity (Malindo add 5 ATR72 and 10 Boeing 737 in last 6 months), but MAA is still able to maintain their price.
(Source: http://www.investopedia.com/terms/p/pricingpower.asp)
For the inflation rate, I do agree that MAA airfare doesn't inline and may even lag behind inflation rate.
2016-12-29 19:39
Cruger,
1. the responsibility of maintenance and overhaul (MRO) in on lessee, not lessor. Alternatively, lessor will charge lessee a fee called maintenance reserve for MRO. As AAC is a lessor, it doesn't has to spend cash from their own pocket, they could even earn interest on lessee's maintenance deposit.
2. For the lifespan, i don't have the breakdown but we do know the average age of all aircraft, it's safe to use average age for modelling.
3. future adding/selling of aircraft is beyong current valuation of AAC's current profolio worthy.
For 1 above, the reason I think it's safe to assume aircraft lifespan of 25 years is due to internationally acceptance of depreciation rate of aircraft. I found from AA & BOC Aviation annual report that both of them are depreciate aircraft in 25 years. If you interest I could send you the spreadsheet of my summary on their depreciation rate, together with my spreasheet of IRR calculation, just give me your email =)
2016-12-29 20:06
Btw, i found that you are right about passenger number, it doesn't include AAX group, but does include flights operated by IAAX on behalf of IAA. (i.e 3rd party passenger number we always saw in prelim Operating Statistic.
2016-12-29 22:31
Thanks VG. Appreciate if you could email me the calculation. But is there any other way to tell uou my email ? I dunno how many enemies I made in this forum ha ha ha . Don't want to get my email spamed. Read enough spam on i3 already ha ha ha . Thanks.
2016-12-29 22:55
By the way reading Tony interview get me a bit spooked. Adding 28 aircraft each year for the coming years . That take a lot of capital. Unless it's cash flow can really match the expansion otherwise it will red flag all over the places . By expansion is good . It will make a lot of money if he can pull it off nicely. Let's hope for the best.
2016-12-29 22:59
Haha, really, if anyone disclose their email here, he will spammed by those spammer, haha.
Or maybe u can create a temporary email and we exchange our true email from there?
2016-12-29 23:01
Ohhhh ... It is in the edge recently which I think iou can find the link in i3. Anyway here you go http://www.theedgemarkets.com/en/article/airasia-moving-full-steam-ahead
2016-12-30 07:35
I think Tony only said will add 28 aircrafts in 2017 ...he did not mention to add same amount in every year to come. Also, gradual replacement of old planes with new planes will increase effeciency as well as competitive advantage.
2016-12-30 08:41
KL Lee. This is from HL bank : " AirAsia has updated its fleet plan for 2017 with an expected growth of 26 net additional aircrafts (+15.9% yoy). Fleet expansion is expected to continue until 2028, with an average of 19-20 aircrafts per annum. New deliveries of A320NEO (15% fuel saving) has begun since Sep 2016, while the A321NEO (20% fuel saving) will begin in 2019. " ....
2016-12-30 09:18
VG. Thanks just send you a mail .... you can delete your email here just in case your email gor spamed hahahha.
2016-12-30 11:07
malindo its always cheaper than airasia. airasia based far mayb cheaper but u need to add up luggage etc. malindo is all included with 30kg luggage & snacks/ water. even a meal if the flight is more than 3 hours. wider seat n also inflight entertainement. Only Malindo doesnt serve as many routes as AA. I rather pay little more for comfort if the fare jus 20-50rm extra
2016-12-30 22:24
An mix. If that is true that will be a great news for Airasia. Imagine you could maintain that pricing with a more than 85% load factor that is a big loney there to be made.
2016-12-30 23:52
Taking away the analytics, i am actually quite impressed by the organizational culture in Air Asia. I think that this is what other competitors are missing at
2017-01-04 19:14
Airasia is about to complete its pullback corrections.....Best Buy at 2.05....
2017-01-04 22:14
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
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Two thumb ups for the write up .
2016-12-29 00:44