AirAsia has little margin for error in crisis over missing jet

As AirAsia Bhd grapples with its first airliner disaster since its founding a dozen years ago, Asia's biggest budget carrier will have little margin for error given tough competition and thin profits in the sector.

Even before an Indonesia AirAsia flight went missing on Sunday night with 162 on board, presumed to have crashed off the Indonesian coast, affiliates in Thailand and the Philippines as well as its long-haul unit were posting losses while its Indonesian unit eked out only a tiny profit in the latest quarter.

Several analysts believe the incident could deter some passengers from using the airline, at least in the short term, with an outsized impact on its bottom line.

"Given the thin margin nature of the airline business, our calculations suggest that a 1 percent decline in IAA (Indonesia AirAsia), Malaysia AirAsia and Thai AirAsia's 2015 passenger traffic will result in a 13 percent reduction to AirAsia's 2015 net profit," CIMB analysts Raymond Yap and Jian Bo Gan said in a report.

The group is locked in fierce competition with regional rivals such as Malaysian Airline System Bhd, Qantas unit Jetstar, Indonesia's Lion Air and subsidiaries of Singapore Airlines.

With the AirAsia livery displayed prominently on the missing aircraft, the CIMB analysts expected the AirAsia group's Malaysian and Thai carriers would also be affected by the incident.

"But unless there is a second incident in the very near future, the AirAsia group's strong safety track record and very attractive commercial offerings may help limit the contagion and ensure a speedier demand recovery," they added.

Both the Indonesian and Malaysian aviation sectors have come under scrutiny after a series of accidents which have spooked air travellers and spurred action by safety authorities.

Indonesia said it would review the Indonesian operations of AirAsia to improve safety. Indonesia AirAsia is 49 percent owned by AirAsia, with local investors holding the rest.

SHARES FALL

Investors concerned about the incident's impact sold shares of the company and its affiliates on Monday, with AirAsia ending down 8.5 percent at its lowest close in a month on volume of 103 million shares, 10 times the average volume. During the session the shares had fallen as much as 12.9 percent.

Still, they are up 22 percent for the year so far, compared with a 5 percent fall in the Kuala Lumpur benchmark index .

Shares in Asia Aviation PCL, the holding company for Thai AirAsia in which the AirAsia group owns 45 percent, fell 2.3 percent on Monday.

Analysts believe the incident could prevent the airline from keeping up its yields, or average revenue per passenger for every kilometer flown.

"I was expecting yields to at least maintain on a year-on-year basis in 2015, but now I'm expecting them to decline by up to five percent," said Daniel Wong, analyst at Kuala Lumpur-based Hong Leong Investment Bank. He downgraded his rating on AirAsia to a "trading sell" from a "buy".

The direct impact on AirAsia from the Indonesia unit will be limited, analysts said, because even before the accident the unit was not contributing to AirAsia's bottom line and had not been expected do so for at least several quarters, as it makes up for unrecognised losses.

AirAsia Bhd's third-quarter profit tumbled 85 percent in July-September on rising costs, while affiliated long-haul carrier AirAsia X reported a fourth consecutive quarterly loss.

AirAsia also has a venture in India that launched flights in June and aims to expand. In July, it announced plans for a low-cost airline with Japan's biggest online retailer, Rakuten Inc, and other companies, marking its second attempt to tap the Japan market.