AirAsia founder and chief executive Tony Fernandes has struggled to make headway in Indonesia — one of the world’s fastest-growing aviation markets — because of tough competition and economic turbulence.
Now the ebullient Malaysian tycoon’s Indonesian business is in the headlines for a different reason, after the crash of flight QZ8501 with the loss of all 162 passengers and crew on board.
While recovery efforts continue, AirAsia’s accident-free reputation has taken an immediate hit. The group’s Malaysia-listed shares are down 13 per cent since the incident.
AirAsia has come under fire from the Indonesian government for flying the QZ8501 route between Surabaya and Singapore and several other connections without the correct permits.
Any impact on sales at Indonesia AirAsia, as Mr Fernandes’ 49 per cent-owned venture is known, may not be known until May, as the airline reports traffic data on a quarterly rather than monthly basis, in contrast with many rivals.
While analysts say Indonesia ought to be the group’s most important market — with 250m people it has the biggest population in Southeast Asia compared with Malaysia’s 30m — it has woefully underperformed the other core markets of Thailand and Malaysia.
“Indonesia is one of the most sought-after markets [in Asia],” says Michael Beer, an aviation analyst at Citi in Hong Kong. “It’s paramount for AirAsia to get this right over time.”
Of the eight AirAsia-branded airlines, only the Malaysian one was profitable on an operating basis in the first three quarters of 2014.
Although AirAsia is the biggest low-cost carrier by routes in Asia, it faces two powerful incumbents in Indonesia — Lion Air, which was founded by former typewriter salesman Rusdi Kirana, and Garuda Indonesia, the state-owned flag carrier.
Lion, which is one the biggest customers for Boeing and Airbus, controls just over 40 per cent of Indonesia’s booming aviation market while Garuda has a market share of well over 20 per cent and AirAsia just 10 per cent, according to the Centre for Aviation (CAPA), a consultancy.
“If they did get it right it would be a significant leg up for them. But unlike Malaysia where they really have the territory to themselves, they are a distant number two in the domestic Indonesian market,” says Timothy Ross, head of Asia transport research at Credit Suisse in Singapore.
AirAsia operates 30 aircraft in Indonesia, compared with 80 in Malaysia and 40 in Thailand.
There is no doubting the size of the prize. With a fast-growing middle class, passenger numbers — including inbound numbers from overseas — are forecast to grow in Indonesia from 85m currently to 270m by 2034, according to the International Air Transport Association.
But carriers including AirAsia, founded with one second-hand aircraft in 2001, have been struggling to make money in Indonesia over the past year because of a sharp fall in the rupiah against the US dollar — around 70 per cent of costs including fuel and aircraft are dollar-denominated — and a slowdown in economic growth.
Cutting unprofitable routes and implementing fare increases helped Indonesia AirAsia eke out a small profit in the quarter ended September 30, but it is still lossmaking on a cumulative basis since it was launched a decade ago.
“Lion Air’s Rusdi is a very canny businessman and Tony will have his work cut out for him in Indonesia,” says Shukor Yusof, an aviation analyst at Endau Analytics in Malaysia.
Moreover, says Mr Yusof, while AirAsia has the first-mover advantage as a regional player, Lion is catching up quickly. Already active in Malaysia and Thailand through joint ventures, Lion has more than 500 aircraft on order to add to its fleet of 159, according to CAPA.
Lion has the aircraft and the domestic political connections through Mr Kirana’s position as deputy chairman of one of the parties backing new Indonesian president Joko Widodo. But analysts believe AirAsia can fight back because of its strong regional brand and flexible structure.
Mr Beer of Citi says Mr Fernandes has built a clever business model with which it can circumvent foreign ownership restrictions in Indonesia and other Asian markets by taking minority stakes in the local operating companies but leasing aircraft to them from the parent group.
This leasing model, and the fact that AirAsia is one of Airbus’ biggest customers, allowed it to scale back planned capacity additions in Indonesia last year when business got tough, says Mr Beer.
“Our next goal is to build [up] new places like Bandung, Ambon, Flores, Lombok,” Mr Fernandes told the Financial Times in September. “It’s about developing new markets for us and bringing new traffic flows.”
His ability to deliver will depend in part on how the aftermath of flight QZ8501 plays out. “They have exceptional brand equity,” says Mr Beer. “Is that enough to trump what is potentially a very unfortunate one-off event?”
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