AirAsia X Berhad (AAX) Earnings Call Transcript & Summary

Good evening, and welcome to all sites to today's conference. You are now participating in AirAsia X Berhad Fourth Quarter and Full Year 2019 Financial Results Briefing. [Operator Instructions] I will now hand over this session to Mr. Benyamin Ismail, the CEO of AirAsia X. Thank you. And over to you, sir.

Good evening, everybody. Thanks for dialing in for the fourth quarter analyst results. I apologize, the Board -- the call last week was moved to today. We were having a board, and our Chairman, Tan Sri Rafidah, fell sick. So we have to adjourn the board last week. So we just reconvened today to have another board. So completed today, we'll finalize the results for today. So for the key highlights for FY '19. As you can see, revenue down 4%. This is due to lower passengers down 2% year-on-year, mainly due to cut in -- capacity cuts as well as we see a lot of slowdown, especially for markets like China last year. So it's been tough. Korea as well, we're seeing some dampened demand issues due to the recession that's going through there. What remains good is ancillary remains strong, stood at MYR 1 billion, still 23% contribution of total revenue. A lot of that as well came from the expansion of Teleport within the business. Net operating loss stood at MYR 374 million, mainly attributable to the MFRS 16. Loss after tax recorded at MYR 489.5 million. Higher cost due to maintenance costs, high provisions of sale-leaseback transactions that we did last year, and most of it is more of a change of accounting treatments and a deferred tax charge of MYR 165.9 million in the year. Key highlight of FY '19. ASK down 3%. Average fare remains unchanged, that was all right. And total passenger carried down 2%, mentioned, and load factor remains quite buoyant at 81%. Key highlights for 4Q '19. Revenue up 4%, this means a very strong quarter for us. Higher number of passengers carried a total of 1.6 million, an 8% increase from the same period last year. Increases RASK by 3% to MYR 0.13 from MYR 0.126. Scheduled flights revenue increased by 8%. Ancillary revenue again and freight services are also up by 3%. Net operating loss stood at MYR 88.8 million, mainly attributed by accounting impact for the adoption of the MFRS 16. Loss after tax recorded at MYR 95.8 million, again due to the higher cost of 4Q '19 for maintenance, FOBs and also the accounting treatments and deferred charge. But as well, the losses were partly offset by an improved performance in key metrics and also low average fuel price compared to 4Q '18. Foreign exchange gains this year swing the right way at 1.3 -- MYR 131.7 million. Key highlights. Capacity up for 4Q. Again, we ramped up a lot of capacity in 4Q. Routes also up 11%. Introduced introduction of Fukuoka, Lanzhou, Taipei-Osaka, Narita and Singapore. Passengers carried up 8%, and load factor, 81%. RASK remains high at MYR 0.13, up 3%. And also, we've seen a very strong recovery in some of the routine yields. Cost per ASK went up 8%. This again is just due to maintenance, sale-and-leaseback transactions and MFRS 16. But in generally, in terms of the overall metrics, everything else remains flat or even lower. Unfortunately, the maintenance is -- it was a full year of a lot of maintenance checks that we put through this -- last year. AirAsia X Thailand. Passengers carried up 40%. ASK capacity up 43%. Load factor down 2 points. Average base fare down 120, and a net loss of about USD 3.6 million. Revenue grew 27% to USD 120.7 million. ASK capacity growth in Thailand due to the additional 4 aircraft year-on-year. In total, 2 destinations were added, which was Brisbane and Fukuoka. But what we see as well as in -- as compared to Malaysia and Thailand is, I think, Thailand is flushed with a lot of capacity. Competition is rife, so therefore, it's a bit tough. So therefore, that has impacted them on the fares, but I think the most important thing as well they managed to maintain a very high load factor. Consider performance, again, we are up 3% year-on-year [ to MYR 268 million ]. This is due to the increase in number of passengers and freight in 4Q '19. Again, the star performers of the ancillary seat fees, which is your biggest seat, freight, and also a higher take-up of the lounge services that we have in klia2. That's really much the breakdown of it. We tried -- introduced a lot of dynamic pricing throughout the whole ancillary, basically on a higher route [ stretch ] , which is Australia, the prices are slightly higher and also based on the demand generation as well. Change of seat, auto decline [ about ] 24 hours before departure as well, so that's something that we've cut it down to 9 hours, and as well the development of Santan meals, which also has really improved [ average ] take-ups moving on. So now to the real thing. In terms of the coronavirus, as you can see, it has impacted us quite a bit. It's impacted pretty much every airline. I think for us, China is about 30% of our capacity, 30% of also -- probably close to 30% of our revenue. It has caused a lot of strain on our cash flows. We have gone on a full-blown cost initiative to try to reduce costs as we can because, overly, we don't see in the next 3 or 4 months yields recovering. So I think for the meantime, what we're trying hard is trying to see whether what we can do, made some painful decisions to reduce cost and see how we go. So potentially, what we're trying to do, the first thing we're doing is we are doing a lot of route suspensions immediately, the routes that we have just invested in and is slow to grow. Usually, we would take about a year for this routes to go to profitability, but in this kind of situation, we just feel that we're not in the right position to continue and fund that route. So as at Monday, we have announced the cancellation of Tianjin, Lanzhou and Jaipur. And potentially later, what will happen is these routes will either go to the 321s. It will always come back when the situation is better. We're also looking at a potential outright sale of 2 ECA loan aircraft, which is on our books. This potentially will generate cash proceeds about USD 50 million. So that's still in discussion. The team is negotiating with all the potential buyers. We -- if you read -- I'm sure as you're aware, we've also asked for a huge lease reduction across the entire fleet. That request has gone up at 30% lease reduction. And also, we've also renegotiated with a lot of lease maintenance reserves. We've also asked -- pretty much, we sent a note that go out to all the airports, this is [ an inclusive ] area here for redirects as well, [ how many ] areas are there as well. So we sent also a request to all the airports, ground handlers across our markets, in times of these hard times to see whether how much we can reduce our commitments to them on those costs. We are also looking at some short-term wet lease agreement. We've -- to date, we have canceled up to 500 flights or 350 for -- 350 to 400 in Feb. We are canceling about another 500 flights in March. This is related to just China routes. As you know, China has not unwind the ban yet. AirAsia as well, we're doing the same thing. So I think this is going to be very tough for us for March, especially that I said, 30% of our cash flows is from China. Network plan. Again, this is basically what we added recently, but it's a short distance routes. I think we're not going to do much long-haul for the meantime and just focus on capacity management going into this tough coronavirus time. Other cost saving initiatives, we're looking at early returns of 5 lease aircrafts. The team is negotiating hard to return those on an early return basis, all -- and I mentioned all these [ attitudes ] as well. Outlook. We also have pretty much told Airbus that we're not ready to take any 330neos in the meantime and just focus on reducing capacity and bringing yields up until this -- the market will recover anytime soon. So basically, what we have is a team working on a dual fleet type flight strategy, where we're going to bring the 321s to replace them with the 330s where -- to cover the capacity where we believe that it will take a while to fill up all the 330s. I think once -- the strategy is once that aircraft and it becomes very profitable and the demand is very high, we can potentially move that up to a wide-body operation. So basically, the strategy is anything above 6 hours will be a 330 aircrafts. So this potentially will only start kicking in next year. This year is more of a year just to maintain cash, maintain reduced cost as much as possible and see what we can do for the company. Again, protecting the future, we're doing it. We're hedged for 2020, 80% at $60, $60, $58 and $60 throughout the whole quarters. But I think this is where we're looking at this year. So again, that pretty much sums up fourth quarter for AirAsia X. Again, I apologize for a week delay of the call, and we'll open up for Q&As.

[Operator Instructions] The first question is from Mr. Raymond from CIMB.

So just talking about your fuel hedges, it just came out in the AirAsia's call, and they mentioned that they had hedged about 20% of their frac spreads for quarter 1 to quarter 3 this year. So you didn't mention it over here. So I just wanted to check whether you had also done the same.

The answer would be yes, right? Because that's [ what you call ] the good prices.

Sorry, I can't hear you.

Yes. [ Everything ] is done. Well, we did put it in the slides earlier. So basically everything that's done within the company is done throughout the whole AirAsia fleet. So we [indiscernible] [ the same ].

Okay. And regarding your COVID-19 impact. When you say 600 flight cancellations in March, how much percentage is that of the China capacity? And this is all 600 flights to China, right?

No. So basically, what we have is, we have pretty much for the month of March, we fly to 11 cities. So we will cancel 8 of the cities for the month of March. Basically, we're not operating those flights at all. And then we reduce the capacity for the 3 that balance, which is Shanghai, Beijing and Chengdu. Why those markets were left in because that market is purely FIC. The group content is very small. So the cancellations, therefore, is not as much. The other air destinations are highly group content, are travel agents. And so therefore, at the moment, based on just demand, we're not seeing that coming on. Plus, as you're aware, the ban on traveling for outbound out of China is still in place. So you don't see many Chinese going out at the moment.

Okay. So 600 flights in March cancel. Does that represent about 70% of your China capacity?

Yes, I would say so.

Okay. And when you talk about 400 flights canceled in February, that would imply probably about maybe...

So maybe a bit less because I think that was more ad hoc. So -- and we didn't see the impact because we were doing -- we should have started earlier, but we were -- the problem with the coronavirus, when it happened, we didn't -- travel agents weren't canceling the seats. So when we operated those flights, we saw that the passenger manifest coming back out of China was still pretty heavy. We were looking at still 300 pax coming out. But in reality, when we arrive in [ 1 to 2 ] , brought back to check-in passengers, the no-show rate was 97%. So we made a call that we -- even though the data shows that there are still this rate of no shows, we decided to make a call to cancel those flights and merge -- and make the decision to merge flights. So flights that are running at 4 times or 7 times a week, we will probably operate it once or twice a week. So -- then hence why in March, we just made a concerned decision just to cancel, and we reroute that to the closer cities, whoever that wants to fly.

Okay. So after the cancellation, what kind of a load factor are we looking at for March relative to what it was last year?

Sorry. What? The load factor?