Unfazed by weak yields, AirAsia X bets on scale to win

KUALA LUMPUR (Reuters) - AirAsia X Bhd , the long-haul arm of Malaysian budget carrier AirAsia Bhd, is betting its dual strategy of scale and multi-country hubs will make it the region's dominant airline and help it survive the short-term impact of declining yields.

"We are deliberate in our strategy of expanding aggressively, especially in 2014. This is the business where, basically to succeed, you've really got to be number one in your segment," said AirAsia X Chief Executive Azran Osman Rani Azran.

"If you're number three or number four, it is going to be very hard...that's proven around the region, in America and Europe and how AirAsia continues to survive in Southeast Asia by being more than double the size" of other low-cost carriers, Azran told Reuters in an interview.

Steep price cuts by rival Malaysian Airlines on medium and long-haul routes last year hit passenger yields at AirAsia X, forcing it to discount fares to maintain load factors.

"Naturally there is short-term pressure on yields because typically every new capacity that we add in takes at least 12 months to break even," Azran said. "And so our portfolio is roughly about two-thirds above matured and profitable and one-third of the business is still new," he said.

BIG AMBITIONS

Seven-year-old AirAsia X, which flies from Kuala Lumpur to Saudi Arabia and 18 destinations in the Asia-Pacific region including points in Japan, China and Australia, has been the most ambitious of long-haul budget carriers in expanding its fleet and routes.

It plans to open a Bangkok-based affiliate, Thai AirAsia X, in June, followed by an Indonesian affiliate later this year.

The airline's strategy is to build long-haul bases on the back of AirAsia's extensive short-haul networks and affiliates in the region, focusing on a corridor of demand from North Asia to Australia via Southeast Asia.

It expanded capacity by 49 percent in the fourth quarter and plans a 40 percent increase for 2014, up from 19 percent overall in 2013, before scaling back later on, said Azran.

In December, AirAsia X placed a $6 billion order for 25 Airbus A330-300 aircraft to challenge network carriers. It expects to end the year with a fleet of 25 and operates 21 planes now.

The landscape is getting crowded though. Scoot, the medium and long-haul budget airline owned by deep-pocketed Singapore Airlines , is taking delivery of the first of its 20 Boeing 787 Dreamliner jets this year as it expands services.

AirAsia X also faces competition from Qantas Airways' budget subsidiary, Jetstar, and Philippine carrier Cebu Pacific Air .

"New entrants are coming into the space. We have to make sure we are really ahead of them in terms of size, scale and branding," said Azran, who was handpicked by AirAsia's co-founder, Tony Fernandes, to run the long-haul carrier.

"When we finish this year with 25 aircraft we will to be more than double the size of the next biggest competitor. We would have launched two hubs in Thailand and Indonesia and with a three-hub model that I think is far superior than all the other competition."

DISMAL RESULTS

AirAsia X unexpectedly swung to a net loss of 131 million Malaysian ringgit ($40.12 million) in the fourth quarter to December from a profit of 14 million ringgit a year ago, triggering a slew of broker downgrades.

Shares of AirAsia X have dropped 40 percent since its market debut in July last year and were trading at 75 sen per share on Tuesday, near the all-time low of 74 sen.

As some 65 percent of the airline's costs are in dollars, it will face short-term pressure due to weaker Asian currencies, an industry-wide issue. Improved performance at key routes and lower capacity growth over the next few years will help stabilize yields, Azran said.

($1 = 3.2650 Malaysian ringgit)

(Writing by Anshuman Daga; Editing by Matt Driskill)