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Groundbreaker AirAsia hits a rough patch

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AirAsia CEO Tony Fernandes walks in front of family members of passengers onboard the missing AirAsia Flight QZ8501 at a news conference in Juanda International Airport, Surabaya, on Dec. 28, 2014.   © Reuters

SINGAPORE -- AirAsia, a trailblazer in the region's airline industry, is going through the toughest period in its 13-year history. In addition to the loss of one of its flights in December, the group is being squeezed by the surging number of players in Asia's budget airline market.

     AirAsia Flight QZ8501 crashed into the Java Sea en route from the Indonesian city of Surabaya to Singapore on Dec. 28. Tony Fernandes, founder and group CEO of AirAsia, described it as his "worst nightmare." It was the first major accident for the Malaysian carrier.

Confidence shaken

AirAsia's troubles, however, began even earlier. In July-September, the latest quarter for which data is available, the Malaysia-based core company's net profit plummeted 85% on the year to 5.3 million ringgit ($1.46 million). The drop was mainly caused by losses at affiliates, especially in Thailand.

     Competing in a crowded market, Thai AirAsia has had to drastically cut fares in order to fill seats. Three local and 23 foreign budget carriers operate in Thailand, according to Sydney-based airline industry think tank CAPA-Centre for Aviation.

     Indonesia AirAsia's profit fell 30% as it reduced capacity in the quarter through September, while affiliates in the Philippines and India recorded net losses. At home, troubled flag carrier Malaysia Airlines has been slashing prices to defend its market share after two fatal accidents last year.

     Fernandes' confidence in his regional expansion strategy will likely be tested going forward. "[There is] nothing wrong [with competition] as long as it is fair," he said in an interview with the Nikkei Asian Review just before the crash in December. "We want to be No. 1 regionally, but not No. 1 in every country," he added, stressing  that in foreign markets, it can coexist with local dominant players. Now the question is whether a No. 2 player can stay profitable in this tough market.

     He also brushed off the idea that industry consolidation is on the horizon. The number of aircraft operating in the region, he pointed out, has "not come anywhere close" to that of the mature European market.

     The bankruptcy filing by Japan's third-largest carrier, Skymark Airlines, renewed speculation about AirAsia being a potential sponsor for restructuring. But Fernandes, in the December interview, said that would not happen unless former Skymark President Shinichi Nishikubo "wants to sell and says goodbye." He pointed to his experience trying, unsuccessfully, to form a partnership with All Nippon Airways to run a discount carrier in Japan: "When you have two kings, one dies," he said. "My experience is never do a partnership with an airline. There's got to be one driver."

Epoch-maker's next phase

Despite its recent challenges, AirAsia has been a groundbreaker in many respects. Fernandes, a former Warner Music executive, bought the ailing airline for 1 ringgit in 2001 and turned it into Asia's first successful budget carrier. Since then, the airline has been battling both state-owned Malaysia Airlines and the government, as well as trying to set up foreign affiliates to expand throughout the region.

     Fernandes, a self-described "disruptor," said he wanted to bring air travel to more people, a concept embodied in the company's slogan, "Now everyone can fly."

     "Only 6% of Malaysians had flown on a plane back then," he said, recalling the days of AirAsia's founding. "It was a shock to me." The airline's success has inspired a profusion of rivals in the region. The combined market share of budget carriers in Southeast Asia has come close to 60%, according to CAPA.

     One ray of light in AirAsia's otherwise gloomy outlook is the recent plunge in oil prices. Cheaper oil is expected to give an immediate lift to the airline's performance by reducing fuel costs, which make up 46% of AirAsia's total expenditures. The impact of the accident on travel demand and the company's business is seen as short term.

     "The probability of ... major negative demand contagion to Malaysia and Thailand is very low," CIMB research said in a Jan. 11 analyst report.

     The initial investigation into the crash of Flight QZ8501 revealed administrative irregularities on the part of both Indonesian air authorities and AirAsia, including that the airline did not have permission to fly that particular route on Sundays, the day the accident occurred.

     The plane's flight data recorder is now being analyzed, but the investigation is expected to take another six to seven months. During that time, AirAsia's fleet expansion will likely slow as overcapacity problems linger.

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