AirAsia takes risks with expansion amid downturn

While most airlines are cutting back, one is taking a riskier approach that could make or break its future.

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AirAsia, the region's biggest budget carrier, is taking a gamble: as soaring fuel prices force other airlines to cut back, shed jobs and ground planes, AirAsia is doing the opposite. The Malaysian airline is increasing flights, adding routes and boosting capital investment. Last month, it even gave away a million free seats, with passengers just paying taxes and fuel surcharges. The seven-year-old company is aiming to fill the vacuum as other airlines reduce capacity, betting that more travellers will opt for budget flights amid a global economic downturn. Analysts say that if it survives the industry slump, AirAsia could come out a winner with increased customer loyalty and a strong route network to catch the growth wave when the global economy rebounds.

"They are reasonably well positioned for the long run but there's always a trade-off. It's a long term decision, which will cause some short-term pain," said Damien Horth, Asia transport analyst at UBS in Hong Kong. Already there are some signs of at least short-term trouble in the risky venture. Last month, AirAsia reported a 95 per cent plunge in its second quarter net profit to 9.42 million Malaysian ringgit (Dh9.97m). But the company attributed that mostly to a 77m Malaysian ringgit foreign exchange loss from a weakened Malaysian ringgit and not weakness in its underlying business.

Average load factor - the percentage of seats taken up in an aeroplane - dipped to a still relatively strong 76 per cent, from 80 per cent in 2007. Chief executive Tony Fernandes remains undaunted, saying: "We are focused and happy with our strategy. We won't sacrifice long-term (growth) for short-term profits." There are doubts, however, on whether AirAsia can fund its expansion. It has a cash reserve of about 1 billion Malaysian ringgit but outstanding debts stand at 5.4bn Malaysian ringgit, giving it a net debt position of 4.4bn Malaysian ringgit. Debts, for the sort-term at least, are set to grow as it receives new planes. The carrier has firm orders for 175 Airbus A320 planes, to be delivered gradually up to 2014, as part of fleet replacement and expansion. * Staff with AP