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No comfort at home for AirAsia as overseas units drag

Al-Zaquan Amer Hamzah
Tuesday, 19 Nov 2013 | 4:00 PM ET

KUALA LUMPUR, Nov 20 (Reuters) - Malaysia's AirAsia Bhd will take up to two years to realise a profit from its Indonesia and Philippine units, income that would help prop up eroding margins as Asia's largest budget carrier wages a price war at home.

AirAsia, which has dominated budget air travel in Asia with explosive growth, is now struggling to boost earnings in its biggest market, Malaysia, where rivals such as national carrier Malaysian Airline System (MAS) and Malindo Airways are slashing fares.

Competition is also affecting AirAsia's Indonesia and Philippines units, which have yet to reverse combined losses of 203 million ringgit ($63.65 million) as of the second quarter. Its Thailand unit has completely reversed losses since the first quarter of 2012 thanks to lower fuel costs and more passenger traffic.

"They should be able to reverse the negative equity after next year," said Ahmad Maghfur Usman, an analyst at RHB Research Institute, referring to the Philippine unit which AirAsia said is the smallest in terms of passenger volume.

Maybank analyst Mohshin Aziz forecast the Indonesian unit, AirAsia's third-largest by passenger volume, will take another four quarters to contribute to overall profits as it struggles to fend off competition from Lion Air and Garuda.

AirAsia's profit margins are expected to fall to 10.4 percent in 2013 from 15.7 percent a year earlier, Thomson Reuters data shows. Within the next two years, however, margins are seen rising to around 15 percent.

AirAsia declined to comment ahead of its third-quarter financial results due on Wednesday. Earlier this month, AirAsia Group CEO and co-founder, Tony Fernandes, said a cost-cutting drive had helped deliver "good success" in the third quarter which will carry on into the fourth.

DOOMSDAY FARES

AirAsia's net profit has fallen for the first two quarters by 40 percent and 62 percent year-on-year, largely due to the price war in Malaysia. Fernandes and co-founder Kamarudin Meranun returned to the frontline at home this month to take more control of the airline after a year in Jakarta spearheading regional operations.

Analysts expect net profit in the third-quarter to decline again as costs remain a drag. AirAsia is spending big to set up a unit in India with Tata Group, where taxes make jet fuel costs among the world's most expensive.

"I think its going to show a weakness on a year-to-year basis. A big portion of their earnings are domestic and this is subjected to acrimonious competition, so we could see a huge decline in third-quarter profit," said Maybank analyst Mohshin.

"I've seen some routes go down to 'doomsday fares', especially Kuala Lumpur to Sabah, Sarawak and to Singapore. Even AirAsia can't make money this way," he added.

AirAsia's larger rival, MAS, which this week reported a third-quarter net loss from a profit a year ago, said its yields and prices were pressured by competition..

As of Monday's close, AirAsia's shares were down 8 percent so far this year compared to a 3.3 percent rise for MAS shares.

Analysts, however, said AirAsia's low-cost structure meant it was better placed than Malaysian Airlines to absorb lower ticket prices.

"There is competition from Malaysian Airlines but I think AirAsia's valuation takes this into account," said Arnaud Bouchet, Singapore-based analyst at BNP Paribas.

"Every attempt by an airline to offer very low ticket prices is usually a very bad end," he added, referring to Malaysian Airlines. "I don't think that's sustainable."

($1 = 3.1895 Malaysian ringgit)

(Additional reporting by Anshuman Daga in SINGAPORE; Editing by Miral Fahmy and Niluksi Koswanage)

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