AIRASIA (5099) - Why I think Airasia results will be weak

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If you noticed, the announcements made by Airasia and AAX were very similiar - Higher load factors, % increase in passengers carried > % increase in capacity etc. Also, if you were to read reports, you will find out that Airasia and AAX has been gaining market share by lowering fares. In a newspaper article, Peter Bellew of Malaysia Airlines confirmed that there was a price war.

I suspected all along that these market share gains would not be possible without hitting profits due to lower fares. The recent AAX results confirmed those suspicions. Average fares were slashed by 14% y-o-y from RM526 to RM455 as a strategy to stimulate demand. This caused operating profit to fall 65% from RM20million in 2Q16 to RM7million in 2Q17! I always suspected that you can drive competition away but your profits will get hit. Once you think you've gained market share and decide to increase prices to take advantage, competition will return (unless you're inefficient like MAS previously). The 1st part has been proven. Waiting to see the 2nd part.

Now for Airasia, I suspect their 2Q17 results will be weak due to the same reason above.

Interestingly, Tan Sri Tony Fernandes actually came out to tell reporters on 25 August 2017 that the AAC sale is ''imminent''.......which is actually a LIE.

The Airasia board of directors is actually having a meeting this week to consider new bidders for their AAC business. Not even close to selling it yet. I believe this is an attempt by Tony Fernandes to provide support to the share price given that results could be quite weak.

We'll wait for the results in 2 days time to see if its weak.

My advice is to sell or stay aside until the results are announced, If results are good, you can enter. If bad, you will not be caught. I will not be worried about big gap ups because its an expensive stock, not a cheap one that can open 20-30% higher.


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