6. INFORMATION ON OUR GROUP 6. INFORMATION ON OUR GROUP 6.1 Our Company Our Company was incorporated on 19 May 2006 as a private limited company in Malaysia under the Companies Act under the name of Eden Hub Sdn Bhd. Our name was subsequently changed to Fly Asian Xpress Sdn Bhd on 1 June 2006. Our principal activities then were the operation of air services in the rural areas of Sabah and Sarawak (East Malaysia) until 30 September 2007. We changed our name to AirAsia X Sdn Bhd on 21 September 2007 and our company was converted into a public company and assumed our present name AirAsia X Berhad on 9 October 2012. We have been principally engaged in the business of providing low-cost, Long-haul air transportation services since November 2007. Further details of our Group and our history are set out in Section 7.1 of this Prospectus.
6.2 Share Capital 6.2.1 Authorised, Issued and Fully Paid-Up Share Capital Our authorised share capital as at the date of this Prospectus is RM500,OOO,OOO comprising 3,333,333,333 Shares. Our issued and paid-up share capital as at the date of this Prospectus is RM266,666,668 comprising 1,777,777,787 Shares. 6.2.2 Details of the Issue and Allotment of Shares of our Company Details of the changes to our issued and paid-up share capital for the past 3 years preceding the date of this Prospectus were as follows: (i) Shares Par Cumulative issued and Date of Value paid-up share capital allotment No. of Shares RM Consideration RM 11 June 2010 10,000,000 1.00 Cash 208,000,001 3 July 2010 4,707,200 1.00 Cash 212,707,201 7 July 2010 11,292,800 1.00 Cash 224,000,001 10 May 2013 42,666,667 1.00 Conversion of 266,666,668 RCPS 13 May 2013 1,777,777,787 0.15 Subdivision of 266,666,668 shares (ii) RCPS Par Cumulative issued and Date of Value paid-up share capital allotment No. of RCPS RM Consideration RM 9 July 2010 16,000,000 1.00 Cash 42,666,667 AirAsia Berhad had on 10 May 2013 converted all of its outstanding 42,666,667 RCPS into 42,666,667 ordinary shares of RM1.00 each. 6. INFORMATION ON OUR GROUP (cont’d) There was no outstanding warrant, option, convertible security or uncalled capital in respect of the shares in our Company and subsidiaries as at the date of this Prospectus. Prior to our Listing, a total of up to 9,850,000 ESOS Options are proposed to be granted to Eligible Employees, details of which are set out in Section
4.5 of this Prospectus. 6.3 Our Subsidiaries and Associated Company 6.3.1 Group Structure Our current Group structure is set forth below: AirAsia X
Other than the above, our Company does not have any other subsidiaries, associated companies or joint-controlled entities. 6.3.2 Details of our Subsidiaries and Associated Company As at the LPD, our subsidiaries and associated company were as follows: Our Issued and Company’s Country of Date of paid-up effective Principal Name incorporation incorporation share capital interest (%) Activities AirAsiaX Australia 4 January AUD1.00 100% Provision of Services Pty 2010 comprising 1 management Ltd ordinary logistical and share of marketing AUD1.00 services in Australia AirAsiaX New Zealand 1 February NZD100.00 100% Dormant NZ Limited 2011 comprising 100 ordinary shares
AAX Capital Federal 21 June USD2.00 100% Dormant Ltd Territory of 2010 comprising 2 Labuan ordinary shares 70 6. INFORMATION ON OUR GROUP (cont’d) Name Country of incorporation Date of incorporation Issued and paid-up share capital Our Company’s effective interest (%) Principal Activities AAX Leasing I Limited Federal Territory of Labuan 16 August 2011 USD1.00 comprising 1 ordinary share 100% Engine leasing THAIAAX Co., Ltd. Thailand 12 March 2013 THB15.00 comprising 3 shares of THB5.00 each 33% Dormant
(i) AirAsia X Services Ply Ltd (a) History and Business AirAsia X Services Pty Ltd was incorporated on 4 January 201 Oas a private limited company in Australia under the Australian Corporations Act 2001 under its present name. AirAsia X Services Pty Ltd commenced its business on 4 January 2010. AirAsia X Services Pty Ltd is principally involved in the provision of management logistics and marketing services as well as the employment of Australia nationals to support our operations in Australia. (b) Share Capital As at the LPD, the issued and paid-up share capital of AirAsia X Services pty Ltd consisted of 1 ordinary share at AUD1.00 par. There has been no change in the issued and paid up share capital of AirAsia X Services Pty Ltd since its incorporation date and the issuance of its existing share capital on 4 January 2010 up to the LPD. (c) Shareholder
As at the LPD, AirAsia X Services Pty Ltd was a wholly-owned subsidiary of our Company. There is no outstanding warrant, option, convertible security or uncalled capital in respect of the shares in AirAsia X Services Pty Ltd as at the LPD.
(d) Subsidiary and Associated Companies
AirAsia X Services Pty Ltd did not have any subsidiaries and associated companies as at the LPD.
6. INFORMATION ON OUR GROUP (cont’d) (ii) AirAsia X NZ Limited (a) History and Business AirAsia X NZ Limited was incorporated on 1 February 2011 as a private limited company in New Zealand under the New Zealand Companies Act 1993 under its present name. AirAsia X NZ Limited commenced its business on 1 February 2011. AirAsia X NZ Limited was principally involved in the provision of management logistics and marketing services as well as the employment of New Zealand nationals to support our operations in New Zealand. However, due to the termination of our routes to New Zealand, it has ceased service in New Zealand since July 2012 and we intend to wind up AirAsia X NZ Limited going forward. (b) Share Capital As at the LPD, the issued and paid-up share capital of AirAsia X NZ Limited consisted of 100 ordinary shares. There has been no change in the issued and paid up share capital of AirAsia X NZ Ltd since its incorporation date and the issuance of its existing share capital on 1 February 2011 up to the LPD. (c) Shareholder
As at the LPD, AirAsia X NZ Limited was a wholly-owned subsidiary of our Company. There was no outstanding warrant, option, convertible security or uncalled capital in respect of the shares in AirAsia X NZ Limited as at the LPD.
(d) Subsidiary and Associated Companies
AirAsia X NZ Limited did not have any subsidiaries and associated companies as at the LPD. (iii) AAX Capital Ltd (a) History and Business AAX Capital Ltd was incorporated on 21 June 2010 as a private limited company in the Federal Territory of Labuan under the Labuan Companies Act 1990 under its present name. AAX Capital Ltd was a special purpose vehicle incorporated for working capital loan purposes, and is currently a dormant company, which we intend to wind up going forward. (b) Share Capital As at the LPD, the issued and paid-up share capital of AAX Capital Ltd was USD2.00 consisting of 2 ordinary shares. There has been no change in the issued and paid up share capital of AAX Capital Ltd since its incorporation date and the issuance of its existing share capital on 21 June 2010 up to the LPD. 72 6. INFORMATION ON OUR GROUP (cont’d) (c) Shareholder
As at the LPD, AAX Capital Ltd was a wholly-owned subsidiary of our Company. There was no outstanding warrant, option, convertible security or uncalled capital in respect of the shares in AAX Capital Ltd as at the LPD.
(d) Subsidiary and Associated Companies
AAX Capital Ltd did not have any subsidiaries and associated companies as at the LPD. (iv) AAX Leasing I Limited (a) History and Business AAX Leasing I Limited was incorporated on 16 August 2011 as a private limited company in the Federal Territory of Labuan under the Labuan Companies Act 1990 under its present name. AAX Leasing I Limited is a special purpose vehicle incorporated for the purpose of engine leasing. (b) Share Capital As at the LPD, the issued and paid-up share capital of AAX Leasing I Limited was USD1.00 consisting of 1 ordinary share. There has been no change in the issued and paid up share capital of AAX Leasing I Ltd since its incorporation date and the issuance of its existing share capital on 16 August 2011 up to the LPD. (c) Shareholder
As at the LPD, AAX Leasing I Limited was a wholly-owned subsidiary of our Company. There was no outstanding warrant, option, convertible security or uncalled capital in respect of the shares in AAX Leasing I Limited as at the LPD.
(d) SUbsidiary and Associated Companies
AAX Leasing I Limited did not have any subsidiaries and associated companies as at the LPD.
(v) THAI AAX Co., Ltd. (a) History and Business THAI AAX Co., Ltd. was incorporated on 12 March 2013 as a limited company in Thailand under the Thai Civil and Commercial Code under its present name. THAI AAX Co., Ltd. is currently dormant. Its intended principal activity is to provide low-cost, Long-haul air transportation seNices in Thailand. 73 6. INFORMATION ON OUR GROUP (cont’d) (b) Share Capital As at the LPD, the issued and paid-up share capital of THAI AAX Co., Ltd. was THB15.00 consisting of 3 shares of THB5.00 each. There has been no change in the issued and paid up share capital of THAI AAX Co., Ltd. since its incorporation date and the issuance of its existing share capital on 12 March 2013 up to the LPD. (c) Shareholder As at the LPD, our Company holds 33.3% of the shares in THAI AAX Co., Ltd. which may be further increased up to 49.0%, being the maximum allowable foreign shareholding of a Thai company. Further details of our estimated level of initial capital contributions in THAI AAX Co., Ltd. are set out in Section 12.9.7 of this Prospectus. There was no outstanding warrant, option, convertible security or uncalled capital in respect of the shares in THAI AAX Co., Ltd. as at the LPD. (d) Subsidiary and Associated Companies THAI AAX Co., Ltd. did not have any subsidiaries and associated companies as at the LPD. (The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (1)
Overview We are a leading low-cost, Long-haul airline, operating primarily in the Asia Pacific Region. Based upon our breakthrough business model, we believe that we have the lowest unit cost base of any airline in the world(1), with a CASK of US¢3.74 and CASK (excluding fuel) of US¢1.90 for 2012. This implies a 67.3% and 75.3% lower CASK and CASK (excluding fuel), respectively, as compared to the average CASK and CASK (excluding fuel) of the 10 largest FSCs based in the Asia Pacific Region (ranked by operating revenue) that reported these figures (source: S-A-P). This in turn has enabled us to offer fares(2) that are targeted, on average, to be 30% -50% lower than FSCs and to stimulate new market demand, whereby passenger volumes between Kuala Lumpur and other destinations we serve grew by an average of over 90% from the year before the launch of each route to the year ended 31 December 2012. Incorporated in May 2006, we commenced low-cost, Long-haul passenger and cargo air services in November 2007 from our hub at Kuala Lumpur, with our inaugural route between Kuala Lumpur and Gold Coast in Australia. We now serve 14 destinations across Asia (Tokyo, Osaka, Seoul, Taipei, Beijing, Hangzhou, Chengdu, Shanghai and Kathmandu), Australia (Sydney, Melbourne, Perth and Gold Coast) and the Middle East (Jeddah), with flights to an additional destination, namely Busan, commencing in July 2013. We currently operate a fleet of 10 A330-300s for scheduled services, and have 2 A340-300s which are currently wetleased. We have also accepted delivery of an additional A330-300, scheduled to commence operations in July 2013. Our fleet represents the largest LCC wide-body aircraft seat capacity in the Asia Pacific Region. Our breakthrough model benefits from our association with the AirAsia Group. From commencement of operations, we have been able to leverage the AirAsia Group’s globally recognised brand and large existing customer base, as well as the broad and deep Short-haul LCC network. The broad network served by the other carriers in the AirAsia Group comprises 81 destinations around Asia from 16 hubs as at the LPD, that provides vital feed to and from our hub in Kuala Lumpur. In terms of the depth of the network, the other carriers in the AirAsia Group collectively account for a weekly frequency of 2,864 return flights, or 5,728 one-way flights as at the LPD. In addition, we have benefitted from shared services with AirAsia Berhad via the AirAsia Services Agreement as detailed in Section 7.9.6(ii) of this Prospectus, which lowered our start-up costs and time-to-market. Please refer to Section 7.9.6(i) of this Prospectus for details on the Brand Licence Amendment and Renewal Agreement, which grants us the licence to use the “AirAsia” brand and trade name for Long-haul operations. With our early mover advantage, the largest LCC wide-body aircraft seat capacity in the Asia Pacific Region, our growing route network and passenger base, and lower costs and fares than FSCs, our vision is to be a leading Long-haul LCC globally. We expect to achieve this by exploiting a significantly under-served segment of price-sensitive air travellers on Long-haul routes that extend beyond the commercial range limitations of narrow-body aircraft range used by traditional Short-haul LCCs. To this end, we are scheduled to receive delivery of 22 additional A330-300s up to 2017, and have a firm order for 10 A350-900s beyond that. With 5 A330-300s to be delivered for the remainder of 2013 and 7 A330-300s to be delivered in 2014, we believe we are poised to continue grOWing in the near future. Together with the broader AirAsia Group, we are working towards creating the world’s first global, multi-hub LCC network, with complementary Short-haul and Long-haul networks. Based on comparisons performed against the top 10 FSCs and LCCs by operating revenue based in the Asia Pacific Region and the averages of the top 10 FSCs and LCCs by operating revenue based in Europe and North America, details as set out in the ‘Key Financial and Operating Performance’ table in Section 2.8 of S-A-P’s report in Section 8 of this Prospectus Inclusive of ancillary charges for seat selection, 20kg baggage, meal and airport taxes 75
7. BUSINESS OVERVIEW (cont’d) We have a unique organisational culture and capability, balancing rigorous cost focus and discipline aimed at delivering the lowest unit operating cost; industry-leading reliability and ontime performance standards; and customer satisfaction levels comparable to the ratings achieved by Asia Pacific FSCs. In 2009, we won the Centre for Asia Pacific Aviation’s (“CAPA”) “Airline of the Year Award” jointly with AirAsia Berhad. At Skytrax’s 2012 World Airline Awards, we were ranked second, after AirAsia Berhad, in the “Best Low-Cost Airline in Asia” category. In the Skytrax airline customer survey as of March 2013, we achieved a customer review rating higher than the average rating for major comparable FSCs in the Asia Pacific Region, according to S-A-P. We believe we are a leader in the LCC industry in product innovation. Our innovations in the LCC market include introducing the world’s first Premium FlatBed seats and pioneering transfer “Fly-Thru” connection services, as well as introducing portable in-flight entertainment units, and various seat assignment and upgrade options. Partly as a result of these innovations, we achieved, the highest and the fourth highest reported ancillary revenue per passenger of any airline in the world in 2010 and 2011, respectively, and continued to grow the same by 14.9% from 2011 to 2012. We achieved all of this while simultaneously maintaining what we believe is the lowest unit cost base among all airlines globally<3). The above factors have been instrumental in fuelling our rapid growth. We have achieved a CAGR in passenger volume and RPK traffic of 76.8%, and 76.5%, respectively, from 2008 to 2012. Our revenue has grown from RM230.7 million in 2008 to RM2.0 billion in 2012, representing a CAGR of 70.9%. This growth includes our withdrawn routes, details of which are set out in Section 7.6.5 of this Prospectus. We have achieved this growth despite the global economic downturn and other external shocks that have affected the global airline industry and the markets that we serve during this period. We believe that we are one of the fastest growing start-up LCC airlines in terms of RPK growth in the world, after taking into account our year of launch (2007) and our current RPK (in 2012), as compared to the RPK of other global LCCs based on publicly available data. 7.2 Competitive Strengths We have achieved and maintained our position as a leading low-cost, Long-haul carrier in the Asia Pacific Region due to the following strengths: 7.2.1 We Have an Early Mover Advantage in the Low-Cost, Long-haul Segment Globally, which is Poised for Substantial Growth in the Coming Years Early movers in the LCC industry, such as Southwest Airlines in North America, Ryanair and Easyjet in Europe and AirAsia in Southeast Asia, remain successful leaders in their respective markets, even after entry by other competing LCCs. We believe their success is largely driven by their larger aircraft fleet and route network and their established brand reputation and track record, which offer superior economies of scale and scope and better bargaining power with suppliers, and create barriers to entry for other LCCs. Early movers also have a significant advantage from experience accumulated over their years of operation, leading to an institutionalised knowledge base and skill set within their organisations, allowing them to keep growing at a faster pace and deploy resources more effectively than new entrants. (3) Based on comparisons performed against the top 10 FSCs and LCCs by operating revenue based in the Asia Pacific Region and the averages of the top 10 FSCs and LCCs by operating revenue based in Europe and North America, details as set out in the ‘Key Financial and Operating Performance’ table in Section 2.8 of S-A-P’s report in Section 8 of this Prospectus
7. BUSINESS OVERVIEW (cont’d) We believe we have a similar opportunity to be a market leader in the global low-cost, Long-haul segment, which we believe is poised for substantial growth, similar to the levels that occurred in Short-haul air travel markets with the introduction of LCC services. The low-cost, Long-haul business model feeds off increasing globalisation, rising per capita income and increasing urbanisation, all of which allow more people to travel longer distances, and increased intra-regional business activities that lead to increased demand for business as well as leisure travel. Based on the demand we have stimulated in the markets we serve, we believe Long-haul air travel is similarly price-elastic and poised for comparable high growth with the introduction of lower fares for consumers. According to S-A-P, we have the largest LCC Wide-body aircraft seat capacity in the Asia Pacific Region and are expected to maintain this lead with the largest number of firm additional wide-body aircraft deliveries in the next five years. Having pioneered a breakthrough business model that has delivered the lowest known unit operating cost(4) and having achieved a track record of rapidly growing new passenger traffic in the markets we operate, we believe we have built up knowledge, skills and culture that will be hard to be replicated by others. We believe our early mover advantage gives us a strong competitive advantage over new entrants in the segment and will enable us to continue to lead the low-cost, Longhaul segment in the coming years. 7.2.2 We Operate in Some of the Largest and Fastest Growing Aviation Markets in The World We are well positioned to serve key growth markets around the world from our hub in Kuala Lumpur. Our strong positioning in the Asia Pacific Region in particular allows us to benefit from further expected growth in these markets. According to S-A-P, passenger volumes, measured in RPK, from 2011 to 2031 are estimated to grow at a CAGR of 7.6% on routes within Southeast Asia, 6.7% on routes within the Asia Pacific Region, 6.9% on routes within China, 7.2% on routes between the Asia Pacific Region and the Middle East, 7.7% between Southeast Asia and China, 5.1% between Southeast Asia and Oceania and 5.4% between Southeast Asia and Northeast Asia, compared to 5.0% globally. With an estimated population of 3.4 billion in 2012, and projected growth of up to an additional 164.0 million by 2017 according to S-A-P, we expect the Asia Pacific Region to continue to be a large and attractive feeder market for our Long-haul routes. We believe that the interconnectivity among AirAsia Group carriers benefits us and other carriers of the AirAsia Group mutually, as it provides access to a larger market of potential passengers. As part of the AirAsia Group, we offer our passengers the ability to connect our 14 current Long-haul destinations seamlessly with the feeder network of the AirAsia Group’s Short-haul route network in Southeast Asia. The other carriers in the AirAsia Group serve 81 destinations around Asia from 16 hubs with a fleet of over 100 aircraft as at the LPD, making the AirAsia Group the largest LCC network in Asia. In 2012, 40% of our passengers connected to or from an AirAsia Group flight (including 5% of our passengers who connected between two AirAsia X flights) and this is expected to grow as the AirAsia Group network further expands. (4) Based on comparisons performed against the top 10 FSGs and LGGs by operating revenue based in the Asia Pacific Region and the averages of the top 10 FSGs and LGGs by operating revenue based in Europe and North America, details as set out in the ‘Key Financial and Operating Performance’ table in Section 2.8 of S-A-P’s report in Section 8 of this Prospectus 7. BUSINESS OVERVIEW (cont’d) Finally, we believe that we operate in an underpenetrated home market relative to other major Asian airports in terms of Long-haul flights. S-A-P reported that in the week of 4-10 March 2013, Kuala Lumpur had 512 departing Long-haul flights, compared to Hong Kong’s 657, Bangkok’s 940 and Singapore’s 1,096. A key factor that drives growth in the Malaysian commercial aviation market is that Malaysia is a large domestic market with a population of 28.6 million and annual per capita GDP of USD9,700 in 2011. Malaysia’s commercial aviation market is likewise supported by a tourism industry that saw 25.0 million tourist arrivals in 2012. Further, Malaysia was one of two Asian countries, and the only Southeast Asian country, in the global top 10 countries with the highest number of tourist arrivals in 2011 (source: S-A-P). Thus, we believe our home market provides additional growth opportunities for us to serve some of the world’s largest and fastest-growing aviation markets. 7.2.3 We Believe That We Have the Lowest Unit Operating Cost Base of Any Airline in the World We believe that we have the lowest CASK and CASK (excluding fuel) in the world(5). Our CASK and CASK (excluding fuel) was US¢3.74 and US¢1.90, respectively, for 2012, which was 67.3% and 75.3% lower, respectively, than the average CASK and CASK (excluding fuel) of the 10 largest FSCs based in the Asia Pacific Region that reported these figures. This low-cost structure is achieved through numerous strategies, including: (i) High ASK Per Aircraft We believe our fleet produces the highest ASKs per aircraft among LCCs and FSCs globally, at 1.7 billion ASKs per aircraft per annum in 2012, compared to an average 422.1 million ASKs per aircraft per annum for the top 10 LCCs based in the Asia Pacific Region (ranked by operating revenue) that report such data, and 550.1 million ASKs per aircraft per annum for the top 10 FSCs based in the Asia Pacific Region (ranked by operating revenue) that report such data, as reported by S-A-P. (a) High Aircraft Utilisation As a result of our Long-haul flights and network strategy, we maintain one of the highest aircraft utilisation rates in the Asia Pacific Region. In 2012, our average aircraft utilisation was 16.2 hours per day, apprOXimately 48.6% higher than the average of the top 10 FSCs based in the Asia Pacific Region (ranked by operating revenue) that report this figure (source: S-A-P). (b) High Seat Density Each of our A330-300s offers a total of 377 seats in a 12-premium and 365-economy seat configuration, approximately 21.2% more seats than the next highest A330-300 seat density (311 seats total)(6) and 28.7% higher than the average (293 seats totag for carriers based in the Asia Pacific Region (excluding AirAsia X)( ) as reported by S-A-P. (5) Based on comparisons performed against the top 10 FSes and Lees by operating revenue based in the Asia Pacific Region and the averages of the top 10 FSes and Lees by operating revenue based in Europe and North America, details as set out in the ‘Key Financial and Operating Performance’ table in Section 2.8 of S-A-P’s report in Section 8 of this Prospectus
(6) Based on those carriers that operate a significant number of wide-body aircraft and that S-A-P believes provide a relevant basis for comparison
7. BUSINESS OVERVIEW (cont’d) (ii) Modern, Fuel Efficient and Focused Aircraft Type Fleet Our operating fleet of 9 A330-300s (excluding the new A330-300 delivered to us in April 2013) had an average age of 4.9 years as of March 2013. Our relatively young operating fleet and high seat density, coupled with various fuel management techniques, further details of which are set out in Section 7.8.1 of this Prospectus, allowed us to achieve a fuel consumption rate of 2.27 Iitres and 2.21 litres per passenger per 100 kilometres for the year ended December 2012 and the 3 months ended 31 March 2013, respectively, which we believe, based on available industry evidence, is superior to the fuel efficiency of FSCs using similar wide-body aircraft. By using a focused aircraft type fleet, we are able to reduce costs by maintaining a single pool of pilots, flight attendants, engineers and technicians who are certified for a certain aircraft type (i.e. type-rated), a streamlined spare parts inventory, and common maintenance tools and equipment. We are also able to interchange our aircraft on different routes much more efficiently. (iii) High Labour Productivity From a Non-Unionised Workforce We benefit from a highly skilled, motivated and productive workforce. Because our workforce is primarily based in Malaysia, where the cost of living is lower relative to other major cities in the Asia Pacific Region, and is nonunionised, we believe we have a labour cost advantage. We also maintain high labour productivity; our ASK per employee of 12.5 million in 2012 is more than 3 times higher than the average ASK per employee of Asian FSCs that report such data, and more than 2 times higher than the average ASK per employee of global LCCs (exclUding AirAsia X) that report such data (source: S-A-P). Our staff costs in 2012 as a percent of revenue was 9.2%, compared to 16.2% at Cathay Pacific Airways, 14.8% at Singapore Airlines and 12.9% at Emirates (in their respective latest fiscal years as reported in each of these airlines’ most recent annual report). We have accumulated in-depth experience and expertise from our operations and years of combined LCC knowledge across the AirAsia Group. The inherent no-frills culture, which has been a hallmark of the AirAsia Group, has led us to adopt numerous innovative strategies in the areas of staff productiVity and operating efficiency, unique to Long-haul flight operations. These strategies include lowered corporate overhead and streamlined in-flight service. Our overhead cost is minimised through a lean overhead headcount and flat organisation structure with empowered work teams, relatively lower average base salary with performance incentives, modest office premises and efficient office space utilisation, prudent travel expense management, strict adherence to our procurement standard operating procedures, and an on-going sixsigma continuous improvement initiative. We have streamlined our inflight service processes, from the packaging and serving of our food and beverage items (as individual items instead of the usual trays), having a high-percentage of pre-booked meals which reduces wastage and speeds up service time, as well as the use of disposable food and beverage containers and cutlery which expedites the cleaning process. This allows us to staff fewer flight attendants per flight on aircraft with higher seat density, resulting in a passengers-per-flight-attendant ratio that is approximately 60% higher than that of FSCs. 79 7. BUSINESS OVERVIEW (cont’d) (iv) Streamlined Airport Operations We maintain strict cost control over airport charges per flight, minimising these charges through higher aircraft utilisation hours (as faster turnaround times reduce parking charges), using higher seat density aircraft (resulting in lower landing, parking and other airport fees on a per-passenger basis), and multi-tasking, interchangeability of roles and service automation (resulting in lower ground-handling and check-in costs from lower staffing levels per aircraft turn). As a result, we believe we have a cost advantage over Asian FSCs in terms of airport and ground handling charges per flight. (v) Lower Marketing and Sales Costs Our marketing model is primarily direct-to-consumer, through Internet sales and direct offline sales, with Internet sales being the lowest cost distribution model available. In 2012, an average of 84% of our passenger tickets was distributed via the AirAsia Group’s website, www.airasia.com. An additional 8% was distributed through our own sales channels, including via call centres and sales offices in the same year. Only approximately 8% of our passenger tickets are distributed through third-party channels including travel agents, which typically are of significantly higher cost. In contrast, we believe FSCs typically rely on third party channels for a much greater proportion of their sales. We believe these cost-minimising strategies allow us to maximise profitability and cash flows on a sustainable basis.
7.2.4 We Have Developed a High-Quality Operating Model and Product Even though we operate with a low unit cost, we strive to deliver a high-quality operating model to satisfy the needs of Long-haul passengers both in terms of comfort, and reliability. We operate one of the youngest wide-body fleets in the Asia Pacific Region. Our operating fleet of 9 A330-300s (excluding the new A330-300 delivered to us in April 2013) had an average age of 4.9 years as of March 2013, compared to an average of 9.1 years for the wide-body fleet of carriers based in the Asia Pacific Region (excluding AirAsia xf>, according to S-A-P, and our newer aircraft offer a better cabin experience for passengers, with a 31 inch seat pitch, comparable to some FSCs, and Premium FlatBed seats, comparable to business class seats on some FSCs. We are committed to world-class engineering and maintenance practices, as evident in our long term service agreements with a number of major servicers in the industry, further details of which are as set out in Section 7.8.2 of this Prospectus. As a result, we are able to operate with a high degree of operational reliability; whereby in 2011 and 2012, we achieved a technical dispatch reliability rate of 99.5% and 99.4%, respectively and were awarded the 2010-2011 Top Operational Excellence Award by Airbus for achieving the world’s best technical dispatch reliability rates among all A330-300 operators worldwide in the small fleet category (less than 10 A330-300 aircraft for operations). The award by Airbus is evidence of our high-quality and timeefficient aircraft maintenance program, reflecting our ability to maintain and upgrade our aircraft and/or engines so as to be operationally ready throughout the year. (7) Based on those carriers in the Asia Pacific Region that operate a significant number of wide-body aircraft and that S-AP believes provide a relevant basis for comparison 7. BUSINESS OVERVIEW (cont’d) We also strive for excellence in daily operations and have established ourselves as one of the most punctual airlines in Asia, despite having the highest aircraft utilisation rates and tight turnaround times. In 2012, we achieved an on-time performance rate of 85.0%, compared to an average of 84.2% for FSCs based in the Asia Pacific Region(8) and an average of 81.4% for LCCs based in the Asia Pacific Region(8), according to S-A-P. For the 3 months ended 31 March 2013, we achieved an on-time performance rate of 88.0%. Our simplified operations have also enabled us to achieve a mishandled baggage rate of 1.1 bags per 1,000 passengers, compared to a global industry rate of 8.8 bags per 1,000 passengers for the year 2012. Approximately 50% of all our flights arrive at our hub in LCCT, with its simplified baggage system -the bags are loaded from the aircraft, trucked directly and then off-loaded onto a single conveyor belt to be picked up by the passengers directly, which minimises the likelihood of our passengers’ bags being mis-directed due to incorrect scanning of bar codes or malfunctioning bag tag readers. This is in contrast to the complex conveyor belts as seen in KLlA’s main terminal and other similar airports. In addition, we do not practise code-sharing with other airlines, which would require bags to be transferred to a different airline’s operations and tracking systems, especially when it involves transfers between different terminals at one airport, again minimising the risk of mishandling the bags. We expect to have a similar form of simplified operations at KLiA 2 after our relocation, as KLiA 2 is designed to be a dedicated LCC terminal similar to LCCT. We believe that these strong operating attributes, together with our convenient and warm cabin services and attractive fares, have enabled us to garner high customer satisfaction ratings. According to S-A-P, we scored 7.6 out of 10 in the Skytrax airline customer review rating reported as of March 2013, compared to an average of 8.3 for 5-star airlines(9), an average of 7.0 for FSCs(9), and an average of 6.1 for LCCs (excluding AirAsia X)(9), based in the Asia Pacific Region. We also were acknowledged by Skytrax as being one of the world’s best LCCs, placing second in Asia, in 2011 and 2012. We were also recognised, jointly with AirAsia Berhad, as Asia Pacific’s Airline of the Year by CAPA in 2009. For other awards and recognitions we have received since we began our Long-haul service, see Section 7.4 of this Prospectus. 7.2.5 We Have One of the Highest Ancillary Revenue Per Passenger Levels Among Airlines That Report Such Figures Our focus on developing innovative ancillary revenue streams has enabled us to achieve one of the highest ancillary revenue per passenger levels in the aviation industry. We produced ancillary revenue per passenger of USD46.07 in 2012 and USD48.82 for the 3 months ended 31 March 2013. According to S-A-P, our ancillary revenue per passenger in 2010 of USD38.92 was the highest and that of USD40.09 in 2011 was fourth highest among global airlines reporting ancillary income. These results can be attributed to a higher propensity for passengers on Long-haul flights to purchase food, merchandise and other products due to longer flight duration. (8) Based on the top 10 (ranked by operating revenue) FSCslLCCs in Asia which reported financial and operating performance, that have available data for the latest 12 month periods
(9) Based on major FSCslLCCs in the Asia Pacific Region that S-A-P believes provide a relevant basis for comparison and have available data
7. BUSINESS OVERVIEW (cont’d) Our high ancillary revenue per passenger can also be attributed to our innovation in providing new and attractive pre-flight and on-board purchase options to our passengers. Many of the ancillary products pioneered by us have subsequently been adopted by the other carriers of the AirAsia Group and other LCCs. At the same time, we also enjoy benefits from the other forms of ancillary products that have been developed in conjunction with the AirAsia Group and its partners, such as travel insurance with Tune Ins Holdings Berhad, AirAsia BIG Loyalty programme rewards, Expedia accommodation booking and Tune Talk prepaid mobile SIM cards. Please refer to Section 7.7.4 of this Prospectus for more details about our ancillary products. Ancillary revenue growth has minimal incremental cost and, as a result, generates higher margins than passenger fare revenues. In addition, the wide selection of our ancillary products is an example of how we strive to achieve a high degree of passenger satisfaction. We believe our ability to generate ancillary revenue will be fundamental to our continued growth and success. 7.2.6 As a Member of the AirAsia Group, We Are Able to Benefit from the AirAsia Brand, Cross Selling Opportunities and the Group’s Collective Purchasing Power Since commencement of operations, we have leveraged the strength of the global AirAsia brand, which has enabled us to minimise both our start-up costs and time-tomarket. The AirAsia brand enjoys global visibility and recognition, with branding campaigns including world class sporting properties such as Formula One Grand Prix through the current sponsorship of Team Caterham and past sponsorship of Team AT&T Williams, Barclays English Premier League through the current sponsorship of Queens Park Rangers and past sponsorship of Manchester United, the sponsorship of British MotoGP and the past sponsorship of the Oakland Raiders team in the National Football League. The AirAsia brand is also associated with the only LCC to win four consecutive “World’s Best Low-Cost Airline” awards from Skytrax, from 2009 to 2012. The AirAsia Group’s digital media properties also provide us with a wide customer reach. We believe the www.airasia.com website is a top travel-related website in Asia and one of the most active e-commerce platforms in Asia, with over 9 million average monthly unique visitors and over 182 million average monthly page views in 2012 based on tracking by Google. There are over 6.9 million registered users of www.airasia.com to whom we send promotional emails. Finally, the AirAsia Group also actively promotes itself within and engages with users across social media platforms, such as Facebook, Twitter and Weibo, with 3.5 million fans, 1.1 million followers and 988 thousand fans, respectively, as at the LPD, making AirAsia one of the most active airline social media brands, as compared to the top 10 (ranked by operating revenue) FSCs and LCCs in the Asia Pacific Region which reported financial and operating performance. All of the above have contributed a significant amount of public attention and have generated one of the highest levels of media coverage among airline brands in the Asia Pacific Region. The AirAsia Group is also one of the largest aircraft purchasers in the world, with the world’s largest ever airline order of Airbus’s A320 aircraft as at the LPD. The combined economic size of the AirAsia Group affords us more bargaining power to negotiate aircraft and component purchases, leasing and financing contracts and fuel purchases. Additionally, shared services for information technology systems and training facilities lower our operating costs below what they otherwise would be if we were an independent stand-alone airline. 82 7. BUSINESS OVERVIEW (cont’d) 7.2.7 We Have an Experienced and Stress Tested Management Team and Shareholders Our key management team, led by Azran Bin Osman Rani, has extensive managerial experience and technical competencies. He led the start-up team that developed the business plan, raised capital, secured relevant licences and approvals, acquired aircraft and launched our Long-haul operations. Prior to his appointment, he was the Senior Director of Business Development for Astro All Asia Networks pic, a leading Asian digital satellite television and radio broadcaster, and an Associate Partner for McKinsey & Company, a global management consultancy. He was also appointed by the Malaysian Minister of Tourism to the Board of Directors of the Malaysian Tourism Promotion Board (Tourism Malaysia) in May 2011. Our key management team comprises 7 officers with diverse backgrounds, including experience in the aviation industry. Moses Devanayagam, our Operations Director, has over 40 years of aviation industry experience related to engineering and ground handling operations. lVIost of our key management team members, including Azran Bin Osman Rani, have been at our Company since the start of our Long-haul operations. Our management team is stress tested in light of our exposure in navigating through the global financial crisis, being able to secure aircraft financing on a stand-alone basis despite a very tight global credit market, managing the business in a period of extreme fuel price volatility in 2008, handling various natural disaster crises ranging from earthquakes in Japan and New Zealand, volcanic ash clouds over Europe, snowstorms in Europe, and floods in Queensland -all while growing the business rapidly from inception in 2007 to 2012. We believe the experience and expertise of our key management team, and their track record of working together, have contributed significantly to our growing operations, which have generated an increase in revenue from approximately R1VI230.7 million in 2008 to approximately RM2.0 billion in 2012, representing a CAGR of 70.9%, which includes our withdrawn routes, details of which are set out in Section 7.6.5 of this Prospectus. Our strong management team is guided by our experienced Board of Directors and shareholders, including AirAsia Berhad and Aero Ventures Sdn Bhd. Two of our Directors, Tan Sri Dr. Anthony Francis Fernandes and Dato’ Kamarudin Bin Meranun, are the major shareholders and founders of both companies and bring a wealth of LCC experience from starting up AirAsia Berhad. Our Board of Directors is chaired by Tan Sri Rafidah Aziz, Malaysia’s longest-serving Minister of International Trade and Industry, who contributes a wealth of international experience. Our Board includes representatives from Orix Airline Holdings Limited, a leading aircraft leasing company based in Japan, and Manara Malaysia I Limited, an investor consortium from the lVIiddle East. (The rest of this page has been intentionally left blank) I Company No. 734161-K I 7. BUSINESS OVERVIEW (cont’d) 7.3 Strategies and Future Plans Our vision is to be a leading Long-haul LCC globally and to create, together with other carriers of the AirAsia Group, the first global, multi-hub low-cost carrier network. The main components of our strategy are to: 7.3.1 Expand Our Passenger Base by Growing our Route Network and increasing Our Hubs of Operations The strategic principle underlying our choice of routes to operate is a focus on markets with the highest growth potential and where we can build a market leadership position. We primarily operate in the Asia Pacific Region, the world’s largest and fastest growing aviation region. Our main hub in Kuala Lumpur has the largest LCC feeder network among airports in the Asia Pacific Region in terms of LCC flight frequencies and destinations, but is under-served for Long-haul routes compared to other Asian airports, providing significant growth potential. Our expansion strategy from the current network of 14 routes in 7 markets we serve from Kuala Lumpur will be based on the following priorities aimed at creating a clear leadership position in the markets we serve: (i) Stimulate Demand and Increase Frequencies on Existing Core Routes Twelve of our current 14 routes are to major metropolitan cities, such as Sydney, Perth, Melbourne, Tokyo, Seoul, Beijing, Shanghai and Taipei. Due to the large population and existing market of air travellers in these cities, we believe we can profitably increase frequencies on these routes to 14 times weekly, or a double-daily service. Each of these core routes has already achieved load factors consistently higher than 80%, which signals strong demand that can absorb increased capacity. We currently plan to increase our frequencies to Sydney, Melbourne, Perth and Taipei to a double-daily service in the later part of 2013. We also believe we can profitably increase frequencies to most other routes, such as Chengdu and Osaka, to 7 times weekly, or a daily service. We believe increases in flight frequency will improve customer convenience and stimulate more transfer connections, while enabling us to be a market leader on these core routes. Further, we expect to benefit from capacity deployment on routes on which we already have an established operating base and from brand awareness in markets we already serve. (ii) Open New Routes in Existing Core Markets In addition to our current routes, there are other major cities in our existing core markets into which we may be able to expand. These include Adelaide in Australia, Nagoya and Fukuoka in Japan, and Chongqing and Xian in China. We believe that expanding into new routes within existing markets will allow us to be more effective in marketing and efficient in operations given our established track record in these markets. Some of these cities are already being served by other members of the AirAsia Group, such as Chongqing and Xian by Thai AirAsia Co. Ltd and Nagoya and Fukuoka by AirAsia Japan Co. Ltd (“AirAsia Japan”), which means the consumers in these markets are already familiar with the AirAsia brand and service model, reducing the time required to build up our brand presence and product awareness. 7. BUSINESS OVERVIEW (cont’d) (iii) Establish Routes in New Markets in the Medium Term We intend to continue to look for new markets based on a clear set of criteria that include, among others, market size (catchment and propensity to travel), strength and growth of traffic, diversity of market demand (for example, twoway travel and having many different travel segments) and the current competitive environment. We believe that there are several potential new markets in South and Central Asia and North Africa and Eastern Europe that are within a commercially viable flying radius for A330-300 from our hub in Kuala Lumpur. (iv) Create New Hubs To support the growing demand for low-cost, Long-haul travel and to take advantage of the various Short-haul hubs and the network connectivity established by the AirAsia Group, we intend to establish new hubs outside Kuala Lumpur (for example, hubs in Indonesia, Thailand, Japan and the Philippines) where we can leverage the existing presence of the AirAsia Group, which we believe will provide us with additional feeder traffic. We believe the new hubs will increase our reach and provide additional cost savings from economies of scale, while allowing us to penetrate new markets, thus furthering our goal to link Asia to the world and become a global carrier. The criteria for establishing new hubs include the hub being located in a destination that can be marketable, having a catchment with a significant propensity to travel, being located within an airport with an established Shorthaul feeder network, having established cargo operations, and providing profitable route opportunities and start-up costs that support our cost per ASK targets. We plan to operate our first new hub outside Kuala Lumpur in Thailand through our newly established associated company, THAI AAX Co., Ltd., to tap into Thailand’s well-known leisure market and to leverage on AirAsia’s already established Short-haul feeder network in Thailand. Further details of THAI AAX Co., Ltd. are set out in Section 6.3.2(v) of this Prospectus. (The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (cont’d) 7.3.2 Grow Our Fleet of New, Fuel-Efficient Aircraft to Meet Passenger Demand and Our Expanding Route Mix Our fleet plan is focused on the following concepts: (i) Increasing our Fleet Size We intend to increase our operating fleet size to 32 by 2016 through a mixed strategy of leasing and purchasing aircraft in order to execute our route development plan. In the event that demand further outstrips supply, we believe we will have access to additional aircraft, either through increasing our orders from Airbus or through sourcing from the secondary market, as we have demonstrated with our recent commitment to lease 6 additional A330300s. (ii) Maintaining a Fleet of Modern and Focused Type Aircraft We currently operate a fleet of 10 A330-300s. On 3 May 2013, we took delivery of an additional A330-300, which is scheduled to commence operations in July 2013. We are also scheduled to take delivery of an additional 22 A330-300s up to 2017 and 10 A350-900s from 2018. We also have 2 A340-300s, which are sub-leased to other operators until December 2013. We intend to continue to sub-lease our A340-300s until the expiry of their lease contracts in 2015. We anticipate that we will fly only A330-300s and A350-900s going forward. We expect that the greater fuel efficiency and the longer range of the A350-900 will enable us to fly to destinations that would not be commercially feasible with our current fleet. Please refer to Section 7.5 of this Prospectus for further details on our fleet. We plan to continue to review our fleet plan from time to time and may order more aircraft and may expand the types of aircraft utilised to respond to changes in the market place. 7.3.3 Strengthen the AirAsia Brand in Our Markets and Maintain High Customer Satisfaction We intend to continue to invest in promoting the awareness and acceptance of the AirAsia brand in our markets through continued aggressive and innovative direct-toconsumer marketing (including marketing our brand, the appeal of our destinations, and our promotional fares), leveraging the branding, digital media and global sponsorship activities of the AirAsia Group, including using the AirAsia Expedia platforms and the AirAsia BIG loyalty programme, and increasing the profile and visibility of the brand on traditional and new media through engaging communications strategies. While we plan to continue to increase our presence to the consumers who are active online looking for travel bargains and those who are already familiar with the AirAsia brand, we also intend to extend our marketing and promotional activities to other consumers who are not primarily considering Long-haul travel with an LCC. Strategies to engage these consumers include emphasising the attraction of our wide selection of destinations across Asia, particularly in partnership with tourism bodies, and showcasing the quality of the AirAsia X service, our new aircraft with high operational reliability and our highly-rated customer service. While we expect to maintain price-leadership as our primary attribute, we intend to showcase our high-quality, efficient and friendly customer service to attract customers who are not already familiar with our services. 86 7. BUSINESS OVERVIEW (cont’d) We have implemented a comprehensive customer management programme, including regularly collecting customer feedback from surveys, focusing on key passenger touch points and continuously improving our service delivery and customer advocacy and loyalty. We use a Net Promoter Score (“NPS”) system to track customer satisfaction, wherein passengers are asked to rate on a scale of 1 to 1°how likely they are to recommend AirAsia X to their friends. Promoters are those rated between 9 to 10, and detractors are those rated between 1 to 6. The surveys are sent to passengers who agreed to receive promotional email, and are managed by a third party research agency on an on-going basis, with the sampling being undertaken in accordance to statistical norms. The NPS method measures the difference between the percentage of customers who are promoters (typically those who are willing to recommend a product to friends and colleagues) and the percentage of customers who are detractors (typically those who are unwilling to recommend the product to friends and colleagues). The NPS is seen as proxy for customer satisfaction as studies have shown a strong correlation between a customer’s willingness to recommend a product and the customer’s satisfaction with the product. In instances in which our NPS declines, we make every effort to take prompt action to identify and address issues. We intend to continue to seek to improve our NPS and to use NPS and other tools available to us to design our customer service strategy. Finally, we expect the move to KLiA 2, with its much larger size, improved check-in systems, departure gates (directly at the aircraft parking bays, no longer requiring open-air walks to aircraft), transfer facilities, retail and food and beverage outlet selections and easy access to public transport, all of which will improve passenger experience significantly at our hub. 7.3.4 Maximise Passenger Revenue and Develop Innovative Ancillary Revenue Streams Our revenue maximisation strategy includes: (i) Capitalise on Route Maturity A key factor that affects our overall passenger volume and profitability is the maturity of our routes, or the period of time that we service each particular route. Generally, when we begin service to a new route we experience lower load factors as the local population in the new market may be less aware of our services or the AirAsia brand. Therefore, we tend to start with lower fares initially to stimulate local demand for our services. As load factors improve as the route matures, we increase our fares to our standard levels. (ii) Dynamic Revenue Management We have implemented a revenue management system to manage our revenue from passenger seat sales. Through the system, we continually monitor and adjust our fares based on, among other data, the date of the flight, the forecasted and actual demand for the flight and how far before the departure date the ticket purchase is made. We analyse this data, as well as other data, including data related to our competitors’ products, to try to maximise our revenue from passenger seat sales while remaining com petitive. Please refer to Section 7.7.1 of th is Prospectus for a more detailed description of our revenue management system. 87 7. BUSINESS OVERVIEW (cont’d) (iii) Maximising and Introducing New Sources of Ancillary Revenue We currently generate ancillary revenues through various fees including, but not limited to, baggage handling fees, seat selection fees, sales of meals, inflight entertainment, and travel insurance products for selected destinations. We intend to expand our ancillary revenue streams through enhancement of certain ancillary services, and through the introduction of innovative services and products such as increased and customised seating selection methods and other pre-departure add-ons. We recently introduced our “Quiet Zone” and Red Carpet services, further details of which are set out in Section 7.7.4 of this Prospectus. In addition, we expect to increase payment options for inflight purchases through credit/debit card facilities and to offer pre-book pre-departure add-ons, travel visa application services and taxi booking services. We also intend to continue to further expand our ancillary revenue streams. 7.3.5 Continue to Implement Initiatives to Strengthen Our Operations Quality and Cost Structure (i) Maintaining Cost Leadership We intend to maintain our global cost leadership position by improving our fuel management practices that have already provided us with industryleading consumption performance, improving engineering and maintenance services, purchasing, and inventory management as we gain more scale, minimising ticket distribution costs through greater reliance on the Internet as a distribution medium and reducing advertising expenditure through higher allocation to digital and owned media, and improving airport operations through efficiency gains and better use of technology. (ii) Improving Operational Reliability We intend to maintain our industry-leading operating reliability performance through continuous improvement of our current engineering reliability with a focus on using technology and data to drive predictive systems, strong internal quality assurance and external audit processes and on-going knowledge sharing and information dissemination to our staff and agents. (iii) Implementing Integrated Safety Management We comply with the highest international safety standards and practices, and have implemented an integrated safety management system. We integrate the key elements of the safety management system into our daily operations. The system ;s an integrated set of work beliefs, practices and procedures for monitoring and improving the safety of all aspects of our operations, identifying the potential for errors and formulating defences to reduce the risk that errors result in unwanted incidents or accidents. For a discussion of our safety management system, please refer to Section 7.9.1 of this Prospectus. We intend to continue to comply with the high international safety standards and practices. 7. BUSINESS OVERVIEW (cont’d) 7.4 Our Milestones and Key Achievements Year Milestones I Achievements 2007 • Launched Long-haul service, with the first flight to Gold Coast, Australia • Placed a firm order for 25 A330-300s 2008 • Received 2008 Budgie World Low Cost Airline Awards for Best Newcomer -this award recognises leaders, innovators and pioneers in the global low-cost aviation industry • Awarded the CAPA New Airline of the Year Award 2008 -one of the aviation industry’s most prestigious awards 2009 • Together with AirAsia Berhad, awarded “World’s Best Low-Cost Airline” by Skytrax, which each year makes such an award based on a poll conducted among millions of passengers worldwide • Joint winners, with AirAsia Berhad, of the CAPA Airline of the Year Award 2009, an award bestowed on the airline that has had the greatest impact on the development of the airline industry in the region, establishing ourselves as a leader and benchmark for others to follow
• Placed a firm order for 10 A350-900s
2010 • Introduced Premium FlatBed seats, the first LCC in the world to do so • Together with AirAsia Berhad, awarded the “World’s Best Low-Cost Airline” by Skytrax for the second consecutive year
• Pioneered “Fly-Thru”, a hassle-free connecting service at LCCT
• Surpassed RM1 billion in annual revenue
2011 • The Asahi Shimbun, a widely circulated Japanese newspaper in Japan, awarded AirAsia X second place in the Transportation and Advertising category of the Asahi Advertising Award. We were the first low-cost, Long-haul carrier to receive this award • Awarded “Best Network Performance” at the inaugural World Routes Awards 2011, which is the first global award of its kind for route planning by an airline. Nominees are evaluated on, among other criteria, ability to deliver strong shareholders’ return on the airline’s assets through efficient network strategy
• Ranked second as “Best Low-Cost Airline in Asia” by Skytrax, after AirAsia Berhad
• Received Special Commendation from Smart Traveller, which awarded AirAsia X as Best BUdget Airline 2011
• Together with AirAsia Berhad, awarded the Air Cargo Industry Customer Care Award 2011 from Air Cargo Week
• In partnership with Optiontown began offering guests an “Upgrade Travel Option” which allows travellers to purchase, for a nominal fee, an option for an upgrade to a Premium Flatbed seat, subject to availability
• Surpassed 5 million cumulative passengers carried since inception
89 7. BUSINESS OVERVIEW (cont’d) Year Milestones I Achievements 2012 • Awarded the Airbus Top Operational Excellence Award 2010-2011 for being the world’s best A330-300 operator (small fleet category) • Ranked second as “Best Low-Cost Airline in Asia” by Skytrax, after AirAsia Berhad
• Together with AirAsia Berhad, awarded the Air Cargo Industry Customer Care Award 2012 from Air Cargo Week
• AirAsia X and Optiontown introduced an innovative new product called “Empty Seat Option”, which allows guests to purchase, for a nominal fee, an option to have all three seats in a row to themselves, sUbject to availability
• Entered into operating leases for 6 A330-300s
• Named Best Low Cost Airline in the Travel Top 50 issue of Wish, the weekend magazine of The Australian
• Together with AirAsia Berhad, awarded the “Rising Star Carrier of the Year” at Payload Asia Awards 2012
• Best New Route Launch (for Haneda) for the 2012 World Low Cost Airlines Congress Budgies Awards
• Ranked 4th best in-flight meals at the 2012 inaugural Skyscanner Asia Pacific Food Awards (long-haul category)
(The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (cont’d) Note: We describe our business model in the sUbsequent sections, grouped and sequenced as follows: Section 7.5 Our Fleet. Aircraft capacity and utilisation are our primary drivers of growth. This section covers our choice of aircraft (7.5.1), aircraft deliveries (7.5.2) and aircraft utilisation (7.5.3). Section 7.6 How We Deploy Our Fleet. This section covers our choice of primary hub (7.6.1), route selection (7.6.2), current routes (7.6.3), future routes (7.6.4) and withdrawn routes (7.6.5). Section 7.7 How We Fill Our Planes. This section covers the key drivers of our revenue generation, including revenue management (7.7.1), marketing, advertising and promotions (7.7.2), sales and distribution (7.7.3), ancillary products (7.7.4), cargo (7.7.5) and major customers (7.7.6). Section 7.8 How We Serve Our Passengers. This section covers fuel (7.8.1), engineering and maintenance (7.8.2), airport operations (7.8.3), people and training (7.8.4), and information technology (7.8.5). It also addresses intellectual property (7.8.6), property (7.8.7), major suppliers (7.8.8) and research and development (7.8.9). Section 7.9 How We Maintain Operational Integrity. This section covers the key areas that drive the integrity, reliability and compliance of our operations, and includes safety (7.9.1), security (7.9.2), insurance (7.9.3), interruptions to business and operations (7.9.4), regulations, including major licences and permits (7.9.5), and dependence on contracts, agreements or other arrangements (7.9.6). Section 7.10 Our Competition. A final section addresses our competitive landscape. As part of our business, we rely on and benefit from our close association with AirAsia Berhad and the other members of the AirAsia Group. Our relationship with AirAsia Berhad is primarily governed under the Brand Licence Amendment and Renewal Agreement dated 21 July 2012 and the AirAsia Services Agreement dated 31 October 2007, as supplemented and amended in 22 June 2012. Under the Brand Licence Amendment and Renewal Agreement, we have a non-exclusive and nonassignable licence to use and reproduce the “AirAsia” brand and trade name, including trade and/Or service marks, for Long-haul operations. Please refer to Sections 7.9.6(i) and 11.1.2(i) of this Prospectus for further details of the licence and cost. Under the AirAsia Services Agreement, AirAsia Berhad provides various services to us, which include (i) the sale of AirAsia Insure to our passengers; (ii) regUlatory matters and infrastructure development support in China; (iii) commercial services comprising sales and distribution, sales support, sales offices, provision of sales channels and corporate branding services; (iv) information, communication and technology (ICT) services comprising email networks and telecommunications systems, the website www.airasia.com. reservation and booking systems, procurement systems and flight operations, which are largely provided by third party service providers engaged by AirAsia Berhad; (v) treasury services such as the negotiation of fuel pricing and analysis of hedging structures suitable fo’r us, and other services to be provided on a per-usage basis such as audit and consulting services, security and shared resources. Please refer to Sections 7. 9.6(ii) and 11.1.2(ii) for a more detailed description of the services provided to us by AirAsia Berhad and the cost of such services. . 7. BUSINESS OVERVIEW (cont’d) We also entered into other commercial arrangements with AirAsia Berhad and/or companies affiliated with AirAsia Berhad. Certain of these commercial arrangements involve the provision of services to us by AirAsia Berhad or its affiliated companies, while others involve the provision of services by us to AirAsia Berhad or its affiliated companies. A list of such services is set out below: (i) Our appointment as a corporate agent to a company affiliated to AirAsia Berhad for the sale of AirAsia Insure, and the outsourcing of the management of AirAsia Insure to a company affiliated to AirAsia Berhad is set out in Sections 11.1.2(ix) and (viii) of this Prospectus, respectively. Following from the above, the sale of AirAsia Insure previously undertaken by AirAsia Berhad under the AirAsia Services’ Agreement has since been managed by the party under the aforementioned outsourcing arrangement; .
(ii) Pilot secondment by AirAsia Berhad to us as set out in Section 11.1.1 (Vii) of this Prospectus;
(iii) Provision of airport management, ground handling, regulatory liaison and related services by us to AirAsia Berhad and its affiliated companies as set out in Sections 11.1.2(iii), (iv), (v), (xiv), (xv) and (xvi) of this Prospectus; (iv) Provision of airport management, ground handling, regUlatory liaison and related services by a company affiliated to AirAsia Berhad to us as set out in Section 11.1.1 (xi) of this Prospectus;
(v) Provision of training services by a company affiliated to AirAsia Berhad to us as set out in Section 11.1.2(vi) of this Prospectus;
(vi) Purchase of prepaid mobile SIM cards from AirAsia Berhad for sale-on board our flights as set out in Section 11.1.2(vii) of this Prospectus; and
(vii) Provision of call centre services by a company affiliated to AirAsia Berhad to us as set out in Section 11.1.2(xiii) of this Prospectus. (The rest of this page has been intentionally left blank) I Company No. 734161-K I 7. BUSINESS OVERVIEW (cont’d) 7.5 Our Fleet 7.5.1 Choice of Aircraft We currently have an operating fleet of 10 A330-300s. Six of these A330-300s are held under finance lease and the remaining 4 are held under operating lease. Please refer to Section 12.9.4 of this Prospectus for a summary description of the terms of the finance leases. As of March 2013, the average age of our operating fleet of 9 A330-300s (exclUding the new A330-300 delivered to us in April 2013) was 4.9 years. Our aircraft are all configured to maximise aircraft space and the number of seats available. Our typical A330-300 can carry 377 passengers, compared to the average seating arrangement of 293 passengers for carriers based in the Asia Pacific Region (excluding AirAsia X)(10) as reported by S-A-P. We have chosen the A330-300 as we believe it is the most efficient aircraft for our route network. 7.5.2 Aircraft Deliveries We have committed to take delivery of 22 A330-300s up to 2017. We have also ordered 10 A350-900s, to be delivered from 2018 onwards, with an option to order 5 more. The table below shows our current fleet and firmly ordered aircraft with their anticipated year of delivery: Aircraft Type Year A330-300 A340-300 A350-900 Total Current 11″ 2 13 Remainder of 2013 5 18 2014 7 25 2015 5 (2) 28 2016 4 32 2017 1 33 2018 onwards 10 43 Total 33 10 Note: Includes an A330-300 that we took delivery of on 3 May 2013, which is scheduled to commence operations in July 2013. To support the delivery of the abovementioned aircraft, we have secured the relevant traffic rights (which are currently unutilised) for new routes which we intend to introduce, in addition to the unlimited traffic right access of the open skies agreements between Malaysia and certain countries we fly to, such as Australia (all destinations except for Melbourne, Sydney, Perth and Brisbane), Korea, China and Taiwan. Notwithstanding the existing open skies agreements where Malaysia is a party as mentioned above, we, as an airline, are still required to submit applications to the Ministry of Transport of Malaysia and relevant authorities in the destination country before being granted traffic rights for routes and frequency of flights. In addition, we are also required to apply to the applicable airport authorities for available landing and take-off slots. (10) Based on those carriers that operate a significant number of wide-body aircraft and that S-A-P believes provide a relevant basis for comparison I Company No. 734161-K I 7. BUSINESS OVERVIEW (cont’d) 7.5.3 Aircraft Utilisation According to S-A-P, our aircraft utilisation(11) was the highest among the top 10 Asia Pacific Region carriers (ranked by operating revenue) that disclose such data in their respective latest fiscal year. The key drivers of our aircraft utilisation rate are securing air traffic rights and landing and departure slots, maintaining an efficient aircraft turnaround time and ensuring a high-quality and time-efficient aircraft maintenance programme. In 2012, our average aircraft utilisation was 16.2 hours per day, despite achieving 17.1 to 17.5 hours per day utilisation for certain aircraft rotations. For the 3 months ended 31 March 2013, we achieved an average aircraft utilisation rate of 16.5 hours per day. Our average utilisation is below our capability to operate at approximately 17.0 hours per day as we were not able to secure air traffic rights and slots suited to our aircraft planning. Our maximum aircraft utilisation is computed based on a generally accepted industry standard taking into account the number of hours our aircraft is under maintenance layovers and transit times in a 24-hour period. In other words, an average of 7 hours per day is needed for maintenance activities and turnaround activities, including passenger boarding, ground handling and flight preparation. With our new route network strategy and approvals for our new routes, we believe we can achieve our target aircraft utilisation rate going forward. Even at a sub-optimal rate of 16.2 hours per day in 2012, which we believe to be one of the highest aircraft utilisation rates in the world, our rate is already approximately 48.6% higher than the average of the top 10 FSCs based in the Asia Pacific Region that report such figures. This is because the FSC model relies heavily on revenue from first and business class passengers who are more sensitive to convenient departure, arrival and connecting times. FSCs, therefore, adjust their flying schedules to suit these requirements, leading to significant aircraft idle time. (i) Traffic Rights Having sufficient air traffic rights in our target markets at least 4 months prior to commencement of operations is critical to enable us to match available capacity to the route. We need sufficient time to sell and fill up the aircraft to be able to efficiently use aircraft capacity that becomes available. There are various factors that would affect the timeliness of obtaining the traffic rights, including but not limited to whether the rights are available on a bilateral basis (between Malaysia and the destination Government); whether the rights are limited or unlimited and whether other airlines in Malaysia are also applying for the use of the same rights. One of the key upcoming developments is the ASEAN Open Skies policy, expected in 2015. We expect this will drive passenger traffic to and from, as well as within, Southeast Asia, thus providing additional feed to our Long-haul destinations. For a discussion of how we secure traffic rights, please refer to Section 7.9.5(ii) of this Prospectus. (11) Computed based on the average block hours per day per aircraft during the year, which is a generally accepted industry standard. Block hours are calculated by measuring the duration between the time of departure of an aircraft and the time of arrival at its destination 7. BUSINESS OVERVIEW (cont’d) (ii) Landing and Departure Slots In addition to air traffic rights, the aviation or transportation authority of each country, together with the respective airports, also grants time slots for aircraft to arrive and depart from each airport. Available time slots correspond to the capacity of an airport’s facilities and influence the ability of a carrier to land at or take off from an airport at a specified time and date. Our ability to maximise our aircraft utilisation depends on securing both arrival and departure time slots that fit an optimal aircraft flying pattern (rotation). Some airports face slot congestion and have limited flexibility to offer slot choices, such as Beijing, Shanghai and Haneda. Others, such as Sydney and Gold Coast, operate with curfew constraints (typically from 11 :00 p.m. to 6:00 a.m.). We need to have a good balance of airports without slot constraints to offset those with constraints to be able to achieve our target aircraft utilisation rate. Slots are typically granted and renewed twice a year (April and October) for a 6-month period, at a global slots coordination conference. We send representatives to these conferences to meet airport slot coordinators and negotiate for the slot times that we need for our aircraft rotation. (iii) Turnaround Time Turnaround time, being the time between arrival at an airport and subsequent departure for the next destination, is another factor that drives utilisation. Using precision timing management, we are able to turn our aircraft around within 60 to 75 minutes. During the turnaround time, we disembark arriving passengers and offload cargo, re-fuel the aircraft, clean the cabin, re-stock in-flight supplies, embark passengers and load cargo for the next flight. In 2012, we achieved an on-time departure rate of 85%, with weather and air traffic control congestion being the two main factors causing delays. (iv) lIIIaintenance We also focus on implementing a high-quality and time-efficient aircraft maintenance programme to ensure that our aircraft operate with industryleading reliability rates and to minimise down-time from scheduled or unscheduled maintenance work. Down-time from scheduled maintenance work primarily comprises two main aircraft checks. ‘A’ checks take approximately 8-12 hours and are done at 800 flying hour intervals, typically once every one-and-a-half months, and focus on visual inspections and reviews of maintenance logs to clear any recorded defects. We use an efficiency rate as a measure to determine the time-efficiency of our aircraft maintenance programme. The rate is the actual flying hour intervals for maintenance relative to the maximum permissible flying hour interval between checks. In 2012, we achieved an ‘A’ check efficiency rate of 99.6% (which means that we conducted ‘A’ checks on our aircraft, on average, every 797 hours as compared to the maximum 800 hours that we are allowed to fly before ‘A’ checks must be conducted), with a low average “open defect” list of less than 1 per aircraft, as acknowledged by civil aviation inspectors during regular audits. ‘e’ checks are done at 18month intervals, and each ‘c’ check takes approximately one week to complete, with a longer 24-day check every 72 months. In 2012, we achieved a ‘c’ check efficiency rate of 93.7%. 95 I Company No. 734161-K I 7. BUSINESS OVERVIEW (cont’d) By having a strong maintenance programme focused on predictive and preventive maintenance, we attempt to minimise unscheduled maintenance downtime and increase aircraft utilisation. 7.6 How We Deploy Our Fleet 7.6.1 Choice of Primary Hub We currently operate out of the LCCT in Kuala Lumpur and have designated LCCT as our primary hub. The LCCT is the main gateway for low-cost carriers into Malaysia and is located approximately 70 kilometres from the heart of Kuala Lumpur. We selected the LCCT as our hub due to its extensive LCC feeder market, with up to 1,401 flights per week serving 73 destinations in the week of 4-10 March 2013, according to S-A-P. As a LCC terminal, it also benefits from lower airport charges (landing charges, parking charges, check-in counter charges, and passenger and security charges) and lower passenger service tax. These savings are translated into lower fares for our passengers. In addition, KLIA is underserved in terms of Long-haul routes relative to airports at Singapore, Hong Kong and Bangkok. As such, KLiA presents more growth opportunities. S-A-P reported that in the week of 4-10 March 2013, Kuala Lumpur had 512 departing Long-haul flights, compared to Hong Kong’s 657, Bangkok’s 940 and Singapore’s 1,096. We are scheduled to move our operations from the LCCT to KLiA 2, a brand new LCC terminal currently under construction. With an expected capacity of 45 million passengers per annum upon completion (versus capacity of 15 million at the present LCCT), we anticipate that the move will allow us to serve more passengers at any one time and service more routes and destinations. We expect that the enhanced customer service and comfort levels at KLIA 2 will make it an attractive terminal for us to use as our hub as compared to the existing LCCr. We also expect KLiA 2 to provide the capacity to grow our flight movements (arrival/departure) at peak times, and help improve commercial performance, overcome operational constraints that currently exist at LCCT, decrease congestion, improve on-time performance at peak times and allow room for further expansion. KLiA 2 should also provide better feeder opportunities from Short-haul networks with a significantly larger transit passenger facility. We also expect KLiA 2 to have better and more convenient accessibility to the city centre via the express rail link service, among others. It is also planned to have additional. facilities for cargo. 7.6.2 Route Selection Our route strategy, as well as our focus on our core markets, is designed for us to capitalise on intra-Asia Pacific traffic growth opportunities, maximise our brand and economies of scale in those core markets and build a market leader position in terms of capacity, which complements our feeder traffic demand. By launching flights to multiple cities within a certain market, we aim to maximise our marketing and branding investments and return on our set up costs in that market. Our decisions with respect to our route network are in part governed by the availability of air traffic rights and landing and departure slots, as certain limitations on their availability may prevent us from increasing flight capacity to more profitable or higher demand destinations. 7. BUSINESS OVERVIEW (cant’d) We generally take into account 3 primary factors when analysing our route network and evaluating new routes: (i) the strategic fit of the route within our existing network and its potential to increase passenger demand across our entire network, (ii) the overall potential for passenger demand for the route, based on market size, catchment and demographics for the route, and competition from other airlines that service the route, and (iii) the feasibility of establishing the route and the costs and potential profit associated with the route. Factors that have driven us to withdraw certain routes include: (i) increases in fuel costs which made certain of our longer flights less economically viable, (ii) local taxes and fees, including local government taxes and carbon taxes, that increase operating costs, and (iii) local economic conditions, such as the economic downturn in the eurozone and the challenging economic and business conditions recently seen in Iran, and other matters that may cause a reduction in passenger traffic from one or more of our existing markets. (The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (cont’d) 7.6.3 Current Routes As at the LPD, we operated regular scheduled services on 14 point-to-point routes covering 7 countries, with an additional destination (Busan) scheduled to commence in July 2013. We focus on providing Long-haul services and, therefore, all our destinations are at least 4 hours flight time and at least 1,700 nautical miles from our hub. The following route map illustrates our scheduled route network as at the LPD.
The table below indicates the frequency of scheduled flights that we operate or plan to operate to the various destinations as at the LPD. Current or Planned 7. BUSINESS OVERVIEW (cont’d) Destination City Route Commencement Date FlightslWeek Gold Coast 2 November 2007 5x Perth 2 November 2008 9x Melbourne 12 November 2008 7x Sydney 1 April 2012 7x Hangzhou 4 February 2008 5x Chengdu 20 October 2009. 5x Beijing 23 June 2012 7x Shanghai 19 February 2013 6x Taipei 1 July 2009 7x Tokyo 9 December 2010 7x Osaka 30 l\Jovember 2011 4x Seoul 1 November 2010 7x Kathmandu 3 July 2012 4x Jeddah 16 February 2013 3x Busan 15 July 2013 4x
Through our association with the AirAsia Group, passengers on our flights may connect to destinations across the Asia Pacific Region on routes served by other AirAsia Group carriers. Similarly, we are also able to more readily access the other AirAsia Group carriers’ passengers in order to fill our flights departing from our hub in Kuala Lumpur. The entire AirAsia Group network, consisting of 6 airlines serving 91 destinations from 16 hubs as at the LPD, gives us access to a much larger passenger base than the markets that we serve directly. The following illustrates the destinations served by the AirAsia Group as at the LPD.
(The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (cont’d) 7.6.4 Future Routes We currently conduct substantially all of our operations and generate substantially all of our revenue, in the Asia Pacific Region. In the near term, we expect to focus on markets with strong prospects of profitability and prioritise capacity towards launching new routes and expanding frequency into Australia, China, Taiwan, Japan and Korea. In addition to taking advantage of the anticipated extensive growth opportunities in traffic within the Asia Pacific Region, the rationale for the focus on these core markets is: (i) to build a strong market leadership position in selected regions, instead of having a smaller presence which results in limited service options for passengers and less pricing flexibility;
(ii) to maximise marketing and brand awareness in existing markets;
(iii) to spread fixed operational costs over a greater passenger base to reduce fixed costs per passenger; and (iv) to enhance schedule choices for passengers, which we expect would generate strong levels of demand. 7.6.5 Withdrawn Routes Based on our continual analysis of our route network, we have withdrawn from certain routes and markets to improve our overall route network and improve our results of operations. In January 2012, we announced our withdrawal from the London, Paris, Mumbai and Delhi routes. SUbsequently in March 2012, we announced our withdrawal from the Christchurch route. The table below sets out when we commenced and ceased flight services to the withdrawn routes. Withdrawn Routes Commencement Date Cessation Date London 11 March 2009 16 April 2012 Paris 14 February 2011 31 March 2012 Mumbai 6 May 2010 1 February 2012 Delhi 4 August 2010 23 March 2012 Christchurch 1 April 2011 31 May 2012 Following the withdrawal from these routes, all affected customers were offered refunds, re-routes through one of our destinations, or reaccommodated via another airline. (i) We deployed our A340-300s on the London and Paris routes due to the extended range and longer flight times of those routes, which could not be met by our A330-300s. However, the 1O-year older A340-300s were less fuel efficient than our brand new A330-300s, which was further compounded by sharp increases in fuel prices since we commenced flights to London in March 2009 and to Paris in February 2011. 7. BUSINESS OVERVIEW (cont’d) The eurozone crisis negatively impacted the European market for leisure air travel. In addition, the European Union applied the European Union Emission Trading System (ETS) to the aviation sector commencing from 1 January 2012, which would have required us to pass on the related emissions costs/tax to our passengers. Attempts to increase fares to reflect the higher operating cost demonstrated the high price elasticity of travel, with demand falling. Operating efficiency, rising fuel costs, the depressed leisure air travel market in Europe and emissions costs to our passengers combined to make the London and Paris routes uneconomical and no longer viable for us to operate. For the years ended 31 December 2011 and 31 December 2012, the London and Paris routes collectively accounted for approXimately RM351.4 million and RM103.3 million of our revenue respectively, and approximately RM92.7 million and RM65.9 million of our LBT respectively. (ii) Our load factors on the l\I1umbai and Delhi routes were relatively low, averaging approximately 72%, since we started servicing these routes. These routes came under additional pressure when the Malaysian government removed visa-on-arrival facilities in August 2010 soon after the routes were launched. This placed Malaysia at a significant disadvantage vis-a-vis Thailand and Singapore, which offer Indian tourists convenient visa-on-arrival facilities and visa-free entry, respectively. Demand for flights to and from India was expected to be further weakened due to massive increases in airport taxes, fees and handling charges, which were already high, as compared to our destinations in Australia. For example, in May 2012, Delhi airport increased airport fees by 346%. These increases, occurring in a high fuel price environment, made the economics of our already loss-making Delhi and Mumbai routes even less attractive. For the years ended 31 December 2011 and 31 December 2012, the Mumbai and Delhi routes collectively accounted for approximately RM154.6 million and RM28.6 million of our revenue respectively, and approximately RM36.5 million and RM4.4 million of our LBT respectively. Although AirAsia Berhad is currently in the process of establishing a low-cost airline in India together with 2 other joint venture partners via AirAsia (India) Private Limited (“AirAsia Indian) which is expected to commence operations in September 2013 (source: AirAsia Berhad’s announcement dated 18 April 2013), we do not have any immediate or specific plans to recommence servicing flights to India. However, we do foresee opportunities that we may be able to leverage on the potential of AirAsia India’s feeder network with that of our overall business model and strategy. Any such decision to recommence flights to India would be subject to factors that we typically take into account in determining and evaluating new routes, such as strategic fit with our existing route network, passenger demand and potential, competition as well as the economic feasibility to establish any routes to India, including the success of AirAsia India’s operations and network. Under the Indian Air Transport guidelines, any Indian air transport undertaking shall be eligible to apply for operation of international scheduled air transportation, if it is in possession of, amongst others, a minimum of 5 years’ experience of continuous operation of domestic scheduled air transport services. 7. BUSINESS OVERVIEW (cont’d) (iii) Christchurch is mainly a leisure destination for Malaysians; a series of earthquakes in Christchurch, especially the one in February 2011 which resulted in severe damage to the city and significant fatalities shortly before our inaugural flight, and the post-earthquake rebuilding efforts reduced Christchurch’s attractiveness as a tourist destination. Although we needed to offer promotional fares to stimulate demand, increasing fuel costs limited our ability to offer low fares on that route. In a high fuel price environment, the Christchurch route became an unprofitable route for us to operate. For the years ended 31 December 2011 and 31 December 2012, the Christchurch route accounted for approximately RM78.5 million and RM48.1 million of our revenue respectively, and approximately RM37.5 million and RM12.7 million of our LBT respectively. Following from the withdrawals, we have fully redeployed the A330-300s (used on the Mumbai, Delhi and Christchurch routes) and other resources to new routes and increased frequencies to destinations with better market potential, while the A340300s that previously served the London and Paris routes are currently wet-leased. The Malaysian government granted us approval in December 2011 to commence flight services to Sydney, Australia (a destination for which we had lobbied intensely since 2009), and approval in January 2012 to increase flight frequencies to Haneda, Japan. These route approvals created new opportunities for us to service markets that offer greater prospects and that are consistent with our current route focus. Our decision to exit from unprofitable routes and redeploy aircraft to new routes resulted in improved operating cost efficiencies and consolidation of the network to focus on our core markets of Australia, China, Taiwan, Japan and Korea where we have established stable, profitable routes with an infrastructure that supports low-cost services. We intend to focus on opening up new routes within these markets, as well as increasing frequencies on existing routes. In addition, on 15 October 2012, we terminated our service to Tehran (which we commenced service on 4 August 2010) due to the challenging economic and business conditions in Iran, including the volatility of the Iranian currency. We do not have any immediate plans to resume service to Tehran. Consistent with aircraft previously deployed to our other withdrawn routes, we have re-deployed our aircraft previously serving our Tehran route to increase frequencies in other more profitable markets since December 2012. 7.7 How We Fill Our Planes 7.7.1 Revenue Management (i) Route Maturity A key factor that affects our overall passenger volume and profitability is the maturity of our routes, or the period of time that we service each particUlar route. Generally, when we begin service to a new route we experience lower load factors as the local population in the new market may be less aware of our services or the AirAsia brand. Therefore, we tend to start with lower fares initially to stimulate local demand for our services. As load factors improve over time, we increase our fares to our standard levels. 7. BUSINESS OVERVIEW (cont’d) (ii) Fare Pricing Scheme We have a mUltiple fare pricing structure, and fares are based on one-way travel. We utilise a revenue management system, comprising of airRM, InFare and NewSkies 3.2 Reservation System (see Section 7.8.5 of this Prospectus for a description of these software programmes), to dynamically manage our revenue from passenger seat sales. Through the system, we continually monitor and adjust our fares based on, among other data, the date of the flight, the forecasted and actual demand for the flight and how far before the departure date the ticket purchase is made. We analyse these data, as well as other data, including those related to our competitors’ products (flight frequency, timing, aircraft type, market share, choice of seat class) to optimise our revenue from passenger seat sales while remaining competitive. 7.7.2 Marketing, Advertising and Promotions (i) .. General Marketing, Advertising and Promotions We are focused on raising public awareness of our main value proposition that people can now fly further with cheaper prices than those offered by fullservice carriers. Our tagline, “Now Everyone Can Fly Xtra Long!” emphasises our mission to be the foremost low-cost, Long-haul airline globally. We have maximised our global brand recognition and awareness of the services that we provide by a mix of high profile sponsorship, effective marketing and promoting brand awareness. Since commencement of operations, we have leveraged the strength of the global AirAsia brand, which has enabled us to minimise our start-up costs and time-to-market. The AirAsia brand enjoys global visibility and recognition, with branding campaigns including world class sports properties such as Formula One Grand Prix through the current sponsorship of Team Caterham and past sponsorship of Team AT&T Williams, Barclays English Premier League through the current sponsorship of Queens Park Rangers and past sponsorship of Manchester United, the sponsorship of British MotoGP and the past sponsorship of the Oakland Raiders team in the National Football League. We conduct direct-to-consumer marketing by advertising and marketing on various platforms including in print, on air, on the ground, via publicity from the press and digital/online marketing. The AirAsia Group’s digital media properties also provide us with a wide customer reach. We believe the www.airasia.com website is a top travel-related website in Asia and one of the most active e-commerce platforms in Asia, with over 9 million average monthly unique visitors per month and an average of 182 million monthly page views in 2012 based on tracking by Google. There are over 6.9 million registered users of www.airasia.com to whom we send promotional emails. Finally, the AirAsia Group also actively promotes itself within and engages with users across social media platforms, such as Facebook, Twitter and Weibo, with 3.5 million fans, 1.1 million followers and 988 thousand fans, respectively, as at the LPD, making AirAsia one of the most active airline social media brands, as compared to the top 10 (ranked by operating revenue) FSCs and LCCs in the Asia Pacific Region which reported financial and operating performance. 103 7. BUSINESS OVERVIEW (cont’d) We also engage our passengers through contests, such as competitions to name our new aircraft, innovative destination marketing and aggressive destination and price-based marketing, ground activities and partnerships with various government and non-governmental entities. We are also able to leverage our relationship with the AirAsia Group by collaborating in events such as the Football Masters and the Barclays Premium League Trophy Tour, which allows us to expose and market our services to a wider audience. Finally, we actively participate in travel fairs and events around the world to increase brand exposure to the public. In 2012, 32% of our advertising expenses were allocated to the digital space, 26% to print, 16% to outdoor, 12% to production, 9% to television and radio and 5% to events and sponsorships. We utilise the digital media platforms as our primary marketing channel. (ii) Our Shareholders’ Benefit Programme INVESTORS ARE ADVISED TO READ, FULLY UNDERSTAND AND CAREFULLY CONSIDER THE CONTENTS OF THIS PROSPECTUS IN ITS ENTIRETY, AND NOT BASE YOUR INVESTMENT DECISION IN OUR SHARES SOLELY ON OUR SHAREHOLDERS’ BENEFIT PROGRAM OR THE INAUGURAL BENEFIT, AS DESCRIBED BELOW. As part of our promotional activities to create further public awareness and in conjunction with our Listing, we have also implemented the Shareholders’ Benefit Programme as an incentive programme for our shareholders. The Shareholders’ Benefit Programme is introduced to give recognition and appreciation to our shareholders for their continued support and for being part of the AirAsia X family. Shareholders who qualify under this Shareholders’ Benefit Programme will be entitled to take part in and enjoy the benefits offered, such as AirAsia X zero fare return air tickets under our Inaugural Benefit, subject to the fulfilment of eligibility as well as the applicable terms and conditions of such benefits. We believe the Shareholders’ Benefit Programme will serve as an effective marketing initiative and tool to encourage our shareholders who qualify to travel with AirAsia X instead of with our competitors, depending on the nature and type of benefits extended. This may result in improving our Company’s business as well as of our passenger load factor. All our shareholders, except for those who are directors and employees of the AirAsia Group, are able to participate in our Shareholders’ Benefit Programme and to enjoy any such benefits introduced, subject to applicable terms and conditions including any eligibility criteria being met. The programme will be effective from the date of Listing until terminated by our Board, at our Board’s sole discretion. Certain benefits under our Shareholders’ Benefit Programme may be offered or introduced from time to time in whatsoever form or nature throughout the duration of the programme. We also reserve our rights to introduce, amend or withdraw any benefits as well as any eligibility criteria in connection with the Shareholders’ Benefit Programme from time to time, at our sole discretion, save for the Inaugural Benefit inclUding its eligibility criteria and associated terms and conditions. 104 7. BUSINESS OVERVIEW (cant’d) To enquire about available benefits, eligibility criteria or any other general enquiries relating to our Shareholders’ Benefit Programme, shareholders can contact us at: (a) firstname.lastname@example.org; or (b) The AirAsia X Premium Line (600 85 888) during operating hours from 9.00 a.m. to 6.00 p.m. Monday to Sunday.
For our IPO, we have introduced the Inaugural Benefit which entitles eligible shareholders to zero fare return air tickets to any AirAsia X’s destinations originating from Malaysia. Eligibility to redeem such AirAsia X zero fare return air tickets is dependent on our shareholders holding at least 10,000 or 100,000 fPO Shares and continuing to hold such minimum number of IPO Shares for a pre-determined timeframe. The detailed terms and conditions and eligibility criteria applicable to the Inaugural Benefit are set out in Annexure C of this Prospectus. The Inaugural Benefit will result in an impact to our financial statements going forward, further details of which are set out in Note 2.3(b) of Appendix A of the pro forma consolidated balance sheet in Section 12.22 of this Prospectus. While the Inaugural Benefit will be exclusive and remain unchanged to those shareholders who are eligible during the duration of the Inaugural Benefit, there is no assurance that the benefits in the form of AirAsia X zero fare return air tickets will not apply to other benefits which may be introduced under the Shareholders’ Benefit Programe in the future. Such other benefits may include AirAsia X zero fare air tickets substantially similar to the Inaugural Benefit but governed by different eligibility criteria and other terms and conditions. Shareholders who qualify under the Inaugural Benefit mayor may not also qualify for any other benefits to be introduced under our Shareholders’ Benefit Programme. There is also no assurance that we will introduce any other forms of benefits under the Shareholders’ Benefit Programme in addition to that of the Inaugural Benefit as any introduction of new benefits is dependent on its nature and type; market factors; AirAsia X’s marketing and promotional plans or activities; operational considerations; and any other factors. Furthermore, although all shareholders, except for those who are directors and employees of the AirAsia Group, are able to participate in our Shareholders’ Benefit Programme, there is no assurance that every or any such shareholder will ultimately receive any associated benefits as the receipt of such benefits may be SUbject to eligibility criteria including any other terms and conditions. If in doubt, shareholders are advised to contact us at the above contact details for further information regarding the benefits, eligibility criteria and terms and conditions for any of our benefits under the Shareholders’ Benefit Programme. (The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (cont’d) 7.7.3
Sales and Distribution We market our services and execute our sales transactions through three categories of channels: direct online sales, direct offline sales and third-party sales. The table below shows the percentage of seats sold through each channel in 2010, 2011 and 2012. Percentage of seats sold Year ended 31 December Description 2010 2011 2012 Direct Online Sales 87% 86% 84% Direct Offline Sales 10% 4% 8% Third Party Sales 3% 10% 8% Total 100% 100% 100% (i) Direct Online Sales Sales from our direct online channels, which account for the largest proportion of our total sales, are made up of Internet and mobile sales. For Internet sales, we share the www.airasia.com website with the broader AirAsia Group, on which our fares are displayed and from which our flight tickets may be purchased. The sharing of the portal with the AirAsia Group provides us with access to a wider customer base, particularly to passengers of other carriers of the AirAsia Group. Over the period from 2010 to 2012, an average of 86% of our total flight reservations were made through the website. In order to attract more passengers to purchase their tickets online, the lowest promotional fares are only made available on the website. Our passengers may also purchase their flight tickets on their mobile phones via our mobile web portal at http://m.airasia.com. Mobile phone subscribers with Internet access are able to access the Internet through their mobile phones and make reservations on that web portal. In addition, our partnership with Expedia enables us to sell our tickets on Expedia’s website and the AirAsiaGo website and to provide tour packages sold in a bundle together with our air tickets. (ii) Direct Offline Sales Our direct offline sales are made through a few methods, including call centres and sales offices at airports. We utilise the AirAsia Group sales network in Southeast Asia to facilitate direct sales of our tickets. The AirAsia Group sales network is made up of 64 travel service centres that are AirAsia-exclusive travel agents, 45 airport sales counters and 18 sales offices. 7. BUSINESS OVERVIEW (cont’d) In addition to sales offices, we maintain call centres to assist passengers who wish to book their flights by phone. Our call centres based in Kuala Lumpur and China provide support to our passengers in various locations across the Asia Pacific Region. We are able to provide voice support in our passengers’ local language; a passenger from a particular country in which we operate need only call the local number for support in their local language. We currently provide telephone support in Malaysia, Singapore, Australia, and with local language in Japan, Korea, and China and Taiwan. Our passengers are also able to use call centre lines in Thailand, Indonesia, Philippines, Hong Kong, Macau and India. (iii) Third Party Sales Our flight tickets are also available for sale through third party channels including travel agents, travel fairs and corporate accounts. We currently maintain a network of more than 2,000 “skyagents” (which are non-exclusive travel agent partners which may sell seats on other airlines), of which 95% are located in the Asia Pacific Region, to assist us in ticket sales. Aside from the above, we also distribute tickets through global reservations systems operated by Amadeus IT Group, SA, Abacus International Pte Ltd and TravelSky Technology (Hong Kong) Ltd., which allow travel agents worldwide to access our fares, schedules and ancillary products. 7.7.4 Ancillary Products As a low-cost carrier, our business model is to offer our passengers fares that are substantially lower than those offered by FSCs and, at the same time, cater to our more discerning passengers by giving them the option to purchase any of our innovative ancillary products and services. By providing ancillary products on an asdemanded basis, we minimise waste and weight and our passengers do not have to absorb the cost of products they do not desire, by paying higher, all-inclusive fares. We are the first low-cost, Long-haul carrier globally to install a flat-bed seating class, introduce tiered baggage fees, provide in-flight entertainment, offer pre-booked food options and offer seat selection options. We pioneered the “Fly-Thru” service in the low-cost carrier market, which allows for seamless connection without having to obtain a visa when transiting at KLiA to other AirAsia Group destinations outside lVIalaysia. We produced ancillary revenue per passenger of USD46.07 in 2012 and USD48.82 for the 3 months ended 31 March 2013. According to S-A-P, our ancillary revenue per passenger of USD38.92 in 2010 was the highest, and our ancillary revenue per passenger of USD40.09 in 2011 was the fourth highest of the global airlines that reported such revenue. (The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (cont’d) (i) Seat Fees Seat fees include fees for Pick-a-Seat (which allows passengers to pre-book seats up to 1 hour before scheduled departure time) and Hot Seats (seats with extra legroom). In addition, through our business partner Optiontown (a third party travel option provider) we offer our passengers preferred seating options such as an Upgrade Travel Option (by which guests can bid for an upgrade to a Premium FlatBed seat at a fraction of the premium fare, subject to availability 4 hours prior to scheduled departure time) and an Empty Seat Option (by which a guest can purchase, for a nominal fee, an option to have all 3 seats in a row to themselves, subject to availability 4 hours prior to scheduled departure time). Our “Quiet Zone” is an additional option exclusively for guests who are above age 12. The “Quiet Zone” is located at the front of the aircraft directly behind the Premium Flatbed area. The “Quiet Zone” features a quieter ambiance with soft lighting, offering a more relaxing cabin atmosphere. The “Quiet Zone” option may be selected in the pick-a-seat option during the booking process, with no extra charge currently imposed for this option except for the standard Pick-a-Seat fee. (ii) Change Fees Passengers may change their flights up to 48 hours before the scheduled departure time subject to payment of a change fee per passenger per sector (not applicable to Premium fares) and any applicable difference. (iii) Convenience Fees (now known as Processing Fee) We charge a non-refundable processing fee for online payment through credit, debit or charge cards. The fee is charged per guest per sector of travel and only applies to the initial booking and not to changes to existing bookings. Processing fee does not apply to direct debit payments. (iv) “Fly-Thru” Fees In October 2010, we began offering “Fly-Thru” service to our passengers. By purchasing this option, passengers have the convenience of transferring between two different flights of the AirAsia Group via the transit hall with no transit visa required. Their bags are automatically transferred from their first flight to the second flight without the need to re-check baggage for their second flight. Since June 2012, our “Fly-Thru” service has been extended to enable passengers to connect to and from selected Malaysian destinations (currently Langkawi, Penang, Kota Kinabalu and Kuching) with their baggage checked through to their final destination. (v) Baggage Fees Passengers are able to purchase up to 40kg baggage allowance with a charge levied on blocks of 5kg, starting from 15kg. We also levy a charge on certain sports equipment. 108 7. BUSINESS OVERVIEW (cont’d) (vi) In-flight Sales Passengers may purchase in-flight meals and in-flight entertainment up to 24 hours before their flight. Our in-flight meals are catered by different vendors; passengers have an extensive menu to choose from. In-flight entertainment on all our flights is provided by way of portable media players. Passengers may also purchase in-flight meals and entertainment on board without prebooking, subject to availability. Aside from in-flight entertainment and meals, we also sell souvenirs and duty free products on board our aircraft. (vii) Loyalty Programme Our passengers have the opportunity to join the AirAsia BIG Loyalty Programme, which was launched by AirAsia Berhad in 2011 to create and retain passenger loyalty. Membership is open to all our passengers as well as the general pUblic. Members of the programme earn points for buying tickets on any flight operated by an AirAsia Group carrier and for purchasing any ancillary service, on hotel stays, travel packages, car rentals and other spending with various partners, including AirAsia Megastore, AirAsia Go, Tune Hotels, Hotel Properties Limited, Healthway Medical Group and Budget car rentals. Members may redeem points in full or through a cash top-up for air travel on flights operated by any AirAsia Group member, AirAsia gift vouchers, AirAsia merchandise, travel packages by AirAsia Go and hotel stays at Tune Hotels. When a member redeems the points for AirAsia X tickets, the operating company owning the AirAsia BIG Loyalty Programme pays AirAsia X for the seat. The number of points required to redeem a seat depends on the number of seats available on, and the destination of, the particular flight for which redemption is to be made. (viii) Travel Insurance Through the AirAsia Insure product, we offer travel insurance to our passengers. Benefits and coverage may differ from country to country, but generally all policies provide coverage for trip cancellation, flight delay and damage to or loss of baggage and personal effects. (ix) Red Carpet Service In February 2013, we introduced the Red Carpet Service, which includes a dedicated check-in counter, priority baggage tagging and loading, access to the Plaza Premium lounge at LCCT, fast track immigration and security clearance and priority boarding with buggy service to the bay (subject to aircraft parking bay distance) which includes priority baggage delivery upon arrival. 7.7.5 Cargo lVIost of the airports in our network are primary air cargo hubs serving major industrial and commercial regions. We have dedicated cargo space on all our aircraft, and we carry various types of consumer and industrial goods. 7. BUSINESS OVERVIEW (cont’d) Our cargo revenue and its percentage contribution to our total revenue since we started commercialising our cargo space in 2008 up to 2012 and the 3 months ended 31 March 2013 are shown in the table below: 3 months ended Year ended 31 December 31 March Description 2008 2009 2010 2011 2012 2013 Cargo revenue 5,385 27,262 54,966 96,471 79,267 19,914 (RM 000) Cargo as a % of 2.3% 3.8% 4.3% 5.2% 4.0% 3.7% total revenue Our cargo revenue grew in both absolute terms and as a percentage of our total revenue from 2008 to 2011, but subsequently decreased from 2011 to 2012. The growth in cargo can be attributable to an aggressive pricing strategy and high operational reliability, both in terms of on-time performance of our flights and delivery efficiency. The decrease from 2011 to 2012 is primarily due to the cargo revenue attributable to our withdrawn routes in 2012. We have a Departed-as-Planned ratio (the percentage of time cargo is flown at time booked) of 96.1 % in 2012, which we believe is higher than the industry average. Our customer service for our cargo clients has been recognised by Air Cargo Week, which awarded the Air Cargo Industry Customer Care Award in 2011 and in 2012 to us and AirAsia Berhad jointly. The award is conferred based on industry votes and other criteria such as customer services, customer care policy and strategy for problem solving. 7.7.6 Major Customers Our customers are primarily individuals travelling by air. No customer accounted for 10% or more of our Group’s total revenue in any of the years ended 31 December 2010,2011 and 2012 and the 3 months ended 31 March 2013. For details on revenue generated by passenger seat sales, please refer to Sections 12.6.1 and 12.8 of this Prospectus. 7.8 How We Serve Our Passengers 7.8.1 Fuel The largest component of our total operating expenses is fuel, which includes payments for jet fuel and other into-plane costs, such as airfield fees, throughput fees and other administrative and processing surcharges. Fuel expenses represented 45.3%, 52.6% and 48.1 % of our total operating expenses in the years ended 31 December 2010, 2011 and 2012, respectively. For the 3 months ended 31 March 2013, fuel expenses represented 47.4% of our total operating expenses. 7. BUSINESS OVERVIEW (cont’d) We currently engage in the following activities to minimise inherent risks of rising fuel costs: (i) Fuel Procurement To maintain competitive ticket prices, we seek to procure fuel at the best possible rates. Our largest fuel supplier currently is Petronas Dagangan Berhad in Malaysia where we uplift most of the fuel requirements in LCCT. Other fuel suppliers are mainly at the airports of our destinations. We negotiate our fuel contracts together with AirAsia Berhad and other members of the AirAsia Group as the combined volume of fuel required by the AirAsia Group allows us to negotiate better prices than if we were to procure our fuel on a standalone basis. The fuel procurement team of the AirAsia Group has a practice whereby the team makes recommendations to the Chief Financial Officers of the respective carriers in the AirAsia Group, who then decide if they would like to procure fuel on the basis quoted. The AirAsia Group sources its fuel in various ways, including extension or renewal of fuel supply contracts, open or closed tender and evergreen contracts. The factors taken into consideration when procuring fuel include the relationship with the supplier, the contract period and whether any charges, taxes or fees will be imposed. We procure fuel by, among other things, developing good commercial relationships, negotiating for favourable prices and terms and securing the commitments from fuel suppliers. In terms of fuel availability, we have not experienced any fuel shortage in the past. (ii) Fuel Management Policy To help minimise our fuel burn rate, we implement various fuel management techniques. These techniques include the implementation of clear gUidelines covering all areas of flight operations such as controls over the total weight carried on our aircraft in order to minimise our fuel burn rate. This includes allowing the aircraft to reach optimum height within the shortest amount of time, determining the optimum flight level to match the engine performance versus weight as less fuel is consumed at optimum height, applying best practice flying techniques for all flight profiles by taking straight-line flight paths and at fuelefficient speeds as much as possible, and decreasing the overall weight of the aircraft by, among other things, matching supply with demand for food and beverages, on-board documents and water. (iii) Fuel Hedging Additionally we also conduct fuel hedging activities as detailed below: Hedging position -We currently target to hedge between 30% and 50% of our fuel requirement for 3 to 6 months’ forward sales. However, the actual amount hedged could differ depending on various factors such as macroeconomic factors and forward and forecast jet fuel prices. For example, in the event that forecast fuel price is expected to drop below our budgeted price, we may not hedge as it would be more advantageous to procure fuel at market prices. On the other hand, in the event that forecast fuel price is expected to increase above the price quoted in our orders, the counterparties may not accept our orders unless at a significantly higher premium. Notwithstanding the above, we do not hedge more than our expected fuel consumption. 111 7. BUSINESS OVERVIEW (cont’d) For the year ended 31 December 2012, approximately 40% of our total fuel consumed during the period was hedged. As at 23 May 2013, a total of 42%, 3rd31 %, 27% and 5% of our projected fuel consumption for the 2nd , and 4th quarter of 2013 and 15t quarter of 2014, respectively, have been hedged. Hedging instruments -The underlying contracts are plain vanilla or conventional fixed swaps hedging instruments, hence avoiding any complexities associated with other more complicated derivative contracts. By generally engaging reputable financial institutions for such contracts, counterparty risks are limited. The forward price at which the fuel is hedged is determined collectively by the AirAsia Group’s Financial Risk Management Committee (“FRMC”) of which we are a member, taking into account the budgeted fuel price for the year. Hedging savings are recorded in the event that the actual market price of fuel is above the hedged price. In the event that the actual market price is below the hedged price, the difference represents the additional price we have to pay above market price, which in turn may affect our cost competitiveness should the difference be significant. Hedging participation -We engage in fuel hedging through the AirAsia Group, in particular the FRMC. The hedging proposals structured by counterparties are analysed by AirAsia Berhad’s treasury team, taking into account the collective budgeted fuel demand of the AirAsia Group. The FRMC then deliberates and recommends the appropriate hedging proposals to its member carriers. This collective hedging with the AirAsia Group allows us to negotiate for pricing, cost and risk structures that are more favourable to us, due to increased bargaining position from economies of scale, as opposed to only undertaking fuel hedging activities by ourselves. In terms of participation by the member carriers, there are no set parameters for each carrier to participate in the recommended transaction, and we can elect whether to participate in each transaction or not, taking into account our own fuel hedging plans, financial portfolio, cost of transaction as well as our risk appetite. We are not bound by any requirement to follow the recommended hedging structure should we believe such structure is not optimal for our hedging requirements, and we are entitled to request AirAsia Berhad’s treasury team to enter into such other types of hedging structures on our behalf, if required. These fuel hedging contracts are entered into by AirAsia Berhad where gains and losses are apportioned when the hedging contracts mature based on the amount of fuel hedged by the respective participating members of the AirAsia Group, divided by the total budgeted amount of fuel hedged by the AirAsia Group. We do not enter into any fuel hedging contracts directly as such contracts are negotiated and entered into by AirAsia Berhad directly with the counterparties. Consequently, any gain or loss arising from fuel hedging is recognised when risk transfers to our Group, namely upon allocation by AirAsia Berhad to us when the hedge matures. In the event we do not meet or deviate from our hedging targets, we will consider other options, namely fuel surcharge as mentioned in (iv) below to pass on a portion of our fuel expenses to passengers. Although our Board is not directly involved in managing such deviations, our hedging activities are presented to our Audit Committee for review during our quarterly meetings, where the Audit Committee is briefed on the nature and pricing of the hedges we have participated in, together with a sensitivity analysis on pricing. 7. BUSINESS OVERVIEW (cont’d) As a result of our hedging activities, we managed to achieve the following fuel cost savings / (loss) through hedging during the following periods under review: Year ended 31 December 2010 2011 2012 Net hedging savings I (loss) per barrel (USD) 2.32 0.30 (0.14) Average fuel price per barrel (USD)(l) 92.50 127.80 129.59 % savings I (loss) compared to average fuel price 2.5 0.2 (0.1) Note: (1) Calculated as average price for fuel oil for the period based on the reported mean price of fuel oil reported by Platts, a global provider of energy, petrochemicals and metals information, and a source of benchmark price assessments for those commodity markets. (iv) Fuel Surcharge We also pass a portion of fuel price increases to our passengers in the form of fuel surcharges, which is determined periodically depending on the market price of fuel in addition to our level of flight operations. See Section 5.2.5 of this Prospectus for a discussion of the risks related to increases in the cost of fuel or limitations on fuel supply. We are represented by our Chief Executive Officer and Chief Financial Officer in the FRMC, and likewise for the other airlines within the AirAsia Group. The FRMC is tasked with the broad objective of managing the market risk exposures inherent in the AirAsia Group’s commercial operations, so as to reduce the potentially adverse impact of these risks on the group’s earnings and cash flows, while at all times operating within constraints such as corporate risk appetites, various pricing / cost benchmarks as well as the management of credit and operational risk arising from treasury transactions and operations. The AirAsia Berhad treasury team provides market updates and hedging recommendations on a continual basis to the members of the AirAsia Group through the FRMC. Currently, we largely conduct only fuel hedging activities through the FRMC. 7.8.2 Engineering and Maintenance We have a comprehensive engineering programme comprised of technical services, maintenance, planning, quality assurance, procurement and inventory. All our maintenance programmes are based on the aircraft manufacturer’s guidelines and the requirements of the DCA. We have been approved by the DCA as an Approved Line Maintenance Organisation for A330-300 and A340-300 since October 2007 and an Approved Design Organisation since December 2011. The line maintenance approval allows us to conduct routine or scheduled maintenance on our aircraft, which is carried out according to the types of checks required. The design approval allows us to perform more complex maintenance procedures than an ordinary line check; we can carry out minor changes and repairs including changes and repairs to aircraft structure, cabin interior and the interior equipment. 113 7. BUSINESS OVERVIEW (cont’d) Our own technical staff perform our ‘A’ checks. We have outsourced ‘c’ checks in 2011 and 2012 to Lufthansa Technik Philippines, Inc., which also performs some aircraft upgrade and modification work. To enable us to be kept updated with the latest developments and to obtain the best in aircraft engineering and maintenance service, we have long term service agreements, generally with terms ranging from 3 years to 20 years, with a number of major servicers in the industry, including our fleet supplier Airbus, which provides aircraft retrofit, modification and upgrade, aircraft spare part supply, aircraft technical support and aircraft health monitoring services to us. Our aircraft currently utilise engines from Rolls-Royce pic, GE Engine Services Distribution LLC and CFM International Inc. We have long term service agreements with Rolls-Royce pic and its affiliates pursuant to which these parties provide engine maintenance, repair and overhaul services, component support, engine technical support, spare engine support and an engine health monitoring programme. GE Engine Services Distribution LLC and CFM International Inc. also provide engine maintenance, repair, overhaul and technical support services. Honeywell International Sari prOVides us maintenance and exchange services for our auxiliary power units. We have recorded no major incidents relating to our aircraft which can be attributed to maintenance or engineering faults of our own. Major incidents are major hazardous occurrences other than accidents, associated with the operation of an aircraft which affects or could affect the safety of operation, such as mUltiple malfunctions of one or more aircraft systems seriously affecting the operations of the aircraft. 7.8.3 Airport Operations (i) Airport Handling Service Our Company has all the required licences and agreements to operate at all of our international destinations. These licences and agreements allow us to utilise a wide range of support and ground services available at various airports, including the use of airport equipment and facilities, terminals and related services. The ground handling services that our airline requires for all our flights include ramp, cargo and baggage handling. To keep costs low, we outsource our handling services to third parties that adhere to international standards and best practices. (ii) Airport Charges Airport charges are imposed on our Company at every destination to which we fly. These charges are made up of various fees, which include landing and parking fees at airports and security fees. To manage such costs, we make every effort to ensure that we obtain favourable rates at all airports that we fly to by demonstrating our ability to increase passenger traffic to and from the airports we serve. 7.8.4 People and Training (i) Our People Our Company had 1,094, 1,245 and 1,300 employees (including contract staff) as at 31 December 2010, 2011 and 2012, respectively. As at the LPD, we had a total of 1,459 employees. Our employee composition, by function and geographic location are set out as follows: 114 I Company No. 734161-K I 7. BUSINESS OVERVIEW (cant’d) Function 31 December 2010 Number of Employees as at 31 December 2011 31 December 2012 LPD Operations Engineering Flight Operations -Crew Flight Operations -Flight Attendant Department Head Office and Corporate Commercial and Marketing Total pIll 137 183 290 28 27 665 C(2) 10 152 265 2 429 Total 147 183 152 555 28 29 1,094 pIll 209 209 160 289 55 34 956 C l21 17 22 246 4 289 Total 226 209 182 535 55 38 1,245 p(l) 214 219 158 315 85 33 1,024 C(2) 41 15 217 3 276 Total 255 219 173 532 85 36 1,300 pIll 322 234 161 342 89 45 1,193 C(2) 37 1 19 206 3 266 Total 359 235 180 548 89 48 1,459 Number of Employees as at
Location 31 December 2010 31 December 2011 31 December 2012 LPD Malaysia 1,052 1,195 1,252 1,409
Australia8857 China 11 11 13 14 Taiwan79891195 UK 212India Korea 93 11 1 85Japan 245 France2212 New Zealand 2 USA Total 1,094 1,245 1,300 1,459 Notes: (1) Permanent staff.
(2) Contract staff.
115 7. BUSINESS OVERVIEW (cont’d) Our employees are not unionised and we have not experienced any material industrial disruption due to labour strikes, work stoppages or labour disputes in the past. Our management team enjoys a good working relationship with our employees. We are not involved in any material labour dispute that has a material effect on our financial position and business, and we are not aware of any circumstances that would give rise to any labour dispute that may materially and adversely affect our financial position and business. As at the LPD, our Company employed a total of 160 foreign employees based in Malaysia, who mainly serve as captains and flight attendants. These foreign employees are typically employed for a period of 2 years. Any extension of their work permits is subject to applicable Malaysian immigration laws and their satisfactory work performance. In addition, we have 50 employees based in various overseas locations, primarily in airport operations and marketing. (ii) Training We require our people to comply with training requirements relevant to their responsibilities. Due to the highly regulated nature of the aviation industry, there are extensive mandatory or regulatory training requirements, both recurrent and non-recurrent. In addition,as part of our Company’s efforts to remain aware of latest developments, we offer training programmes which may not necessarily be mandated by law but which we believe contribute towards the improvement of our operations. The majority of our training programmes are centered on technical competence, specifically the skills of our pilots, flight attendants and engineers. There are also various training requirements imposed on our security and guest services teams. (a) Pilots Newly recruited pilots (who each must already be qualified with an Airline Transport Pilot’s Licence) are required to attend the Standard Training Conversion (STC) programme. The STC programme includes line checks, runs for approximately a month and is conducted by our own in-house instructors. All pilots are also required to attend the Crew Resource Management (CRM) programme to equip themselves with the necessary leadership and people management skills. Pilots who do not have the particular type-rating for aircraft in our fleet must undergo additional type-rating training in order to qualify to operate our aircraft. In addition, our pilots are also required to undergo a bi-annual training programme to refresh their skills. The programme is divided into 4 modules, to be completed at 6-month intervals. (b) Flight Attendants Our flight attendants once recruited, are required to attend a mandatory safety management system (SMS) programme, an initial entry programme that covers all the basic requirements of our fleet. Our flight attendants are also required to participate in mandatory yearly training to remain current on the partiCUlar type-rating for aircraft in our fleet. 116 7. BUSINESS OVERVIEW (cont’d) (c)
As with the pilots, our cabin crew are also required to undertake a conversion programme if they wish to work on an aircraft that is different from the aircraft type on which they were originally trained. Engineers Apart from the basic maintenance and technical services training, our engineers are also required to attend specific type-rating and manufacturer-related courses, depending on the type(s) of aircraft and engines on which they work. The training programmes are conducted by the respective manufacturers or an approved training organisation (for example, Asian Aviation Centre of Excellence Sdn Bhd and Sepang Aircraft Engineering Sdn Bhd). The training includes courses on type rating for A330-300/A340-300 and various enginerelated courses, which are intended to equip our engineers with basic technical knowledge and trouble-shooting skills, as well as to enable our engineers to be kept up-to-date with not only the basic skill sets to maintain our aircraft but also the latest developments in aviation engineering. Security Various courses on aviation security, including ICAO courses, are mandatory for all security officers. Our security team also regularly participates in various forums, training workshops and training simulations with local regulatory authorities in the markets in which we operate, to keep current with latest developments. Guest Services Our guest services team members attend a mandatory guest services initial programme intended to train them in the basic skills and knowledge required for their role. Our guest services officers are also required to attend various recurrent programmes. Safety Management System We provide extensive training to all employees in line with our commitment to maintaining the safety and security of our passengers and our employees by encouraging our employees to understand our safety management system and to be familiar with the particular aspects of the systems that are relevant to their roles. 7. BUSINESS OVERVIEW (cont’d) 7.8.5 Information Technology We share various information technology systems with the broader AirAsia Group, pursuant to the AirAsia Services Agreement between our Company and AirAsia Berhad. AirAsia Berhad invests in information technology in a manner intended to lower the AirAsia Group’s costs, leading to economies of scale and improved efficiency and business continuity. Our principal operating software system is NewSkies 3.2 Reservations System by Navitaire, Inc. (“NewSkies”), which we use for inventory and sales management, reservations and check-in. NewSkies operates through a single database and provides real time access to revenue information. The software fully integrates bookings received through the Internet, the nationwide call centre, sales offices, mobile phones and tablets. We have a full disaster recovery site in Sydney for NewSkies. We also use InFare and airRM, revenue management software programmes, which are used by many airlines. InFare is a programme that monitors airline web prices and stores historical fare data, which we use to make customised searches in order to track our competitors’ fares. airRM is a programme that filters flights with similar attributes and allows the user to adjust pricing automatically in accordance with rules established by the user. We set up and revise fare rules in airRM using competitors’ fare data collected by InFare. We use these two programmes, together with NewSkies, to manage our revenue dynamically. Our other principal operating software systems include Microsoft’s Axapta Financial Management (“Axapta”), which we use for enterprise resource planning and financial reporting; Merlot Flight Operations System (“Merlot”) by Merlot Aero Ltd which we use for flight scheduling and crew rostering; AMOS, which we use for aircraft maintenance engineering and logistics management; and Microsoft SharePoint for Intranet (“SharePoint”), which we use for enterprise portal, for employee self-service and collaboration. All critical systems and data networks have redundancies for business continuity. If one server or network link fails, we switch to the back up immediately and downtime is minimal, if any. For a more detailed discussion of the AirAsia Services Agreement with AirAsia Berhad, please refer to Section 7.9.6(ii) of this Prospectus. 7.8.6 Intellectual Property We are a member of the AirAsia Group and use the “AirAsia” and “AirAsia X” brand and trade names, including trade and/or service marks under licence from AirAsia Berhad pursuant to the Brand Licence Amendment and Renewal Agreement. Please refer to Section 7.9.6(i) of this Prospectus for a description of the terms of the Brand Licence Amendment and Renewal Agreement. Other than the “AirAsia” and “AirAsia X” names and the related marks and logos, we are not dependent on any other intellectual property rights for our business operations. 7. BUSINESS OVERVIEW (cont’d) 7.8.7 Properly As at the LPD, we did not own any real property. We, namely AirAsia X, lease the office space that we use for our corporate headquarters for a monthly rental of RM26,780.00, which is described below. Approximate Date of Description of landt Built-up Existing expiry of property Locationt Address area use Lessor lease Single storey Lot PT16, Jalan KLiA 4,489.33 General Sepang 31 July office building, S7, Southern Support square feet office Aircraft 2013 (with partially occupied Zone, KLlA, 64000 and Engineering an option by AirAsiaX Sepang, Selangor library Sdn Bhd to renew for one year) We are not in breach of any lease covenants or conditions, and we are not aware of any non-compliance with current statutory requirements, land rules or building regulations by the lessor in respect of the above-mentioned prpperty, that will have a material adverse impact on our operations as at the LPD. 7.8.8 Major Suppliers The table below identifies suppliers that accounted for 10% or more of our cost of sales in any of the years ended 31 December 2010, 2011 and 2012, and the 3 months ended 31 March 2013, the amount we paid to each of these suppliers in each year / period and the percentage of our total cost of sales in each year / period attributable to each of those suppliers. 3 months ended Nature No. of years Year ended 31 December 31 March of of 2010 2011 2012 2013 Vendor Service Relationship RM 000 % RM 000 % RM 000 % RM 000 % Petronas Fuel 4 348,012 30.9 514,914 30.4 550,904 32.9 130,114 31.4 Dagangan Berhad Shell Malaysia Trading Sdn Bhd Fuel 6 136,061 12.1 139,327 8.2 111,897 6.7 11,362 2.7 Total 484,073 43.0 654,241 38.6 662,801 39.6 141,476 34.1
Fuel cost is the single largest component of our cost of sales, accounting for approximately 53.1 %, 60.1 %, 55.2% and 54.7% of our total cost of sales in the years ended 31 December 2010,2011 and 2012, and the 3 months ended 31 March 2013, respectively. We enter into annual and biennial agreements with Shell Malaysia Trading Sdn Bhd and Petronas Dagangan Berhad, respectively, for our fuel requirements. We are entitled to review the pricing and quantity of the fuel supplied or to be supplied by these suppliers upon expiry of the agreements. As a result, we are not bound to engage such suppliers if we are not satisfied with the terms of the renewal agreements. Other than the suppliers identified above, no one supplier accounted for 10% or more of our Group’s total cost of sales in any of the years ended 31 December 2010, 2011 and 2012, and the 3 months ended 31 March 2013. 119 7. BUSINESS OVERVIEW (cont’d) 7.8.9 Research and Development Our business is not dependent on research and development. Accordingly, we have not had any material spending on research and development in any of the years ended 31 December 201 0,2011 and 2012. 7.9 How We Maintain Operational Integrity We are committed to ensuring the safety and security of our passengers and our employees. This commitment is reflected in our systematic and comprehensive safety and security management system, which is implemented in a rigorous manner. We provide extensive training to all employees involved, and we employ stringent and explicit policies and procedures, which reflect the applicable regulations, international standards and industry best practices. We staff our safety and security departments with experienced personnel who have extensive experience and knowledge in their areas of responsibility. 7.9.1 Safety Our safety management system is part of our overall risk management programme. Risk management is targeted at the identification, analysis and mitigation of risks associated with our operations. It aims at balancing resource allocations to address all risks and ensure that viable risk control and mitigation actions are in place. We .integrate the key elements of the safety management system into our daily operations. The system is an integrated set of work beliefs, practices and procedures for monitoring and improving the safety of all aspects of our operations, identifying the potential for errors and formulating defences to ensure that the errors do not result in unwanted incidents or accidents. We utilise: (a) a reactive programme (including safety and mandatory occurrence reports); (b) a proactive programme (internal surveys, audits and safety reports); and (c) a predictive programme (flight data analysis and direct observation), for hazard identification. After a hazard is identified, we take risk control measures (Le., assessing the risks associated with the hazard and implementing actions aimed at reducing the risks). We have established various safety performance indicators and targets to provide us with an “early warning” of any potential safety hazard. In addition, we continuously track the indicators and measure them against our safety goals. We also track the reliability of aircraft systems and components; maintain a log of safety reports; track engineering reliability, track flight safety and cabin safety as well as ground safety observations. With regard to flight safety, we have programmes that analyse flight data, which enable us to track any deviation by our pilots from our standard operating procedures. In addition to identifying potential areas of concern early, we use data collected from the regular tracking and reporting in evidence-based training, both at monthly pilots’ dialogues and bi-annual mandatory pilot training. We also use these data to further improve our procedures. (The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (cant’d) As part of our effort to ensure our safety management system’s efficacy, we have established a Safety Review Board, whose members include the Chairman of our Board and our Chief Executive Officer, to oversee our safety function. Our Safety Review Board meets quarterly to review our safety performance against objectives, continuous improvement initiatives, and audit and investigation findings. Our Board also reviews our Company’s safety performance at every quarterly Board meeting. In addition, regular internal and external audits are conducted, including audits by the DCA and similar regulatory bodies in other jurisdictions. Since we began our. operations in 2007, we have passed all audits and none of our aircraft has been involved in any major incidents, which are major hazardous occurrences other than accidents, associated with the operation of an aircraft which affects or could affect the safety of operation, such as multiple malfunctions of one or more aircraft systems seriously affecting the operations of the aircraft. 7.9.2 Security While the relevant airport operators are responsible for security screening of passengers and baggage at our domestic and international destinations, we train our staff to be Vigilant in identifying potential security breaches and to handle unruly passengers. Operations employees are only hired after they have undergone a background security screening. We provide extensive training to ensure that our employees have the appropriate skills to carry out their duties. All crew and ground handling staff are required to undergo dangerous goods awareness training to be able to identify potentially dangerous goods and items that threaten the safety of the flight (these include flammable liquids and containers that are likely to explode under pressure). Following the terrorist attacks in the United States on 11 September 2001, ICAO adopted regulations and guidelines requiring airlines to adhere to certain security measures. These include: (i) installation of reinforced doors and review of policies and procedures on cockpit visits;
(ii) occupying of jump seats;
(iii) removal of checked-in luggage from the aircraft when the passenger fails to board the aircraft; (iv) review of items allowed as cabin luggage;
(v) enhanced surveillance of holding baggage; and
(vi) crew training on handling of disruptive passengers and passenger profiling.
We are in compliance with all of the DCA’s and the ICAO’s regulations. In addition, cockpits in all of our aircraft have reinforced, bulletproof doors. DCA carries out annual audits on our home base in Kuala Lumpur; DCA has also in the past audited our other stations, such as Melbourne and Perth. The Australia Department of Infrastructure and Transport conducts Australian Last Port Of Call (LPOC) Audits once every 2 years. Other regulatory bodies, such as the Office of Transport Security in Australia, also carry out annual audits in all our stations under their jurisdiction. We have not, to date, had any major audit findings. 121 7. BUSINESS OVERVIEW (cont’d) 7.9.3 Insurance We maintain aviation and non-aviation insurance in connection with our operations and in some instances to comply with the terms of our aircraft financing and leasing arrangements. We believe our overall insurance coverage is consistent with industry practice and is maintained at adequate levels. (i) Aviation Insurance We maintain aircraft insurance, valid for operating anywhere in the world, against the following risks and with varying coverage limits: (a) Hull All Risks (which includes aircraft engines, spare parts, components and equipment, ground support equipment, aircraft spare kits (including whilst installed or on board on aircraft) and engineers and mechanics tools) against loss and damage whilst flying and on the ground, for an agreed value for each aircraft;
(b) Hull (including spares) War and Allied Risks, as excluded by the War, Hijacking and other Perils Exclusion Clause, for an agreed value for each aircraft;
(c) Hull Deductibles (which covers the difference between the deductibles payable by us in the Hull All Risks policy (up to USD1,000,000,000) as mentioned under (a) above and USD50,000 for each and every claim); and
(d) Aircraft third party, passenger, baggage, cargo, mail and airline general third party legal liability for a combined single limit (bodily injury/property damage) (including war and allied risks); and
We maintain passenger personal injury liability insurance as required by the various airports and regulatory agencies. All insurance policies are renewed annually. As at the date of this Prospectus, they are effective up to 14 lVIay 2014. The rates for the above insurances are obtained together with the AirAsia Group, but the respective insurance policies are obtained specifically in the name of AirAsia X and the costs for maintaining these policies are borne solely by us. (ii) Non-aviation Insurance We also carry non-aviation insurance which covers our assets, properties, machinery and equipment, motor vehicle, third party public liability, employer liability and personal accident and hospitalisation insurance for our employees. All of our non-aviation insurance policies are renewed annually. As at the LPD, they are effective up to 31 December 2013. We do not carry insurance covering business interruptions. We have not experienced any material interruption to our business and operations since we started operating as a low-cost, Long-haul carrier. 7. BUSINESS OVERVIEW (cont’d) For the past 5 years and up to the LPD, we had not made any claims or suffered any losses or damages or incurred any liabilities relating to our passengers, third parties, aircraft, assets, properties, employers and employees that has had an adverse effect on our business and financial position. None of our insurance policies have been revoked, nor have we been denied coverage by any insurer. We believe our levels of aviation-related insurance coverage are generally in line with industry practice, and meet the requirements set by the respective lessors and pursuant to the conditions under the licences issued by the relevant government authorities. There has been no instance of non-compliance in the past. Please refer to Section 5.2.22 of this Prospectus for a discussion of risks related to our insurance coverage. 7.9.4 Interruptions To Business And Operations Our Company had not experienced any interruption in business that had a significant effect on operations during the 12 month period prior to the LPD. 7.9.5 Regulations The main legislation, regulations and orders in force in Malaysia relevant to civil aviation are: Civil Aviation Act 1969, Carriage By Air Act 1974, Aviation Offences Act 1984, International Interests in Mobile Equipment (Aircraft) Act 2006, Civil Aviation Regulations 1996, the Air Navigation (General) Regulations 1955, the Air Navigation (Radio) Regulations 1955, the Carriage by Air (Colonies, Protectorates and Trust Territories) Order 1953 and the Carriage by Air (Non-International Carriage) (Colonies, Protectorates and Trust Territories) Order 1953. Such legislation incorporates the principles of certain international conventions such as the Convention on International Civil Aviation, 7 December 1944 (known as the Chicago Convention), the Warsaw Convention as amended at the Hague on 28 September 1955 and supplemented by the Guadalajara Supplementary Convention signed at Guadalajara 1961, the Convention for the Unification of Certain Rules for International Carriage by Air, 28 May 1999 (known as the Montreal Convention), and the Cape Town Convention on International Interests in Mobile Equipment and the associated Protocol on Matters Specific to Aircraft Equipment. The regUlator of the airline industry in Malaysia is the DCA, an agency under the Ministry of Transport of Malaysia. The DCA regulates civil aviation affairs, especially those pertaining to aviation security and standards in Malaysia. The DCA is responsible for the regulation of all matters concerning the entry, transit and departure of aircraft, passengers, crew and cargo and further for the certification and licensing of aircraft, personnel, airports, air operators and aircraft instruments, equipment and flight documents. (i) Aircraft requirements and licences The Civil Aviation Regulations 1996 (“CAR”) prescribe certain licences, permits and approvals required to be held by a carrier of passengers, mail or cargo before the carrier can legitimately operate. The regulatory body that regulates and issues such licences, permits and approvals is the DCA. Major licences, permits and approvals required to be held by air carriers include the ASL, which permits a carrier to operate in Malaysia, and the Operator’s Certificate, which certifies that the carrier has met the requirements of CAR. 123 7. BUSINESS OVERVIEW (cont’d) In addition, each aircraft owned and/or operated by the air carrier must be registered in Malaysia on the aircraft register at the DCA. Each aircraft must also have its own certificate of airworthiness, issued by the DCA after inspection confirming that such aircraft is maintained and operated in accordance with CAR and a noise certificate certifying that such aircraft complies with the levels specified in CAR. In addition to the certificate of airworthiness, a Malaysian aircraft is required to have 2 copies of a certificate of maintenance review, certifying that the aircraft, its engine, equipment and, in particular, its radio station is maintained in accordance with approved procedures, issued by the holder of an aircraft maintenance engineer’s licence. One copy is to be carried in the aircraft and the other is to be kept by the operator of the aircraft. All aircraft that fly in or over Malaysia are required to be registered with the DCA in Malaysia (as a Malaysian aircraft) or a state that is party to the Chicago Convention or any other foreign state with a bilateral or multilateral air agreement with Malaysia. There are additional requirements under CAR. A Malaysian aircraft must have enough flight crew (Le., pilots and flight engineers) on board to meet the requirements of the aircraft’s certificate of airworthiness and to ensure the safety of the aircraft. An aircraft registered in another country also must have the number of flight crew on board that is required by the law of its country of registration. Each member of the flight crew is required to be licensed in the appropriate class. The classes of licences granted by the DCA include commercial pilot’s licence, airline transport pilot’s licence, flight engineer’s licence and flight radio-telephony operator’s licence. In addition to flight crew, an aircraft with a seating capacity of less than 200 passengers must have at least one cabin attendant (who cannot act as a member of the flight crew) for every 50 passengers and where the aircraft carries more than 200 passengers, one cabin attendant for every main exit in the aircraft. Upon being satisfied that the applicant has sufficient knowledge, experience, competence and skill in aeronautical engineering, the DCA will grant a licence allowing the applicant to perform line maintenance and issue certificates of release to service or reports, where required, in relation to the inspection, overhaul, repair, replacement, modification and testing in accordance with approved manufacturer’s manuals and documents for certain aircraft as the DCA may specify. The DCA may also issue a design organisation approval allowing the holder to perform minor repairs and minor changes to type certification upon provision of satisfactory evidence of the qualifications and competence of the applicant, the facilities at the disposal of the applicant and the work procedures proposed by the applicant. With regard to operations in foreign countries, operation permits are issued by the aviation authorities of the respective countries in which operations are conducted. For certain countries, such as Australia, an AOC is also required, which is issued once the Civil Aviation Safety Authority of Australia is satisfied that the Australian Civil Aviation Act is complied with. 7. BUSINESS OVERVIEW (cont’d) (ii) Air Services Agreements Relationships between countries regarding international air services are governed by bilateral air services agreements. These agreements are aimed at concluding, interpreting, expanding, amending or resolving disputes in relation to intergovernmental agreements, arrangements or understandings concerning international air services. The wide use of bilateral air service agreements globally to regulate international air transport is a result of principles agreed in the Chicago Convention, recognising the need for special permission or other authorisation for the operation of international air services in the territory of another state. These bilateral air service agreements are a result of the difficulty in establishing a multilateral commercial aviation regulatory scheme. Malaysia has signed or is in the process of negotiating bilateral air service agreements with close to 100 states. These agreements are not publicly available. However, we believe that such bilateral services agreements contain the standard provision in the ICAO International Air Transport Agreement signed at Chicago that provides that each contracting state reserves the right to withhold or revoke a certificate or permit to an air transport enterprise of another state in any case where the withholding or revoking state is not satisfied that substantial ownership and effective control are vested in the nationals of a contracting state. The ICAO International Air Transport Agreement provides no explanation or definition of the method or criteria for determining substantial ownership and effective control of an airline. However, there is a practice internationally that the requirement of substantial ownership and effective control is met by at least 51% ownership of the airline being vested in the nationals of a contracting state. To meet this requirement of substantial ownership and effective control, at least 51 % ownership of our Company must be vested in Malaysian nationals. To ensure compliance with restrictions on foreign ownership, our Articles of Association provide a 45% limit on non-Malaysian ownership of our Shares. For a discussion of the risk related to restrictions on foreign ownership of our Shares, please refer to Section 5.3.8 of this Prospectus. Our operation of international passenger services depends on traffic rights (also known as “freedoms”) negotiated in air services agreements by the government of Malaysia with other countries. As traffic rights are negotiated on a government-to-government basis, the traffic rights secured in air services agreements belong to each relevant government, which allocates the rights to airlines under its jurisdiction. We secure traffic rights by applying to the Ministry of Transport of Malaysia (“Ministry”). The Ministry determines whether available bilateral rights exist with the country that we are seeking to fly to, either because there is an open skies arrangement (unlimited flights permissible), such as between Malaysia and Korea, Taiwan and China, or if there is availability from existing quotas, such as with Australia (quotas based on seat capacity per week to 4 main cities), Japan (open skies from summer of 2013, except for Haneda) and Nepal (quotas based on flights per week). If available, the Ministry has the discretion to grant them to us, if it is deemed in the national interest. If not and if it supports our application, the Ministry will attempt to seek additional rights from their counterparts in other countries. The air traffic rights granted specify the volume and frequency of flights to specific airports in the country. There may also be caps placed on the number of total seats on the aircraft that an airline is allowed to fly to a particular airport. 125 7. BUSINESS OVERVIEW (cont’d) We have obtained and are in possession of all traffic rights required to operate on our routes. Traffic rights may be revoked or withdrawn by the country giving the rights. As at the LPD, none of our traffic rights had been withdrawn. (iii) Major Licences, Permits and Approvals We have obtained the required licences, permits and approvals for our operations. The details of these licences, permits and approvals are set out in Annexure A of this Prospectus. 7.9.6 Dependency on Contracts, Agreements or Other Arrangements Apart from those major licences, permits and approvals set out in Section 7.9.5(iii) of this Prospectus and those set out below, as at the LPD, there were no material contracts, agreements or arrangements which have been entered into by us on which we are dependent for our business operations. (i) Brand Licence Amendment and Renewal Agreement We entered into the Brand Licence Amendment and Renewal Agreement with AirAsia Berhad on 21 July 2012, whereby AirAsia Berhad granted us a non-exclusive and non-assignable licence to use and reproduce the “AirAsia” brand and trade name, including trade and/or service marks, for Long-haul operations. The Brand Licence Amendment and Renewal Agreement will have an initial term of 5 years. Thereafter, parties may enter into negotiations for up to 4 further extensions of 5 years each of the agreement. Upon expiry thereafter, the parties may negotiate to further extend the agreement. In exchange for the licence, we have agreed to pay AirAsia Berhad an annual licence fee of (i) RM680,OOO; or (ii) if our gross revenue for any financial year exceeds RM136 million, 0.5% of our gross revenue, but no more than the average of 0.5% of our gross revenue for the 3 best performing of the first 5 full financial years (“Fee Cap”). The Fee Cap shall apply (i) going forward for the subsequent financial years; and (ii) by way of adjustments in the event that any of the annual fees paid during the first 5 financial years exceed the Fee Cap. Furthermore, pursuant to the Brand Licence Amendment and Renewal Agreement, we were also granted a waiver from the licence fee for the first year of operations (being 2008) and a deferment for the subsequent 2 years (being 2009 and 2010). AirAsia Berhad has agreed to not directly or indirectly invest in or license another low-cost, Long-haul air carrier based in Malaysia. If opportunities arise to invest in other low-cost Long-haul carriers based in another member country of ASEAN, AirAsia Berhad will give us the first right of refusal to undertake the investment. If opportunities arise to invest in other low-cost Long-haul carriers outside of ASEAN, AirAsia Berhad will give us a reasonable opportunity to co-invest with them. For example, in the event that AirAsia India and AirAsia Japan (located outside ASEAN) decides to venture into Long-haul routes, under the terms of the Brand Licence Amendment and Renewal Agreement, we shall be provided a reasonable opportunity to co-invest with AirAsia Berhad in respect of its investment in and/or license for AirAsia India’s or AirAsia Japan’s Longhaul venture. 126 7. BUSINESS OVERVIEW (cont’d) The Brand Licence Amendment and Renewal Agreement acknowledges that, where our Company and AirAsia Berhad operate from a common point or hub, AirAsia Berhad is a Short-haul air carrier, operating flights under a 4 hour flight range and our Company is a Long-haul air carrier, operating flights above a 4 hour flight range. Notwithstanding that, we are under an obligation to provide notice to AirAsia Berhad if AirAsia Berhad is, at the relevant time, already operating flights above a 4 hour flight range from a point or hub, prior to our Company operating from such point or hub. As at the LPD, AirAsia Berhad does not operate any flights above a 4 hour flight range. We are not permitted to code-share any services with an operator other than AirAsia Berhad on any sector on which AirAsia Berhad operates to ensure that the goodwill associated with the “AirAsia” brand is not diluted. We are required to adhere to the “AirAsia Service Standards” as may be amended by AirAsia Berhad from time to time, and ensure our staff, representatives and agents conduct our operations in an orderly and business-like manner so as to maintain the standards of quality and reputation of the AirAsia brand and the AirAsia Service Standards. For certain goods and services, we are required to use supplier(s) nominated by AirAsia Berhad to ensure the maintenance of standards. As a Long-haul air carrier, we will not undertake scheduled flights of under a 4-hour flight range. We shall also not code-share any services with an operator other than AirAsia Berhad on any point-to-point route on which AirAsia Berhad operates. AirAsia Berhad is entitled to terminate the Brand Licence Amendment and Renewal Agreement if we take any legal or procedural steps to challenge AirAsia Berhad’s exclusive right to all or any part of the AirAsia brand, if our AOC or ASL is revoked or cancelled, or if there is a change in control in our Company (excluding a change in control resulting from an initial pUblic offering). “Change in control” means the change in power of a person or group of persons acting together to secure: (a) by means of the holding of shares or the possession of voting power in or in relation to AirAsia X or any other body corporate; or
(b) by virtue of any powers conferred by the articles of association or other document regulating AirAsia X or any other body corporate;
that the affairs of AirAsia X are conducted in accordance with the wishes of that person or group of persons acting together. Either party can terminate the Brand Licence Amendment and Renewal Agreement in the event of a breach by the other party that is incapable of remedy or, if capable of remedy, not remedied within 28 days after notice. Either party may also terminate the Brand Licence Amendment and Renewal Agreement if the other party ceases or threatens to cease to carry on business or suffers an insolvency event including arrangement or composition with creditors, petition for winding up or the appointment of a liquidator, manager or receiver over the whole or any part of its assets. The Brand Licence Amendment and Renewal Agreement amended and renewed the Brand Licence Agreement entered into with AirAsia Berhad on 20 July 2007. 7. BUSINESS OVERVIEW (cont’d) (ii) AirAsia SerVices Agreement We entered into the AirAsia Services Agreement with AirAsia Berhad on 31 October 2007, which was supplemented by a Renewal of Fee Schedule dated 28 November 2008, amended by an amendment agreement dated 13 May 2011, and supplemented by a renewal agreement dated 22 June 2012. Under this agreement, AirAsia Berhad provides various services to us, which include AirAsia Insure (which has since been undertaken by Tune Insurance Malaysia Berhad (formerly known as Oriental Capital Assurance Berhad) and Tune Ins Holdings Berhad, companies related to AirAsia Berhad, as detailed in Sections 11.1.2(ix) and 11.1.2(viii) respectively), regulatory issues and infrastructure development, commercial services, information, communication and technology (ICT) services, treasury services, and other services to be provided on a per-usage basis such as audit and consulting services, security and shared resources. We may also request AirAsia Berhad to provide adhoc services as and when necessary. The fees payable are generally based on the cost of services with a 10% margin. There is no expiry set out for the AirAsia Services Agreement. However, the schedules on the scope and pricing for the services have in practice been renewed on a yearly basis, whereby the scope has generally decreased over time. For the latest renewal agreement dated 22 June 2012, the term for the scope and pricing is 1 year from 22 June 2012. A summary of the current scope of services and the cost of each of the services as stated in the renewal agreement are as follows: Service Description of Service Contractual Cost of Service AirAsia Insure Provision of AirAsia Insure as a purchase option for our passengers. Regulatory AirAsia Berhad to contribute towards issues and the manpower cost for the AirAsia infrastructure Group regional manager in China. development
Under our outsourcing arrangement for Tune Ins Holdings Berhad to manage AirAsia Insure as set out in Section 11.1.2(viii) of this Prospectus, AirAsia X shall be entitled to the commissions or fees received for the sale of AirAsia Insure in China and Taiwan via AirAsia Berhad. The monthly salary of the AirAsia Group regional manager in China shall be apportioned between our Company and the AirAsia Group companies that operate into China, on an equal basis, without any mark up. (The rest of this page has been intentionally left blank) 7. BUSINESS OVERVIEW (cont’d) Service Description of Service Contractual Cost of Service Commercial services Information, communication and technology services i. Sales Distribution, Sales Support and Web Team AirAsia Berhad to provide services to business development shared with our Company including on-line’ travel agents and global distribution system, travel agent registration and reconciliation and to manage, plan, build and develop the airasia.com website. ii. Direct Channel AirAsia Berhad to provide direct channel services including sales offices, airport sales counters and the AirAsiaTravel and Service Centres. iii. Branding and Creative AirAsia Berhad to provide branding and creative services which include sponsorship and corporate and commercial branding. AirAsia Berhad to provide information technology (“IT”) services to the infrastructure, business system, enterprise systems, business operation and business analytics*. • Through third party service providers engaged by AirAsia Berhad Cost of·services will be based on staff salary apportioned by seat capacity. The respective sales offices, airport sales counters and AirAsiaTravel and Service Centres will retain the service fees charged to customers to defray the set up cost and on-going operating expenses. Monthly cost which includes staff cost and benefits with mark up of 10% and other on-going operating expenses and overheads will be apportioned based on time spent. Our Company shall pay 15% of the cost for any new shared IT systems hardware and software installed. Monthly cost which includes staff cost and benefits and other ongoing operating expenses and overheads will be charged based on seat capacity allocation with a mark up of 10%. Maintenance costs to be apportioned based on seat capacity. Development of projects if
undertaken by AirAsia Berhad, will be at a rate of RM1,500 per man day plus 10% mark up, or at cost if performed by third party. Sales via all channels will be charged at rate of USDO.29 per flown passenger. 7. BUSINESS OVERVIEW (cont’d) Service Description of Service Contractual Cost of Service Treasury Audit consulting services Security Shared resources investigate all fraudulent credit card Unit transactions and develop risk based IT audit plan for the AirAsia Group. Cost of services apportioned AirAsia Berhad to negotiate the best pricing and terms for fuel procurement and to analyse hedging structures suitable for the AirAsia Group. i. ii. Fuel procurement RM5,000 per contract Fuel hedging RM12,000 per month and AirAsia Berhad to monitor and i. Credit Card Fraud Control
based on seat capacity ii. IT Audits On project basis -man-hour estimated cost of RM62 per hour plus out-of~pocket expenses AirAsia Berhad to provide security RM120 for each departing flight. services at the aircraft, passenger and baggage screening and RM360 for each departing flight reconciliation. requiring security profilers.
RM40 for each arriving flight. Fees payable to AirAsia Berhad are 10% above the charges. Sharing of the services of our Our Company shall share the cost Group’s employees provided in equally with the AirAsia Group support of the operations of other companies involved. companies within the AirAsia Group, including our Manager, Operations and Processes headcount and Regional Head of Security. Either party may terminate the agreement by written notice if there is substantial failure to comply with the terms of the agreement and such failure continues after 30 days from a notice to remedy such failure from the nondefaulting party. The agreement will automatically terminate if either party ceases or threatens to cease carrying on business or operations, becomes insolvent or is wound-up or dissolved, or a liquidator, trustee, receiver, or encumbrancer takes possession of or is appointed over all or substantially all of its assets. As the services provided by AirAsia Berhad under the AirAsia Services Agreement are related party transactions, please refer to Sections 11.1.3 and 11.2 of this Prospectus for our internal procedures in place to ensure the terms of the renewal of the agreement are on an arm’s length basis and on usual business terms. 130 7. BUSINESS OVERVIEW (cont’d) (iii) Use of facilities at LCCT Our Company and Malaysia Airports (Sepang) Sdn Bhd (“MASB”) have entered into an arrangement since November 2007, whereby MASB provides us, with respect to the facilities in LCCT at KLlA, certain services, including the use of the apron, landing and parking, passenger loading, waste management and baggage handling. As we do not have an agreement with MASB in respect of the use of such facilities, the arrangement for the use of facilities is primarily governed by a written conditions of use provided by MASB, together with standardised pUblished rates applicable to all airlines using the airport facilities at KLiA. We have, since our commencement of operations, transacted with MASB on the abovementioned basis, whereby we are issued monthly invoices based on our usage level at the pre-determined rates as mentioned above. Notwithstanding this, we have executed written agreements for our operations at all other airports where we operate. Based on the number of passengers we carry, we account for 8.9% of the international passenger movement in KLiA (including LCCT) in 2012, according to S-A-P. In consideration for the provision of such services and facilities, we are required to pay MASB certain charges in the form of landing charges, parking charges, aerobridge charges, passenger service charges, passenger security service charges, and check in counter charges. In term of the fees applicable to the services, the aeronautical charges to be paid by our Company are regulated by the Malaysian Civil Aviation Regulations 1996. MASB charges our Company on a monthly basis based on the actual usage level of the abovementioned services. As part of the conditions of use, we are required to comply with the provisions of all applicable legislation, laws and regulations, including the Civil Aviation Act 1969 and the Aviation Offences Act 1984 and the Malaysian Civil Aviation Regulations 1996. We shall also be aware of and comply with all laws or regulations concerning environmental laws, noise management and/or occupational health and safety. (iv) Master Purchase Agreement We entered into the A330-300 Master Purchase Agreement with Airbus on 14 June 2007 (as supplemented by various letter agreements and amendment agreements, the “Master Purchase Agreement”) pursuant to which we agreed to take delivery of 15 A330-300s in accordance with a specified delivery schedule. By letter agreement dated 14 June 2007 Airbus granted us an option to purchase an additional 10 A330-300s. We exercised the option on 5 December 2007. In addition, under Amendment NO.7 dated 30 December 2010 (as amended and supplemented by various amendment agreements), we agreed to take delivery from Airbus, of 3 A330-200s, with an option to purchase 2 more. Subsequently, we converted one of the firmly ordered 3 A330-200s into an A330-300, which is scheduled to be delivered in the 4th quarter of 2014. The 2 remaining firmly ordered A330-200s have been disposed of to third parties. 7. BUSINESS OVERVIEW (cont’d) If any payment due to Airbus under this agreement is not received by the due date, Airbus shall be entitled to charge us late payment interest from the due date up to the date when payment is received. Either party may terminate all or part of the Master Purchase Agreement by written notice in the event that, amongst others, the defaulting party files a voluntary petition in bankruptcy, or is divested of a substantial part of its assets for a period of at least 60 days. In addition, Airbus has the right to terminate all or part of the Master Purchase Agreement, subject to applicable grace periods, for payment and other material defaults by AirAsia X including under certain other agreements entered into with Airbus and its affiliates. (v) A350-900 Purchase Agreement We entered into the purchase agreement with Airbus on 16 June 2009 (as supplemented by various letter agreements and amendment agreements, the “A350-900 Purchase Agreement”), pursuant to which we agreed to take delivery of 10 A350-900s in accordance with a specified delivery schedule and we have an option to take delivery of 5 more. If any payment due to Airbus under this agreement is not received by the due date, Airbus shall be entitled to charge us late payment interest from the date falling 5 days after the due dateup to the date when payment is received. Either party may terminate all or part of the A350-900 Purchase Agreement by written notice in the event that, amongst other, the defaulting party files a voluntary petition in bankruptcy, or is divested of a substantial part of its assets for a period of at least 60 days. In addition, Airbus has the right to terminate all or part of the A350-900 Purchase Agreement, subject to applicable grace periods, for payment and other material defaults by AirAsia X including under certain other agreements entered into with Airbus and its affiliates. 7.10 Our Competition Our competition can be broadly categorised into full-service Long-haul carriers based in Asia Pacific Region and other low-cost, Long-haul carriers in Asia Pacific Region. Our main local competitor in the Long-haul segment is Malaysia Airlines. Malaysia Airlines is a FSC, offering multi-class scheduled services to a broad network of more than 100 domestic and international destinations, complimentary in-flight meals, a frequent flyer programme and airport lounges. We also compete directly with other foreign competitors such as Emirates, Korean Airlines, Japan Airlines, Garuda Airlines, China Airlines and Eva Air, and indirectly with Singapore Airlines, Thai Airways International and Cathay Pacific Airways, on certain international Long-haul routes. We believe we distinguish ourselves from our FSC competitors by offering customers fares that are often lower than the fares of these carriers. Our principal competitors in the low-cost, Long-haul segment in which we operate include Australia’s Jetstar and Singapore’s Scoot. We also compete with Singapore’s Tiger Airways for our flights to Perth and Taipei, where Tiger Airways flies out of Singapore. The Philippines’ Cebu Pacific is expected to launch a low-cost, Long-haul operation in October 2013. None of our Long-haul LCC competitors currently competes with us directly on our routes. Furthermore, we believe our early mover advantage gives us a competitive edge against these competitors. Please refer to Section 8 of this Prospectus for further discussions on our competition.