Airline fuel costs are about to jump as carriers’ hedges expire, AirAsia co-founder Tony Fernandes warned.
“It’s tough,” Fernandes, who is also chief executive of Capital A Group, said onstage at the Global Tourism Economy Forum (GTEF) in Macau on Oct. 16, during a panel moderated by Fortune‘s Asia editorial director Lee Williamson. “Any airline who says it’s great is not telling the truth. A lot of people’s hedges are coming off, and prices are going to go up dramatically.”
Asia’s carriers are still grappling with high fuel costs in the wake of the U.S. war with Iran. Disruption to oil supplies through the Strait of Hormuz is keeping jet fuel and diesel prices elevated. Asian jet fuel is trading at just over double the average last year, according to calculations by the International Air Transport Association.
Low-cost carriers have less room to increase fares, so rising fuel prices hit their margins. AirAsia, in particular, has struggled with higher jet fuel prices and a large debt burden. The airline’s shares are down almost 75% for the year.
The airline plans to raise $1 billion for debt refinancing. Fernandes recently met with Malaysian government officials to discuss funding support for the airline, Reuters reported last week citing unnamed sources. He has denied needing a bailout and says he has not asked for government help—though he admitted to Reuters he would accept help if offered.
At GTEF, Fernandes estimated that the current period of volatility would last about 12 months, though conceded the timing was a guess. “When does this war end?” he asked, referring to the current conflict in Iran. “We don’t really know.”
Unlike the last travel shock—the COVID pandemic—there isn’t a clear signal as to when things will get back to normal. “You can’t get a vaccination for Donald Trump,” Fernandes says. “We just have to live with it for the moment.”
Off the beaten path
Fernandes expects the next leg of Asia’s travel boom will focus on secondary and tertiary cities that few airlines bother to serve.
“The GDP of these cities is growing much quicker than the capital cities,” he said. “There’s a lot of disposable income, and a lot of these populations have just not been connected.”
Onstage, Fernandes recounted a request from the governor of Guangdong province to set up a route to Shantou. The governor described it as a “small” city, which in the Chinese context meant five million people. “I said, ‘That’s bigger than my capital. We’re flying there tomorrow,’” Fernandes recalled. AirAsia now flies there three times a day from Kuala Lumpur.
Still, the aircraft currently available can be a poor fit for an extensive route network. The Airbus A320, a narrowbody, can manage roughly four hours; anything longer needs a widebody like the Airbus A330, which seats almost 400 people in AirAsia’s configuration, compared with the roughly 180 carried by the A320. Few routes can justify a plane of that size.
Airbus has released new narrowbody models that offer greater range. AirAsia is tapping the A321LR on its Seoul route, tripling frequency. The newer A321XLR can fly for up to nine hours, depending on configuration. AirAsia is also the launch customer for a new 160-seat version of the A220 that Airbus hopes to certify in 2028.
“160 seats opens you up to a huge market,” Fernandes said.
“We believe in small planes and lots of frequency,” he added. “We think frequency is the answer.”
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