AirAsia's Fernandes warns fuel costs will 'go up dramatically'

AirAsia co-founder Tony Fernandes says airline costs will rise sharply over the next 12 months as fuel hedges expire across the industry. Asian jet fuel is already trading at just over double last year's average, according to calculations by the International Air Transport Association.

"Any airline who says it's great is not telling the truth," 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. "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.

Low-cost carriers have less room to raise fares, so rising fuel prices hit their margins harder. 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.

How is AirAsia responding?

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 the current period of volatility would last about 12 months, though he 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 said. "We just have to live with it for the moment."

Where does Fernandes see growth?

He 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.

Can the fleet match the strategy?

The aircraft currently available can be a poor fit for an extensive route network. The Airbus A320, a narrowbody, can manage roughly four hours of flying; anything longer needs a widebody like the Airbus A330. That jet seats almost 400 people in AirAsia's configuration, against roughly 180 on the A320. Few routes can justify a plane that size.

Airbus has released new narrowbody models with 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."

If fuel stays elevated for the 12 months Fernandes expects, AirAsia's bet on smaller jets and high frequencies may determine whether it can refinance $1 billion in debt without a government lifeline.