appConfigEntityId

bodyType

customContents

entityId

entityUuid

isVideo

articlePageQuery

article

articleSchemaContent

content

hooksArticlePageAdvertisementConfigArticle

hooksArticlePageFloatingButtonConfigArticle

appConfig

filter

json

liveArticle

Vincent Tan

Malaysia could struggle to preserve some domestic air links if low-cost carrier AirAsia is forced to scale back operations, analysts have warned, as rival airlines would have little commercial incentive to take over unprofitable routes.
That reality could leave the government facing a stark choice: allow domestic flight services to shrink or step in with subsidies for essential routes, rather than assuming competitors will automatically fill any void left by the country’s largest budget airline.
The concern has taken on added urgency as AirAsia seeks fresh financing following a sharp rise in jet fuel costs, which contributed to heavy losses across its wider airline group.
The government had already sounded out full-service flag carrier Malaysia Airlines and hybrid operator Batik Air on whether they could expand into AirAsia’s domestic routes should its financial position worsen, Reuters reported on Wednesday.
Both carriers indicated a willingness to take on more routes, but doing so at scale could require them to assume AirAsia’s existing aircraft leases, according to two sources familiar with the discussions.
Batik Air chief executive Chandran Rama Muthy separately told national news agency Bernama that the carrier was able to “bring aircraft in quickly” to help meet domestic demand if required.
According to data from the Civil Aviation Authority of Malaysia, AirAsia handled a third of all passengers passing through Malaysian airports in the first quarter of the year, compared with 17.1 per cent for Malaysia Airlines and 10.3 per cent for Batik Air.
Malaysia has no other large-scale budget operator; Firefly, the next largest domestic carrier, accounted for just 4 per cent of traffic.

Domestic difficulty
Analysts said rival airlines were most likely to prioritise adding capacity to commercially attractive routes, leaving thinner, secondary domestic services vulnerable.
Wang Kun, an assistant professor at Hong Kong Polytechnic University’s department of industrial and systems engineering, said international routes within Southeast Asia were generally more attractive to carriers because of established demand and existing low-cost competition.
“If the expected commercial return is insufficient, other airlines may choose not to enter the route or may provide less capacity unless an appropriate support mechanism is available,” Wang said.
He added that even profitable routes could not be replaced overnight, as expansion would depend on aircraft availability, staffing, airport slots and other operational bottlenecks.
Fu Xiaowen, a transport economist and head of the same university department, agreed that while competitors would probably move into AirAsia’s profitable routes over the medium to long term, they could not stretch existing fleets and crews indefinitely.
“There’s a safety limit on the number of hours a pilot can fly,” Fu said, adding that the government could protect essential links by allowing fewer flights rather than trying to match AirAsia’s previous schedules.
Wang said routes deemed essential but not commercially viable could be sustained through targeted passenger or seat subsidies, government purchases of capacity or competitive tenders in which airlines bid to operate them.
Malaysia already uses such a model: the federal government pays 209 million ringgit (US$50 million) annually to subsidise rural air services in Sabah and Sarawak. Those routes are now operated by state-owned AirBorneo, which took over the operations from Malaysia Airlines’ regional arm, MASwings, in January.
Extending such frameworks could protect vital domestic links without requiring a broader state bailout of an airline.
Fu said government intervention would come with significant costs, including to taxpayers and through the precedent it set for future rescues.
“But if you do not intervene, it’s going to create a disruption to the whole economy,” he added, pointing to the effects on passengers, creditors, suppliers and local government.
Fuel squeeze
The contingency planning comes as AirAsia’s parent group faces mounting financial pressure caused by this year’s surge in global fuel prices.
While Malaysia Airlines and Batik Air were similarly exposed to the rising costs, AirAsia faced the spike largely unhedged after shelving its hedging plans in January. By April, chief executive Bo Lingam acknowledged the carrier could not afford to hedge at prevailing prices.
Jet fuel prices surged to average US$183 a barrel in the second quarter amid market disruptions due to the Iran war.
AirAsia Group subsequently reported a headline net loss of 830.5 million ringgit, which included 331 million ringgit in foreign-exchange losses. The group said its core short-haul operations in Malaysia remained profitable, with losses concentrated in its long-haul business and regional subsidiaries in Thailand, the Philippines and Indonesia.

Wang said budget airlines were particularly vulnerable to fuel price volatility because fuel made up a large share of their variable operating costs compared with full-service carriers, which generated additional revenue from services including meals and checked baggage.
AirAsia’s second-quarter accounts show current liabilities of 18.4 billion ringgit against 954 million ringgit in cash reserves at the end of June.
The carrier is seeking up to US$1 billion in international debt and 700 million ringgit in local credit lines, though sources cited by Reuters say it needs at least US$3 billion.
In a September 2 statement, AirAsia Group said its fundraising was primarily aimed at debt restructuring, refinancing and consolidating its balance sheet.
Fu said the exact size of the funding shortfall would heavily influence policymakers’ response.
“If they are close to a deal, the government only needs to provide some support,” Fu said, while a much larger shortfall could be a signal for the government to proceed more cautiously.
In a press release issued on Friday, AirAsia Group said it was managing industry-wide pressure from fuel prices, geopolitical uncertainty and higher costs through fare adjustments, capacity cuts and fleet optimisation.
The company said it would not be “distracted by unsubstantiated speculation from anonymous sources”.
Lingam said in the same release that AirAsia had recovered about 70 per cent of second-quarter fuel-price increases through dynamic fares and lower non-fuel operating costs and that the group had returned 25 older, less fuel-efficient aircraft to lessors on what it described as favourable commercial terms, reducing its fixed lease burden.
He explained that the airline had cut third-quarter capacity by 20 per cent to 25 per cent during a traditionally weaker travel period but was preparing to raise capacity again towards pre-war levels in the fourth quarter as year-end demand strengthened.
Wider economic costs
Mohd Harridon Mohamed Suffian, an associate professor at the University of Kuala Lumpur, said AirAsia’s low-fare model supported a wider network of small businesses, hospitality vendors and technical subcontractors dependent on passenger volumes.
“AirAsia employs thousands of workers, and there are numerous subcontractors,” he said.
Allowing AirAsia to collapse would be “financially calamitous” for Malaysia’s economy, Harridon said, though he stressed that the carrier should first try to raise funds privately. Should state-backed guarantees or loans eventually be needed, Harridon added, the government “should have a say in AirAsia’s financial operations”.
AirAsia had previously said it did not comment on market speculation. However, deputy group chief executive Farouk Kamal told Reuters the airline remained focused on business continuity and continued to see strong demand.
Any job losses would also reverberate through an already saturated aviation labour market.
A representative for the National Union of Flight Attendants Malaysia said on September 10 the country was “overflooded with aviation professionals, especially technical engineers and pilots”, adding that qualified Malaysian staff were also being recruited by overseas operators, particularly airlines in the Middle East.


Malaysia’s Najib Razak allowed to serve the rest of his term under house arrest

Thailand’s Muslim separatists vow to fight for independence ‘until the end of time’

Malaysia’s Najib Razak allowed to serve rest of jail term under house arrest

Bail out or downsize? Malaysia’s stark choice as AirAsia losses mount

Malaysia

AirAsia planes stand on the tarmac at Kuala Lumpur International Airport in Sepang, Malaysia, in January. Photo: Reuters

An AirAsia plane on the tarmac of Kuala Lumpur International Airport in Malaysia in February 2024. Photo: Reuters

An AirAsia aircraft flies over Chiang Mai in northern Thailand in November 2025. Photo: Reuters

AirAsia to launch new airline, flying against wind of high oil costs

AirAsia planes stand on the tarmac at Kuala Lumpur International Airport in Malaysia. Photo: Reuters

Canada’s Prime Minister Mark Carney (left) and Lars Wagner, CEO, Airbus Commercial Aircraft (right), cheer on AirAsia co-founder Tony Fernandes during an event in Quebec, Canada, on Wednesday. The Canadian Press via AP


AirAsia X hikes ticket prices by 40%, cuts capacity by 10% as Iran war hits fuel costs

AirAsia planes are parked on the tarmac at Kuala Lumpur International Airport in Sepang. Photo: AFP

Tony Fernandes, the CEO of AirAsia’s parent company, Capital A, poses with a model of his company’s plane. Photo: Reuters

An AirAsia plane prepares to land in Chiang Mai, Thailand, on March 31. Photo: Reuters

Malaysia arrests second pilot linked to Jakarta Ecstasy pills smuggling

Indonesian customs officials display the uniform of a Malaysian pilot and drugs he smuggled as evidence during a press conference at Soekarno-Hatta International Airport on July 31. Photo: AFP

Why Malaysia’s push for 15 million Muslim tourists is no sure thing

A view of Kuala Lumpur’s city skyline. Photo: Shutterstock

A view of the Kuala Lumpur International Airport in Selangor, Malaysia. Photo: Shutterstock

The Bukit Bintang shopping district in Kuala Lumpur, Malaysia. Photo: Shutterstock

Colourful tri-shaws on standby to take tourists around the Malacca old town in Malaysia. Photo: Shutterstock

Tourists walk past a mural featuring the Malaysian national flag in Kuala Lumpur. Photo: EPA-EFE

This Week in Asia

Economics

News

Asia

Southeast Asia

Rival carriers lack commercial incentive to take over unprofitable routes, which could force the government into a subsidy dilemma, analysts say


Rival carriers lack commercial incentive to take over unprofitable routes, which could force the government into a subsidy dilemma, analysts say.


Hong Kong

Hong Kong Polytechnic University

AirAsia

Malaysia Airlines

Bail out or downsize? Malaysia’s stark choice as AirAsia losses mount

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Rival carriers lack commercial incentive to take over unprofitable routes, which could force the government into a subsidy dilemma, analysts say

Rival carriers lack commercial incentive to take over unprofitable routes, which could force the government into a subsidy dilemma, analysts say