Lower jet fuel price has become a catalyst for the upgrade of airline stocks like low cost carrier AirAsia Bhd which is likely to use a cheaper oil bill to stimulate demand for its short haul markets.
Energy prices however have a negative correlation with the US dollar. The gain from cheap fuel will likely be neutralised partly by a higher costs bill as the US dollar continues its bullish trajectory on foreign exchange market.
So its comes down to the management at AirAsia to make the most of these market development.
Analysts have generally upped their target price for the low cost carrier believing the lower fuel charge, high load factors and rise in ancillary income will drive earnings.
Hong Leong Investment Bank Bhd estimates for every 5% change in jet fuel cost, AirAsia’s earning per share will change by 11.9% in financial year 2015 on the assumption the carrier and rivals will use the lower fuel bill to reinforce their load active strategies and fill seats with attractive fares.
“Lower jet fuel price is beneficial to AirAsia. However we believe the carrier will cut its average yield (including fuel surcharge) in order to induce air travel in the current weak demand environment,” the investment bank said in a research note on Oct 21, 2014.
Jet fuel price has eased to about US$100 a barrel now from about US$120 in July as crude oil price eased on bearish demand supply fundamentals.
Fuel costs take up to 60% of total operational cost for cost conscious low cost carriers like AirAsia.
The impact will likely be seen in AirAsia group’s third quarter (3Q) results due in the second half of this month.
AirAsia posted a net profit of RM506.87 million or earning per share of 18.2 sen in the first half 2014 while its medium haul low cost associate AirAsia X Bhd, recorded a net loss of RM140 million or 5.9 sen loss a share.
Public Invest Research, which has initiated coverage on AirAsia, has an outperform call with a target price of RM2.82 sen per share based on price earning multiple of 10 times to its financial year 2015 forecast core net profit of RM786 million.
The research outfit expect the company to post a core net profit of RM635 million in this financial year.
Financial figures aside, weaker jet fuel price is a shot in the arm for the air travel business in the region which remains challenging with capacity available and load active strategies continuing to pressure yields.
AirAsia ability to post a profit is in stark contrast to rivals like Malaysia Airlines (MAS) and Tiger Airways that have had to seek help of major shareholders.
MAS is awaiting a fresh RM6 billion turnaround plan post a privatisation exercise which shareholders will vote on today. (Thursday, Nov 6, 2014).
With a fleet of 178 aircrafts, strong brand name and network across the Asean region, new start-ups in AirAsia India and AirAsia Japan and a new leasing business means growth remains the key theme.
Capacity is set to grow further next year. The company will take delivery of 13 A320 aircraft in 2015, two of which will be deployed in Malaysia, five in Thai AirAsia and three each in AirAsia India and AirAsia Japan.
The group wants to expand operations in Cambodia and Myanmar while inside sources say the group is now considering expanding to Kazakhstan as well.
To shore up yields and diversify revenue streams, AirAsia focus is now on raising ancillary income from about RM45 per passenger now to RM50 in the next 12 months and to about RM60 in two to three years according to management’s target.
As regional rivals retreat under strain of competition, AirAsia is in good position to make gains. Public Invest believes the tough times at MAS offers AirAsia an opportunity to take further market share from the national icon and improve yields.
The early restructuring proposal released by MAS’ controlling shareholder Khazanah Nasional Bhd proposes a further rationalisation of MAS’ network to focus more on the regional market.
Founder and substantial shareholder Tan Sri Tony Fernandes in August told reporters AirAsia’s Philippines operations were turning around and expects to be profitable in Indonesia in the fourth quarter of the year.
The performance of loss making associate AirAsia X is a concern as the medium to long haul low cost carrier finances raises the fear of a need for fresh capital.
It CEO Azran Osman Rani, when contacted, would not comment except said there were no plan to defer aircraft delivery contrary to a newswire report to that fact.
Not withstanding this, AirAsia remained poised to capitalise on the potential of the budget travel market in the long term.
The company has also started to pay dividends, offering to payout about 20% of net profit annually.