Rising fuel costs, seasonal challenges dampen sentiment towards AirAsia X

Higher oil prices will elevate fuel costs and slow down carrier’s recovery


AIRASIA X Bhd (AAX), the long-haul low-cost affiliate carrier of AirAsia Group Bhd (AAG), is expected to continue seeing weak investor interest as airline companies remain dogged by industrial and seasonal challenges.

Shares of AAX closed one sen or 2.04% lower at 24 sen on Monday, valuing the company at RM995.56 million.

At 24 sen, the stock is trading at its lowest since February 2016. It has declined around 33% since the start of the year.

AAG, which closed seven sen or 2.55% lower at RM2.67 yesterday, has fallen some 20% since its opening price of RM3.34 on Jan 2 this year, and some 42% since its high of RM4.60 in March.

Rakuten Trade Sdn Bhd research VP Vincent Lau attributed the dampened investor sentiment to elevated fuel costs due to increasing oil prices, which have risen to their highest since 2014.

“Rising oil prices have elevated fuel costs, which has caused investors to turn away from airline stocks in general. The higher oil prices will slow down AAX’s recovery.

“On paper, the stock looks attractive, but those looking to enter require a longer term view,” he told The Malaysian Reserve.

AAX fell into the red for the second quarter ended June 30, 2018 (2Q18), on higher operating costs, largely due to a higher cost of fuel which was driven by a 36% year-on-year increase in average jet fuel prices.

“Generally, the group needs to show more consistent earnings. It is also adding more routes which should help drive earnings going forward,” Lau added.

In a recently issued research report, MIDF Amanah Investment Bank Bhd (MIDF Research) noted that it expects the group to return to profitability in the financial year ending Dec 31, 2019, through further cost-cutting initiatives, better capacity utilisation and a stable fuel environment.

However, it expects shortterm headwinds, namely higher operating expenditure, to persist. As such, the research house has downgraded the counter to ‘Neutral’.

MIDF Research also noted that AAX’s losses could widen in 3Q18 after recording losses earlier in the year, as it expects oil prices to remain volatile on the anticipated US sanctions on Iranian oil exports, shale bottlenecks and Venezuelan turmoil.

On AAX’s introduction of new routes, the research firm noted that fare prices for such routes are typically given heavy discounts.

“Although this is positive to enhancing presence and connectivity, we have to be cognisant of the short-term pressure it has on seat sales revenue.

“AAX’s ability to sustain earnings in the long run would be largely driven by the continuous improvement in cost structures and the generation of meaningful revenue in new routes,” it said.

Meanwhile, Maybank Investment Bank Bhd (Maybank IB) maintained its ‘Hold’ call on AAX, noting that the budget carrier’s earnings are “extremely volatile” and difficult to predict, given its sensitivity to fuel price movements.

“AAX’s 2Q18 loss was staggering and we think that 3Q18 losses will be similar due to rising jet fuel price, weak ringgit against the US dollar and challenging yield outlook.

“AAX’s ability to grow is limited as its capital base is thin and a new equity issuance is probable,” it said in a recent note.

Maybank IB added that historically, the carrier had struggled when jet fuel prices rose to above US$90 (RM373.50) per barrel.

As such, it expects AAX to record a substantial loss in 3Q18, but would return to profit in 4Q18 as this is seasonally the strongest quarter.

The research house also said the group’s intention to acquire three aircraft in 2018 and a similar number in 2019 would require a substantial capital expenditure, as each of the aircraft costs over US$100 million), and that any form of third-party financing would necessitate a deposit from AAX.

As at end-2Q18, the group’s cash balance stood at RM338 million, although Maybank IB pointed out that the bulk of this stemmed from AAX’s forward ticket sales amounting to RM695 million.

“We think that it may have to tap into the equity market, in addition to debt, to fund its growth plans,” the research firm added.