Kenanga: Tough operating environment for AirAsia over medium term

The higher supply of seats is potentially outstripping passenger demand growth


HIGHER operating costs, sustained high jet fuel prices and intense competition indicate a tough operating environment for AirAsia Bhd over the medium term, said Kenanga Investment Bank Bhd.

The research house revised its target price for the low-cost airline to RM1.70 from RM2.20 previously after downgrading its net profit forecast by 46% and 32% for financial years ending Dec 31, 2019, and 2020 respectively.

“There are nascent signs indicating that the higher supply of seats is potentially outstripping passenger demand growth leading to competitive fare war.

“However, the higher supply of seats and competitive pressure have capped AirAsia’s RASK (revenue per available seat kilometre) growth at 4% year-on-year (YoY), which far trailed the 15% growth in CASK (cost per available seat kilometre),” it said in a research note yesterday.

The investment bank noted that jet fuel costs accounted for 40% of the total group cost and AirAsia has hedged 70% and 85% of fuel requirement for the third quarter (3Q) and 4Q this year at average Brent hedge prices of US$62 (RM259) per barrel of oil (bbl) and US$60.77/bbl respectively.

The Brent price of crude oil is currently trading at US$64/bbl and has averaged around US$62/bbl so far in3Q.

AirAsia’s maintenance cost spiked up in 2Q this year on the back of a new accounting treatment — the Malaysian Financial Reporting Standard for aircraft under sales and leaseback arrangements.

Kenanga expects the low-cost carrier’s maintenance cost to be higher than expected in the second half of the financial year (2HFY19) upon gradual disposal of the group’s remaining 39 aircraft as at June 2019 to five by end-2019.

The weakness in the ringgit could also impact AirAsia’s earnings as 70% of AirAsia’s operating cost is US dollar-denominated, Kenanga said.

Commenting on the group’s outlook, AirAsia is expected to receive new planes to its fleet size with the arrival of its first A320 Neo in November this year.

The new A320 Neo is said to be more fuel-efficient and has a longer range on top of additional 50 seats.

“The group will continue its focus on digital initiatives. Teleport (logistics business) is expected to see encouraging growth due to efforts to seek tieups with different airlines, as well as small and medium enterprises.

“AirAsia is being developed as a full-fledged one-stop travel and lifestyle platform, while BigPay will be rolled out in multiple markets in Asean,” the research house said.

Last week, AirAsia Group and AirAsia X Bhd (AAX) paid a total sum of RM41.5 million in additional passenger service charges to Malaysia Airports Holdings Bhd’s wholly owned subsidiary, Malaysia Airports (Sepang) Sdn Bhd.

The payments came on the heels of AirAsia substantial shareholder Tan Sri Dr Tony Fernandes relinquishing his board positions except at AirAsia and AAX.

Last month, AirAsia Group’s move on the depreciation of its property, plant and equipment and foreign-exchange losses saw it post a lower net profit of RM17.94 million for 2Q19, versus RM3015.3 million in 2Q18.

AirAsia’s share price closed unchanged yesterday to RM1.81, valuing the low-cost airline at RM6.05 billion.

The airline had a fleet of 226 planes as of last year and it provides air transportation throughout Asia, focusing on delivering low fares to travellers.