Low load factor, cash to hedge weigh on AirAsia and AirAsia X

Global travel sentiment has dampened and as a result, passenger load factors for both airlines will drop below 80% in the coming quarters


AIRASIA Group Bhd and AirAsia X Bhd’s (AAX) load factors are expected to take a beating and fall below 80% as travellers shy away due to severe capacity cuts promoted by the Covid-19 crisis.

Despite weighing on the group’s balance sheet, MIDF Research analyst Adam Mohamed Rahim said global travel sentiment has dampened, and thus, put pressure on the airlines’ revenue passenger kilometre.

As a result, he said passenger load factors for both airlines will drop below 80% in the coming quarters.

“Assuming a worst-case scenario whereby the Covid-19 would prolong beyond the financial year 2020 (FY20), load factors will remain depressed, possibly reaching below 70% for both airlines and drag AirAsia to a second year of loss, while stretching AAX’s losing streak for the third year running,” Adam said in a recent report.

He said AirAsia has slashed the overall capacity of AirAsia Malaysia by 10% in the first quarter this year (1Q20) and 23% for AirAsia Thailand due to the virus outbreak.

China destinations account for 13% of AirAsia Malaysia’s total capacity in terms of available seat kilometre (ASK) while between 25% and 45% for AAX. South Korea and Japan combined make up to 40% of AAX’s total capacity.

According to the Centre for Asia Pacific Aviation, China’s international seat numbers fell by nearly 80% compared to last year and domestic seat numbers dropped nearly 60%, Adam said.

Independent aviation analyst Mohshin Aziz said AAX and AirAsia have limited cash to take advantage of the low crude oil price to structure hedging.

The cost of fuel hedging is expected to be higher in the current volatile market due to premium, volume and interest rate factors.

“They will try to hedge more depending on the market volatility. After combining many factors, the premium of fuel hedging for one year ahead may cost higher,” Mohshin told The Malaysian Reserve.

Crude oil price punched below US$40 (RM169) after OPEC+ talks failed to reach a consensus on supply cuts with Russia walking away.

The Covid-19 outbreak also has hit global airlines’ businesses and those with low cash are in a difficult position to hedge.

“The volatility in crude oil is crazy. I think any airlines with a substantial cash balance would like to lock in the current low price for a longer period of time and do some hedging. Unfortunately, not many airlines have a lot of cash right now,” Mohshin said.

Adam said AirAsia and AAX have started to implement 7% to 39% crack hedges from 1Q20 to 4Q20 (averaging around 25%), ranging from US$8 to US$12 per barrel. Usual crack spreads range from US$13 to US$15 per barrel.

Adam also added that the total hedge cost post-revision of the average Brent crude oil price forecast for 2020 to be only -5.4% lower.

“The effect of lower jet fuel expense is marginal for AirAsia as its FY20 earnings will increase only by around +1% while AAX’s net losses in FY20 will be lowered by the same quantum. As such, no changes are made to our earnings forecasts for both airlines,” he said.

MIDF Research has maintained a ‘Neutral’ call on AirAsia, while revising the target price from RM1.20 per share to RM1.14.

Adam said the group’s FY19 earnings were below expectations by more than 10% after recording a normalised net loss of RM345.7 million compared to RM767.1 million net profit in the previous year.