Aviation faces another bleak year


THE fourth wave of Covid-19 infections is expected to further put a drag on the aviation sector due to continued restriction on domestic air travel and longer than expected border closures.

Hong Leong Investment Bank Bhd (HLIB) research analyst Daniel Wong said there were high risks to the sector despite the commencement of a national vaccination programme.

The Malaysian Aviation Commission (Mavcom) recently revised its forecast for Malaysia’s air passenger traffic in 2021 to contract by 22.9%-29.1% year-on-year (YoY) due to resurgence of Covid-19 cases and the implementation of Movement Control Order 2.0 (MCO 2.0).

Wong remained an ‘Underweight’ call on the sector and downgraded Malaysia Airports Holdings Bhd (MAHB) to ‘Sell’ from ‘Hold’ at lower target price (TP) of RM4.85 from RM5.40.

Aside from the overall drop in passenger movements, the HLIB report yesterday stated that MAHB also suffers from lower international mix due to restrictions by various governments, while only domestic travel is still allowed with certain restrictions/conditions in place.

“Compared to international travel, domestic travel provides substantially lower operational leverage due to the lower tariff charges and the segment tends to have lower behaviour spending.

“Concurring with Mavcom, we expect any recovery would be driven by domestic travel (subject to containment of Covid-19) as the measures are within the control of the Malaysian government, while international travel may take longer than expected as worldwide governments are implementing precaution stances from possible new wave in their respective countries,” he added.

He expects the Istanbul Sabiha Gokcen International Airport’s (ISGA) earnings to be badly affected again in view of the increasing cases and prolonged stricter lockdown measures in Turkey.

HLIB stated that MAHB’s current share reflects an optimistic scenario on travel recovery due to the vaccine rollout.

“However, we expect MAHB to continue to face disappointing weak passenger traffic for financial year 2021 (FY21) and only to gradually recover going into 2022-2023 (provided effective vaccination programmes in the region to reach meaningful levels by mid-2022 with opening of country borders in the region and no further risk of evolvement of the virus strain),” Wong stated.

He also maintained a ‘Sell’ recommendations on AirAsia Group Bhd (AAG) with a lower TP of 70 sen from 90 sen, as the group is affected by the surge in cases in Malaysia and the region, further elevated by risk of its ongoing restructuring exercises.

AAG’s earnings turnaround will be a far-reaching target, dragged by the new wave and stricter implementation of MCO 2.0 measures.

“We expect continued risks to air travel recovery into 2022. Other than Malaysia, regional countries are also facing difficulties in containing the virus spreads. India, the Philippines, Thailand, Japan, South Korea, Cambodia and Laos have been recording a surge in daily new cases for the past month.

“Hence, we expect a prolonged drag to domestic air travel demand for AAG. Moreover, AAG will face stiff competition from other domestic based airlines as the players are competing for a share of the now smaller domestic segment (given the limited flight opportunity for international segment),” he said.

AAG’s international segment is expected to face higher risk of recovery as governments are likely to stay cautious in allowing incoming foreigners into their respective countries.

The low-cost carrier recently raised RM336 million via private placements, and upcoming rights issue exercises to recapitalise the group will result in huge dilution to shareholders.

Wong is relatively concerned if AAG does not plan financially ahead for a potential prolonged drag on air travel demand into 2023-2024 instead of being too bullish for strong recovery in 2022.

He expects AAG to face widen losses for FY21 by 37.1% and reduced profit for FY22 by 23.5% as he assumed slower recovery of overall air travel demand.