Aviation to recover this year, says HLIB Research


THE local aviation industry is expected to experience a patchy recovery this year.

Hong Leong Investment Bank Research (HLIB Research) analyst Daniel Wong believes Malaysia’s accelerated vaccination programme and the decrease in Covid-19 cases mark an inflection point for the industry.

Although movement control restrictions have been relaxed and domestic air travel resumed in most countries, the emergence of new clusters and Covid-19 variants remains a worry.

“After a prolonged period of Covid-19 since early 2020, the global community is gradually adapting to the new normal.

“Governments have started to relax restrictions and national border policies, as global vaccination rate increases and health systems can better cope,” he wrote in a research report yesterday.

Malaysia has entered Phase 4 of the National Recovery Plan with interstate travel has resumed while international travel is in the form of travel bubbles and via vaccinated travel lane (VTL).

The country’s domestic air travel traffic has increased from 1.2 million passenger movements in October 2021 to 2.3 million in November 2021.

“Judging from the current developments, we expect domestic air travel to continue its recovery uptrend in 2022 while international travel to potentially enjoy more meaningful recovery towards end-2022.

“We projected a low base effect passenger growth of 793.4% year-on-year in 2022, driven mainly by the domestic segment,” Wong explained.

He believes domestic travel would recover faster than international travel this year as the latter depends on the government’s confidence level with each other’s Covid-19 restrictions.

Thus far, cross-border travel is up where countries have initiated VTL, travel corridor agreement and travel bubbles — which are relaxed travel agreements with no/minimal quarantine requirements.

“We note that Asia-Pacific governments, in general, have lower risk tolerance (compared to the US) and Europe.

“Hence, we anticipate a longer period needed for international air travel to fully recover within the Asia-Pacific region.

“Overall, air travel recovery 2022 will be mainly driven by the domestic segment, we do not anticipate airport operators to recover in similar trend, as domestic travellers command lower spending power and provide lower margins,” Wong added.

He noted most airlines also plan to focus on domestic travel and would be facing stiff competition with limited flight deployment which leads to low asset utilisation.

Many of the carriers are still able to weather this issue as most have successfully restructured their aircraft loan structures which enables the companies to operate at a lower cost base to better match the sales structure.

Another challenge the aviation industry needs to brace for in 2022 is the emergence and spread of the Omicron which has led some countries to take stern action and tighten movement control and border policies.

Preliminary research has indicated that Omicron is more contagious but possibly less deadly (milder symptoms) compared to Delta.

Early studies have shown both Pfizer and AstraZeneca vaccinations (two shots) are less effective against Omicron.

Covid-19 boosters would improve the overall protection against the new Covid-19 variant while the governments and the public have a higher level of awareness.

Wong does not think Omicron would bring another nationwide lockdown this year but national cross-border travel may take longer to fully recover.

A stronger ringgit could help local carriers as well. Since early 2021, the local unit has fallen against the US dollar to RM4.20 per but rose against the euro to RM4.75.

“Our economist expects ringgit/US dollar to average 4.16 in 2022 compared to 4.15 in 2021, while Bloomberg consensus-estimated ringgit/euro to average 4.77 in 2022 compared to 4.90 in 2021,” stated Wong.

It is good for airlines when the ringgit is stronger against the greenback as 40%-60% of their normalised operating costs is denominated in the dollar.

At the same time, Malaysia Airlines Holdings Bhd (MAHB) would take advantage of lower translated losses in wholly owned Istanbul Sabiha Gokcen International Airport.

The investment bank has upgraded its rating for the sector from ‘Underweight’ to ‘Neutral’ and maintains a ‘Hold’ recommendation on AirAsia Group Bhd and MAHB with a target price of 84 sen and RM6 respectively.

“MAHB is expected to remain in the red in the near term, as the hopeful recovery in international air travel (especially in Malaysia) remains a concern,” Wong explained.

HLIB Research added AirAsia has managed to secure enough liquidity until next year and expects the company to benefit from the reopening of regional economy domestic air travel and regional air travel after the regional population gains traction in vaccination rates and improvement in the healthcare system.

“The recently completed Redeemable Convertible Unsecured Islamic Debt Securities rights exercise has certainly improved AirAsia’s existing weak balance sheet position. Management remains committed to further improving the group’s balance sheet and liquidity.”

AirAsia’s rapid digital business segment may also support the group’s earnings.

Wong feels it is important for these two companies to maintain a strong balance sheet and cashflows for the short term to ensure financial sustainability until a full recovery, which is expected by the end of this year.

In their third quarter of 2021 performance, MAHB reported a relatively healthy balance sheet position with RM6.4 billion shareholders’ equity, RM1.5 billion cash, RM193 million short-term debt and RM24 million worth of short term lease liabilities.

AirAsia is in a deeper financial woe with RM3.2 billion negative shareholder’s equity position, RM401 million cash, RM920 million short term debt level and RM4.6 billion short term lease liabilities,” Wong narrated.

AirAsia is now in the process of restructuring a new lease agreement with its lessors and is undertaking a restructuring of its regional aviation businesses. It is also growing its digital businesses. The company has also raised some RM9975 million from a rights issue.