KUALA LUMPUR: Malaysia’s 6% goods and services tax (GST) is looming but the market could be “grossly underestimating” the impact of the new tax regime on air travel demand and profit margins of aviation-linked firms, warned Maybank IB Research.
“A lot of people would dismiss the impact of GST and say that others have introduced it and have coped with it. But, people forget that in this economic condition, the big-ticket items will be axed first and air travel is one of them,” Maybank IB Research aviation analyst Mohsin Aziz told The Edge Financial Daily.
He said domestic flyers will feel the brunt of the GST compared with international travellers as the consumption tax will be levied on all domestic airfares, fuel and passenger service charges (PSC). In contrast, only PSC on international flights may be subject to GST come April 1. Mohsin estimates that consumers will be forking out around 6.3% more for a domestic flight and approximately 1% extra for an international flight.
The scenario could worsen if the government, who has committed to reviewing the rates for PSC on May 2, decides to raise airport tax this year. If so, domestic travel costs could rise by as much as 7% to 9% this year.
“For domestic air travel in particular, there are always alternatives to air travel. When consumers’ reach a bottom line of how much they are willing to pay for a domestic flight, they will switch to alternatives,” Mohsin said. “It will be a challenge for airlines to fully pass on the GST to consumers as a 6% higher “all-in” ticket price is drastic and will have an impact on demand,” he said.
A lower demand for domestic air travel will inevitably adversely impact air carriers.
Mohsin said AirAsia Bhd (fundamental: 1.3; valuation: 1.8) stands to lose the most as 60% of its traffic is domestic. Meanwhile its long-haul arm, AirAsia X (AAX) (fundamental: 0; valuation: 0.3) would be least affected as all its flights are on international routes.
Malaysian Airline System Bhd (MAS) (fundamental: 0.2; valuation: 0) will be right in the middle as domestic passengers constitute only 37% of its total passengers.
RHB Research analyst Ahmad Maghfur Usman also expects consumer sentiment to be weak due to the GST and pointed out that airlines such as AirAsia and MAS could have their yields’ upsides capped as a result. “We expect that passenger growth may not reach double-digit levels due to the uncertain sentiment from the GST. Industry players, however, are more optimistic about the eventual implementation of GST. “The impact on demand for air transportation in Malaysia will not be affected by GST because it is still an essential service for the majority of consumers as it saves travelling time over long distances,” said Malaysian Association of Tour and Travel Agents executive committee member Datuk Tan Kok Liang.
One saving grace that should also not be discounted is the downward trend of jet fuel price since mid-2014 due to ample global supply, which will provide the necessary cushion against any potential fall in domestic air travel demand in Malaysia. This was pointed out by AirAsia group chief executive officer Tan Sri Tony Fernandes, who told The Edge Financial Daily that lower fuel cost will help keep its fares competitive.
A US$1 (RM3.62) per barrel change in oil price would have an inverse impact on its bottom line by RM13.5 million in financial year 2015 (FY15) and FY16. Meanwhile, AirAsia’s sensitivity to the same change would inversely impact earnings by 2.3% in FY15, which is approximately RM18.4 million to RM19.2 million.
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This article first appeared in The Edge Financial Daily, on February 4, 2015.