AirAsia Bhd
(Jan 27, RM2.77)
Maintain buy with target price of RM3.20: AirAsia Bhd abolished fuel surcharge effective from Monday. Fuel surcharge has accounted for 18% of total yields over the past two quarters. It is one of the first airlines in South East Asia to completely abolish fuel surcharge since the downtrend in crude oil price commenced. 

AirAsia has a competitive advantage to do so as it locked in very little hedges through most of 2014 (when oil price was still high). It had 15% of its financial year ending Dec 31, 2015 (FY15) requirements hedged (at about US$100 (RM361)/barrel crude oil) as at end-2014, but it has since raised its hedges, albeit at significantly lower price levels, which should be close to spot oil price over the past one month of just US$50 to US$60/barrel. 

A lot of peers are not in the position to completely remove surcharges, unless they are willing to take a hit on earnings to sell cheap seats at still expensive fuel cost. The more rational capacity deployment among Malaysian airlines (as yields are already at financial crisis levels), as well as a more rational pricing environment (following MAS’ restructuring) should allow base fares to rise to offset part of the impact of fuel surcharge abolishment. 

Secondly, lower fares should  improve load factor. The resultant higher traffic will increase ancillary revenue, which accounts for 26% of ticket sales. Finally, the lower crude oil price should be able to absorb the impact of an 18% fall in yields. 

We raise AirAsia’s earnings by 6%/4% over forecast FY15 (FY15F/16F).This is to factor in changes in key variables: (1) an 8% yield contraction vs a 1% growth previously to reflect a fuel surcharge abolishment; (2) US dollar:RM at 3.40 vs. 3.20 previously; (3) average jet fuel price at US$93/barrel from US$115/barrel previously; and (4) load factor at 82% from 80% previously, resulting in a 3% increase in implied pax traffic. — AmResearch, Jan 27

This article first appeared in The Edge Financial Daily, on January 28, 2015.