Aviation Sector
Upgrade to overweight: The RM316 million allocation by the government to organise various events in conjunction with Malaysia Year of Festivals 2015 to accelerate tourist arrivals, which is already gradually picking up from the downturn caused by the Malaysia Airlines’ MH370 and MH17 disasters, will be positive for the industry.

Restructuring of Malaysia Airline System Bhd (MAS) will also be positive, in terms of less pressure on yields as demand catches up with the slower system capacity growth.

Moreover, MAS’ newly-appointed chief executive officer Christoph Mueller has the tendency to improve yields and adjust capacity only to meet demand growth.

The goods and services tax implementation and AirAsia QZ8501 crash will affect short-term travel demand in the first half of 2015 (1H15), before potential recovery in 2H15, as consumer sentiments normalise.

Yield pressure is expected to slow in 2015 as system capacity growth slows down. Nevertheless, we anticipate lower ticket prices as airlines pass back to consumers  part of the savings from the slump in jet fuel prices. Some have already abolished fuel surcharges to boost air travel and improve load factors.

Jet fuel price plummeted 50% to US$60 per barrel and this will improve airlines’ profitability, but it is partially offset by the impact of the depreciated ringgit against US dollar.

We have a “buy” recommendation on AirAsia Bhd and Malaysia Airports Holdings Bhd (MAHB). AirAsia is set to benefit from the slump in jet fuel price which will outweigh the impact from yield decline and ringgit depreciation. Hence, AirAsia will be in net benefit position.

MAHB, meanwhile, will benefit from improving air travel sentiment in 2015 and full commencement of klia2, as well as full consolidation of the Istanbul-Sabiha Gocken Airport (ISGA) earnings turnaround.

We maintain AirAsia’s forecast but increase MAHB’s earnings by 23.8% in financial year 2015 (FY15) and 3.2% in FY16, after consolidating ISGA earnings. — Hong Leong Investment Bank, Feb 5

This article first appeared in The Edge Financial Daily, on February 6, 2015.