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This article first appeared in The Edge Financial Daily on May 25, 2017

AirAsia X Bhd
(May 24, 45 sen)
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Malaysia AirAsia X (MAAX) reported an estimated airline-only core net profit of RM28.5 million in the first quarter of financial year 2017 (1QFY17), excluding estimated leasing profits earned from its associate airlines, down 63% from 1QFY16’s RM77 million, despite a 29% rise in available seat kilometre (ASK) capacity.

The drop was on the back of a 16% rise in the price of jet fuel from US$57 per barrel (bbl) in 1QFY16 to US$66 (RM283.14)/bbl in 1QFY17, a 9% rise in unit staff costs due to salary hikes for pilots and crew as a defensive retention move, and a 6% appreciation of the US dollar, which impacted around 60% of MAAX’s costs.

The strong 29% ASK growth at MAAX also necessitated underlying yield cuts of 4% year-on-year (y-o-y). Fortunately, revenue passenger kilometre demand responded well, growing faster than ASK growth and helping passenger load factor improve 2.3 percentage points to 84%.

This blunted the negative yield impact on MAAX’s underlying revenue per ASK, which shrank by 1.4% against 1QFY16. Pressures on China yield were acute, with yield falling 11% y-o-y due to a 45% rise in seat capacity, while Australia yield dropped 3% y-o-y on a 25% increase in capacity.

AirAsia X Bhd’s (AAX) 49% share of Thai AAX airline-only core net profit was RM19 million in 1QFY17, up 12% y-o-y on 15% more passenger volume. This was a decent performance since 1Q was impacted by the Thai government’s crackdown on zero-dollar tours. We have attributed a 100% share of Indonesia AAX’s (IAAX) losses into our group AAX profits, reflecting AAX’s true economic interest, in our view. IAAX’s core airline losses doubled y-o-y to RM30.5 million (100% basis) as its two A330s were only partially leased to MAAX.

We believe that 1Q will be reflective of what we project will happen across all of FY17, with a weaker ringgit, higher oil price, higher staff costs and lower yields impacting the size of MAAX’s profits.

From the second half of 2017, yield pressures could escalate as MAAX may have to bear start-up losses on its new four-times-a-week Osaka-Honolulu route that will commence on June 28 while competition in Malaysia could intensify.

Competition may heighten from 4QFY17 and into FY18 as Malindo is expected to take delivery of three A330s from its parent, Lion Air, its first-ever widebodies.

Meanwhile, Malaysia Airlines Bhd is looking to lease two additional A330s in 4Q17 and two more in 1Q18, taking its A330 fleet to 19-strong. These seven additional A330s are expected to compete with MAAX in the medium-haul markets to China, Australia and potentially Japan. The last time the Malaysian market saw A330 additions was in FY16, when MAAX added two.

Meanwhile, IAAX this month recommenced scheduled flight operations with Bali-Narita and Bali-Kuala Lumpur-Mumbai flights. When IAAX operated Bali-Sydney and Balis-Melbourne flights in the past, it could not deliver profits, so we are unclear if IAAX will succeed this time. — CIMB Research, May 24

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