This article first appeared in The Edge Financial Daily on November 23, 2018

KUALA LUMPUR: Rising fuel cost coupled with expected reduction in capacity will continue to eat into AirAsia X Bhd’s (AAX) earnings and keep the low cost carrier in the red in the financial year 2019 (FY19), if not longer.

The aviation stock has halved from this year’s peak of 44 sen in February. It closed at 23 sen yesterday.

In a note yesterday, Affin Hwang Investment Bank Research analyst Isaac Chow has cut his earnings per share forecasts in view of the weak third quarter results amid expectation of continued fuel costs and lower seats available going forward.

“In view of the high fuel prices (we expect Brent price to recover from the current low and sustain at US$70 to US$75 per barrel in FY19E [estimate]) and competitive business environment, we expect AAX to report net losses in the immediate quarters, thereby weighing on share price,” he wrote. According to Chow’s earnings forecast, AAX will be loss making in FY19, but will return to profit for FY20.

Meanwhile, CIMB Investment Bank Research analyst Raymond Yap, who expects the low cost carrier to be in the red until FY20, noted the need for capital raising exercise considering AAX’s cash balance has been dropping fast.

AAX’s cash balance has shrunk from RM433 million as at Dec 31, 2017 to RM266 million as at Sept 30, 2018, due mainly to RM139 million in debt principal repayments and RM163 million in capital expenditure, which was mainly for the overhaul of eight engines during the third quarter of 2018.

“As such, a capital-raising exercise will be vital, particularly with continued strength in jet fuel prices and the weaker ringgit and rupiah,” Yap wrote in a note yesterday.

However, MIDF Research analyst Adam Mohamed Rahim expects an earlier rebound to be seen in 4QFY18. He pointed out that in 3QFY15, AAX experienced a net loss of RM288.2 million before recording a net profit of RM201.6 million in 4QFY15.

The main reason for the recovery, he said, was the 12.9% decline in average Brent crude oil price from US$51.29/bbl to US$44.59/bbl.

“So far in 4QFY18, Brent crude oil price has drop by approximately 26% to hover around US$60/bbl to US$65/bbl in contrast to the 7.4% rise in 3QFY18. We believe that jet fuel prices will follow suit and AAX will be able to reap benefits by hedging its jet fuel requirement more moving forward,” he wrote in a note yesterday.

MIDF expects AAX to stage a full-year earnings recovery in FY19, which Adam said, could be possible through further cost-cutting initiatives and better capacity utilisation.

On Wednesday, AAX reported a widened net loss of RM197.47 million for 3QFY18 from RM43.3 million in 3QFY17, dragged down by impairment of RM138.2 million and higher average fuel price during the quarter under review.

Quarterly revenue slid 4% year-on-year to RM1.08 billion from RM1.12 billion. For the nine-month period ended Sept 30 (9MFY18), AAX incurred a net loss of RM213.43 million versus a net profit of RM14.47 million a year ago, despite higher revenue — up 2% to RM3.4 billion from RM3.34 billion.