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This article first appeared in The Edge Financial Daily on January 4, 2019

KUALA LUMPUR: Long-haul low-cost carrier AirAsia X Bhd (AAX) is expected to post its best year in 2019 after cutting unprofitable routes and costs and renegotiating contracts, according to its co-founder Tan Sri Tony Fernandes.

It posted a RM213.43 million net loss for the cumulative nine months ended Sept 30, 2018 (9MFY18) versus a net profit of RM14.47 million for 9MFY17, no thanks to a RM138.2 million impairment and higher fuel prices, despite a higher revenue of 2% year-on-year at RM3.4 billion.

In his Twitter post yesterday, Fernandes, who is also the group chief executive officer of AirAsia Group Bhd, said: “AAX will have the best-ever year in 2019. [We] have done all the hard work. Cut silly routes. Renegotiated leases. Increased utilisation. Cut cost.”

He also noted that its profitable joint venture (JV) with Thai AirAsia X Co Ltd (TAAX) is expected to see a “roaring” year this year.

As for its Indonesia JV, AirAsia X Indonesia has ceased scheduled service flights this month and will operate non-scheduled service flights moving forward.

Analysts expect the airline to turn around in the financial year ending Dec 31, 2019 (FY19). A check on Bloomberg showed that the consensus is that AAX is projected to be profitable in FY19 at RM23.64 million.

The airline saw its highest net profit at RM146 million in FY10, according to AAX’s Annual Report 2013. The airline was listed on the Main Market of Bursa Malaysia on July 10, 2013.

Despite seeing optimism about the airline turning profitable in FY19, analysts are less bullish on AAX’s stock performance.

Bloomberg data showed that out of 10 research firms covering the stock, only one has a “buy” call, five “neutral” calls and four “sell” calls, with target prices between 12 sen and 39 sen. AAX’s share price has fallen 34.25% over the past year to close at 24 sen yesterday, bringing it a market capitalisation of RM995.56 million.

Despite anticipating the airline to turn profitable for FY19, Maybank Investment Bank Research aviation analyst Mohshin Aziz said the firm’s official stance is “negative” on the stock.

“We believe that the fair value is 20 sen and we recommend people to sell the stock,” Mohshin told The Edge Financial Daily over the phone.

Mohshin explained that the margin is “so low” for the airline and have probably the “highest risk” among other airlines because the capital base is very thin, noting that he “definitely sees” the possibility of a cash call.

“For that level of risk, we don’t think it is good enough for investors to take (invest) ... I believe there are far more safer types of investments out there,” he added.

Still, Mohshin noted that jet fuel prices had been trending downwards, which bodes well for AAX. Brent futures closed at US$54.71 (RM226.50) per barrel yesterday.

Nomura Research aviation analyst Ahmad Maghfur Usman, the only analyst with a “buy” call and a 29 sen target price, said a cash call by AAX is not a concern underpinned by a turnaround in FY19.

He added that potentially more aircraft sale and leaseback (SLB) exercises could be negotiated in exchange for lowering aircraft lease rentals for some of its existing ones along with the new leases.

“We had only factored in SLB exercises for new incoming aircraft deliveries instead of for some of its existing ones. In the event the aircraft disposal materialises, this could potentially strengthen its balance sheet position, allaying market concerns over a cash call,” he said in a report dated Dec 11, 2018, adding that a disposal gain could also be captured.

“However, considering that this is an SLB exercise with an attractive leasing rate, we think the deal needs to be attractive enough from a buyer’s standpoint, as the new owner of these aircraft,” said Ahmad Maghfur.

Additionally, he believes that with the right route network and aircraft, utilisation could be fully optimised to achieve its desired operating efficiency and ultimately sustainable profitability.

One of the catalysts for the airline next year is the listing of TAAX.

“Given the strong earnings prospects for Thailand, the management is already engaging in talks with bankers for a possible listing of TAAX,” noted Ahmad Maghfur.

He also expects Thailand’s prospects to be exciting (an addition of four aircraft in FY19) with expected earnings contributions of RM76 million to exceed its home-based Malaysia units of RM42.3 million, which will continue to suffer from a yield (1% to 1.5% year-on-year) deterioration over FY19 to FY20 due to the departure levy imposed from June this year.

The airline saw the net profit of its Thai operations grow 17 times to RM92.93 million for 9MFY18, from RM5.41 million a year ago.

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