This article first appeared in The Edge Financial Daily, on October 16, 2015.

AirAsia X Bhd
Oct 15 (RM0.21)
Maintain neutral with a target price (TP) of 21 sen based on 1.2 times price-to-book value (P/BV): To date, AirAsia X Bhd (AAX) has hedged 20% of its fuel cost at an average price of US$65 (RM268) for financial year 2016 (FY16). We anticipate the second half (2HFY15) will be a much stronger quarter due to seasonality.

We met with AAX’s new chief executive officer Benyamin Ismail and the Investor Relations team to get an update on its business strategy going forward. 

The key takeaways from the meeting were to focus on its top-line growth and operating profits,  as well as group strategies which include: (i) to renegotiate its aircraft operating lease costs; and (ii) to re-evaluate all routes to better manage its aircraft allocation. 

Currently, management is in the midst of renegotiating with the lessors to restructure its leases. 

The group expects to trim the aircraft lease expenses from around US$800,000 to US$900,000 a month per aircraft to at least US$700,000 a month per aircraft. 

As at 1HFY15, aircraft operating lease expenses were one of the major costs for the group, of around 21% of total costs, increasing by 145.9% year-on-year (y-o-y). This was due to its sale and leaseback strategy that took advantage of a higher resale value for aircraft in order to receive a one-off gain on disposal in the short term. 

The operating lease term would be a 12-year period. This will be a drag on the group in the long run, with a higher cost due to higher interest rate in comparison to finance lease. If the renegotiation is successful, we estimate that it should save about 12% to 13% of its lease rental costs.

On the other hand, management will also revaluate its routes so that it can manage its aircraft allocation better and will allocate more aircraft to routes that are more profitable and have higher utilisation. 

The group has reduced the capacity for its Australian routes since the fourth quarter (4QFY14) to minimise its losses, e.g. the Melbourne route was cut from double daily to 11 times weekly, which has shown positive results in its 1HFY15, with its loss before tax lower by 17% y-o-y for the Australian routes. 

With Malaysia Airlines’ rationalisation strategy, it should also help AAX in minimising its losses, especially for the Australian segment. New routes to be added are Delhi, Auckland (expected to be in Feb 16), as well as Hawaii.

However, a slowdown in outgoing tourist traffic from Japan due to its economic downturn would still be a concern. — PublicInvest Research, Oct 15