Friday 29 Mar 2024
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KUALA LUMPUR (Jan 27): Analysts have responded positively to the removal of fuel surcharge by Air Asia effective yesterday, saying the resultant lower fares will stimulate demand for travel.

They said although the removal would place downward pressure on the airline’s yields, savings from jet fuel prices would offset losses in revenue.

Research firm Public Investment Bank Bhd, in a note today, viewed the policy positively and expected an improvement in operations, aided by the drop in crude oil prices and recovery in yields.

It sees the policy as encouraging passenger travel and improving load factor, especially after the QZ8501 air crash and the upcoming imposition of the Goods and Services Tax (GST).

The flight carrying 162 people from Surabaya, Indonesia to Singapore crashed into the sea off Pangkalan Bun, Central Kalimantan after disappearing from radar on Dec 28.

Public Investment Bank maintained its “outperform” rating on the stock, with a reduced target price (TP) of RM3.22 from RM3.30.

AmResearch Sdn Bhd analyst Hafriz Hezry sees the low-cost carrier's removal of the fuel surcharge will improve its competitiveness among regional airlines as many of its peers are not in the position to do likewise.

“Airasia has a competitive advantage to do so as it locked in very little hedges through most of 2014 (when oil price was still expensive),” he said in a note today.

“It had 15% of FY15 requirements hedged (at circa US$100 per barrel crude oil) as at end-2014, but it had since raised its hedges, albeit at significantly lower price levels, which should be close to spot oil price over the past one month of just US$50 to US$60 per barrel.

“On the contrary, most regional airlines are still stuck with expensive hedges; some up to 75% of FY15 requirements at up to US$116 per barrel jet fuel hedges.

“This means that a lot of peers are not in the position to completely remove surcharges, unless they are willing to take a hit on earnings to sell cheap seats at still expensive fuel cost. On the other hand, not removing surcharges can lead to market share loss,” he added.

Hafriz also notes that lower fares from higher passenger traffic will increase ancillary revenue, which accounts for 26% of ticket sales (RM41 to RM43 per pax spend).

He also said lower crude oil price, which had fallen 55% in the past 12 months, should be able to absorb the impact of an 18% fall in yields (from surcharge abolishment) to the company’s bottomline.

AmResearch also maintained its “buy” rating on Air Asia but raised its TP to RM3.20 from RM3.10 based on an increase in earnings forecasts by 6% and 4% for FY15 and FY16 respectively, based on lower fuel costs and increase in passenger traffic.

Brent crude oil is now trading at US$48.34 per barrel.


(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)

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