This article first appeared in The Edge Financial Daily, on April 8, 2016.

AirAsia Bhd
(April 7, RM1.89)
Maintain add with a target price of RM2.70: Malaysia’s Department of Civil Aviation (DCA) has proposed to raise a multitude of charges on airlines. The most critical increase is for air navigation facility charges (ANFCs), which are based on the distance flown within Malaysia’s airspace. 

The previous rate for an A320 was 20 sen per nautical mile (nm), which could be raised 10-fold to RM2 per nm from April 15. Other rate increases include higher fees for the annual renewal of the air operator’s certificate, and the renewal of pilot and crew licences, but these are not expected to be material in the overall scheme of things.

Domestic flights that travel wholly within Malaysian airspace will be affected the most, while international flights will be affected only for the portion of flights that is within the country. About half of AirAsia Bhd’s flights are domestic, and in our calculations, we have assumed that 600km of each international flight travels within Malaysian airspace.

In our estimates, AirAsia will have to pay slightly more than RM130 million per annum on a full-year basis as a result of higher ANFC rates. This works out to about 10% to 12% of our financial year 2017 ending Dec 31, 2017 (FY17) to FY18 group core net profit forecasts. However, the true impact on AirAsia would likely be less than this, depending on whether the airline industry is able to reduce, postpone or lobby for the additional charges to be scrapped. We think that there is a reasonable chance that the airline industry can achieve some compromise with the DCA.

The increase in ANFC rates works out to be around RM5 per pax on a full-year basis, which is about 4% of the average underlying fare (excluding ancillary income) or about 2.5% of the average revenue per pax (including ancillaries). This is a relatively small amount that may not be too difficult to pass through since airfares have already come down in the current environment of low oil prices. We leave our earnings forecasts intact for now, pending the airline industry’s appeal.

AirAsia is likely to have a good year in FY16, with oil prices remaining low, the ringgit recovering, and efforts behind the restructuring of Indonesia AirAsia and AirAsia Philippines bearing even more fruit this year. We also like the fact that the founders are planning to raise their stake in the company from 18.9% to 32.4%, meaning that they will have even greater commitment and incentives to “make it work”. This is why we recently raised our target price-earnings multiple from six times to eight times (around peers’ average range of six to 12 times). — CIMB Research, April 6