KUALA LUMPUR (Oct 6): Long-haul low-cost carrier AirAsia X Bhd (AAX) is looking to scale back the capacity of its flights in Australia, given the competitive landscape there, according to an analyst with Nomura Securities Malaysia Sdn Bhd.

"The focus of attention will be on growing its North Asia business and India for all its AAX hubs in Kuala Lumpur, which will also be replicated at Thai AirAsia X and Indonesia AirAsia X," Nomura's analyst Ahmad Maghfur Usman wrote in a note to clients today.

Currently, AAX flies to four cities in Australia: Sydney, Melbourne, Perth and Gold Coast.

According to Ahmad Maghfur, the note was following the AirAsia Group's Investor Day, which was held at its "RedQ" headquarter in Sepang yesterday.

The briefing, he added, was conducted by AirAsia X's non-independent, non-executive director Tan Sri Tony Fernandes, and it was attended by some 200 investment professionals.

Ahmad Maghfur said AAX is also exploring the possibility of leasing up to 10 A330s to fuel growth expansion in 2018, as its first two A330 New Engine Options (NEO), which is 15% more fuel-efficient than the current engine option, will only be delivered at end-2018.

"We think early 2019 is more likely, as Airbus is seeing production delays," he said.

"Of the 10 aircraft that it may take up under operating leases, three to four aircraft will be allocated to Malaysia's AAX, four to five aircraft to Thai's AirAsia X and two aircraft to Indonesia's AirAsia X," he added.

The move, said Ahmad Maghfur, was seen as an aggressive expansion and could potentially depress yields further if the aircraft loads are poor, as a consequence of poor demand.

"This presents a risk to earnings," he noted.

At the same time, Ahmad Maghfur noted that AirAsia X is exploring the possibility of converting some of its A330 NEOs to A321 NEOs for sectors that are above four hours.

However, for routes with "thinner traffic potential", he added that such routes may not be commercially viable on a larger capacity aircraft such as the A330.

As for the Airbus delivery pipeline, Ahmad Maghfur said AAX has a firm order of 66 A330 NEOs and 10 A350-900s.

As for the demand from China, he said AAX management had highlighted that "it is recovering well, and the forward loads in the fourth quarter of 2017 (4Q17) look very encouraging".

As for AAX's ancillary income, Ahmad Maghfur said the management is targeting it to grow to RM173 per pax, with no specific timeline indicated, as compared to RM137 per pax chalked in financial year ended Dec 31, 2016 (FY2016).

"We forecast ancillary per pax will only hit RM158.4 per pax by FY2019," he said.

To drive the ancillary income, Ahmad Maghfur said AAX will broaden the variety of its in-flight meals, boosting its cargo business, which is capitalising on the government's e-commerce initiative of setting up the Digital Free Trade Zone, as well as bundling of the insurance kit into Value Pack.

Going forward, Ahmad Maghfur — quoting Fernandes — said AAX is in the business of medium haul, in which the flight travelling time is between four and eight hours.

AAX, he added, is not keen to lengthen the flight length to long haul, as the economics of long haul are not viable at this juncture.

"Ultimately, long-haul connectivity will connect through its various hubs such as AirAsia Japan (to North America) and AirAsia India (to Europe and Africa)," he added.

On valuation of AAX, Ahmad Maghfur said Nomura is maintaining its "buy" on the stock, with a target price of 54 sen per share, pegged at a price-earnings of 11 times.