Thursday 28 Mar 2024
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KUALA LUMPUR (Jan 15): Hong Leong Investment Bank (HLIB) Research expects the aviation sector to continue to face liquidity risk and subsequently liquidation risk without any support from the government as it sees continued limited demand for air travel in the near term in 2021.

In a note today, HLIB analyst Daniel Wong said domestic airlines in Malaysia are facing profitability and cash flow liquidity issues, severely affected by the Covid-19 pandemic and implementation of restricted movement (including border closure), leading to a drastic drop in air passenger traffic.

“All the airlines are currently undertaking restructuring exercises involving cost-cutting (including retrenchment/furlough/lower salaries), renegotiating with suppliers, requesting for debt haircuts and raising new funds (equity and borrowings) in order to survive this difficult period,” he said.

Wong also expects a prolonged impact of Covid-19, especially on international travel, affecting profits and margins of the sector.

He said the recent implementation of stringent movement control order 2.0 (MCO 2.0) measures across Malaysia further impeded the hopeful recovery of air travel, given the fast spread of the third wave of the Covid-19 pandemic.

"The bulk of Malaysians [as well as those in other nations] will likely still have to contend with living in the “new normal”, i.e. limited travel and continued cross-border restrictions in place in 2021," he said.

Thus, he assumed a low-base rebound of 64.1% year-on-year (y-o-y) in passenger movement in 2021 (still 50% below the 2019 level) after a drastic drop of 75.5% in 2020.

Wong also expects that Covid-19 will still very much be around in 2021 as he only expects Malaysia to achieve an immunisation level of 20% of the population by end-2021.

While the third quarter of 2020 (3Q20) showed some positive signs of domestic air travel recovery, Wong said, the situation turned sour towards 4Q20 as Malaysia experienced the third wave of Covid-19 since September.

“The sudden drastic drop in air passenger traffic signifies the high risk faced by the aviation sector in view of the current pandemic,” he said.

Wong did not anticipate a smooth recovery in international air travel in the near term.

“With the lower international travel mix, both airlines and airport operators will lose out as international travel commands higher spending power and operational leverage (and hence higher margins).

“Moreover, domestic airlines will have to operate competitively just for a piece of the now smaller domestic segment (given the limited flight opportunity for the international segment),” he said.

Wong maintained his "underweight" rating of the aviation sector with "sell" recommendations on AirAsia Group Bhd (target price [TP]: 37 sen) and Malaysia Airports Holdings Bhd (MAHB; TP: RM4.65).

Edited BySurin Murugiah
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