KUALA LUMPUR (Feb 23): CIMB Research has maintained its "reduce" call on AirAsia X Bhd (AAX) at 42 sen with an increased target price of 24 sen (from 19 sen), after the company reported a strong performance in its fourth quarter ended Dec 31, 2016 (4QFY16), and said it expects the weakness of the ringgit, recovery of oil prices and increased competition to work against the airline moving forward.

"Jet fuel prices have increased from an average of US$53 (RM235.85) per barrel in FY16 to a year-to-date average of US$66 per barrel. AAX hedged 74% of FY17F fuel consumption at US$60 per barrel, but remains exposed for the rest," the firm said in a note yesterday.

"Our forecast in financial year 2017 (FY17) is for spot jet fuel to average US$65 per barrel and for the ringgit to average RM4.30, suggesting downside risks," it added.

The firm said Malindo Air may take delivery of two A330-300 jets to launch medium-haul routes while Malaysia Airlines will compete on AAX's Wuhan route in China from June 2017, while Shanghai frequencies will be increased from 7 times to 14 times weekly from March of this year.

"MAS (Malaysia Airlines) also plans to increase its A330-300 [jet] fleet from 15 to 17-strong in the fourth quarter of this year (4Q17). As FY17 progresses, we expect competition to escalate," it added.

The firm added that available seat kilometres (ASK) growth may exceed 25% in FY17 if the airline intends to launch nine times more weekly flights to London Gatwick from June 2017.

"Although AAX is not adding additional aircraft to its fleet this year, the ASK expansion is driven by the full-year impact of the capacity put in place in FY16, higher aircraft utilisation, and the redeployment of two wet-leases back to scheduled Malaysian flights," it said.

"We worry that AAX's return to European services would be difficult, since direct Kuala Lumpur to London seat capacity has increased 55% since AAX stopped its London services in mid-2012," it added.

The firm said that including one-stop services via the Middle East Gulf hubs of Dubai, Abu Dhabi and Doha, as well as Istanbul, capacity to London has increased by 43%.

"AAX's entry into the London market may trigger a defensive response from the incumbents," it added.

At 11.26am, AAX fell 0.5 sen or 1.2% to 41 sen, for a market capitalisation of RM1.68 billion.