Expect AAX to increase base fare to cushion declining yield

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AirAsia X Bhd
(Counter was suspended on Jan 30)
Maintain neutral with a target price (TP) of 69 sen:
Following the announcement of fuel surcharge abolishment, we see a loss of revenue for AirAsia X (AAX). Based on our assumptions of 4.7 million passengers carried in our financial year 2015 ending December forecasts (FY15F), the group could lose RM370 million in revenue (10% from total revenue), further compressing the yield. Nevertheless, our estimation of US$80 (RM289) per barrel (down from US$116) in FY15F for the average jet fuel prices, is expected to help reduce about 30% of fuel cost.

According to management, for every US$1 drop in jet fuel price, the group can save about RM12 million to RM14 million in fuel costs. Bear in mind, though the fuel price has come down significantly, AAX was in the midst of expanding capacity especially in the Australian routes, which the yield are under downward pressure.

Hence, we expect AAX will increase the base fare to replace the fuel surcharge exclusion to cushion from a further decline in its yield.We anticipate that AAX will positively benefit from lower fuel prices and better capacity management by redeploying its aircraft capacity to wet lease operations during the lean period.— Public Investment Bank Bhd, Jan 30

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This article first appeared in The Edge Financial Daily, on February 4, 2015.