Fuel price drop a lucky break for AirAsia

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DESPITE the sharp 84.8% year-on-year drop in its net profit for the third quarter ended Sept 30, 2014, analysts are optimistic about AirAsia Bhd and expect it to do better, thanks to lower fuel prices.

In fact, the budget carrier started to enjoy the benefits of cheaper fuel in 3Q2014 as evident from the 3% year-on-year increase in its cost per available seat kilometre to 12.79 sen compared with the 11% jump in CASK ex-fuel to 6.68 sen.

“Core earnings almost tripled q-o-q (despite 3Q2014 being a weak quarter seasonally) as AirAsia is starting to benefit from lower jet fuel prices (albeit diluted as it was 40% hedged at US$118 per barrel while jet fuel spot price was US$116 per barrel in 3Q2014). Q-o-q, CASK was down 11% and ex-fuel down 6%, driven mainly by lower fuel and maintenance costs,” AmResearch says in a Nov 20 note.

Maybank IB Research’s latest estimates put jet fuel price at an average of US$115 per barrel next year, which is 3.6% lower than this year’s estimated average of US$119.30 per barrel. The bank-backed research house had projected an average jet fuel price of US$125 per barrel for next year.

AirAsia group CEO Tan Sri Tony Fernandes expects the plummeting oil prices to create a cascading effect that will ultimately spur passengers to opt for low-cost carriers. According to him, should fuel prices continue to fall, AirAsia might do away with the fuel surcharge, thus encouraging more people to fly with the LCC.

AirAsia’s average travel fare stood at RM146 in 3Q2014, unchanged from a year ago. Fernandes tells The Edge in a text message that there is no plan to cut fares as demand is growing.

He is also unperturbed by the planned implementation of the Goods and Services Tax next year. “GST is a non-issue. I think more people will fly (with) LCCs due to lesser disposable income. Also, Malaysia is now (an LCC) hub — so many nationalities are flying with us.”

Had fuel prices not declined this year, things would have been different for AirAsia as it would have continued to be dragged down by rising costs after its aggressive fleet expansion over the past few years.

To its credit, AirAsia has decided to cut down on aircraft delivery next year to just five from the planned 13. Management has also told analysts that it is targeting 10% growth in ancillary income as AirAsia is introducing duty-free products and on-board WiFi apart from premium add-ons to rival full-service carriers.

CIMB Research says in its latest note that AirAsia’s Malaysian operations (MAA) are seeing a price increase, which “is likely to creep forward in 2015”.

“However, because AirAsia’s competitors have not actually taken any action to rationalise their capacity, we are not factoring any material yield recovery into MAA for 2015. Our assumption is for a 1% y-o-y yield increase only, which could be conservative if certain airlines move on with their corporate restructuring plans. In any case, we view the risks to 2015 as being skewed towards the upside as yields are not likely to decline further from the already very low 2014 levels,” the research house adds.

Nonetheless, this does not address the underlying issue that AirAsia is facing — its aggressive fleet expansion has resulted in idle aircraft.

“Each aircraft sitting idle costs the company roughly RM1 million per month in terms of depreciation, interest charge and maintenance cost provisions. Management has indicated that it will progressively bring the aircraft into service and expects all the planes to be on full duty by early 2015,” says Maybank IB Research.

AirAsia’s volume growth might not translate into higher revenue per available seat kilometre (RASK) as turnover may not increase in tandem with capacity.

For the nine months ended Sept 30, the LCC’s RASK was 15.7 sen, down 0.4 sen from the previous corresponding period, says Maybank IB Research. The growth in load factor during the period was also tepid, up 0.7 percentage point to 79%.

Nevertheless, RHB Research Institute believes AirAsia’s yields are at an inflection point as the group is likely to increase its prices going forward.

“With the restructuring of Malaysian Airline System Bhd and the likelihood of a 20% to 30% cut in capacity next year, the upward airfare rationalisation is expected to kick in on a stronger note. We expect overall yields to inch up year on year by 4QFY2014 with an increase of 4% in FY2015 and 2% in FY2016,” says its analyst Ahmad Maghfur Usman.

He expects AirAsia’s earnings growth to be strong in both years as yields recover amid the lower jet fuel price environment. RHB has a “buy” call on the LCC and a fair value of RM3.11.

According to Bloomberg data, most of the 27 analysts covering AirAsia have a “buy” recommendation on it and an average target price of RM2.90.

The stock closed at RM2.41 last Friday.

This article first appeared in The Edge Malaysia Weekly, on November 24 - 30, 2014.