Hong Leong ups AirAsia earnings forecast on cheaper jet fuel

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KUALA LUMPUR (Oct 21): Hong Long Investment Bank Bhd upped its earnings forecast on AirAsia Bhd by up to 5% after taking into account crucial factors including cheaper crude oil and jet fuel.

In a note today, Hong Leong said the recent drop in jet fuel prices to US$100 (RM326) per barrel in line with the decline in global crude oil prices, was beneficial to AirAsia.

This is because jet fuel contributes 60% to 67% of the low cost carrier’s operating cost.

“We expect jet fuel prices to remain at US$100 bbl for the fourth quarter ended Dec 31, 2014 (4QFY14) and FY15 and FY16 as well. However, we believe that AirAsia will cut its average yield, which includes fuel surcharges, in order to induce air travel in the light of the current weak demand environment

“After imputing for potentially lower yield, lower jet fuel cost and higher US$, we have increased FY15 and FY16 earnings by 2.8% and 5.0%,” said Hong Leong.

AirAsia's financial year ends on December 31.

Hong Leong has also upgraded its call on AirAsia shares to "trading buy" with a higher target price (TP) of RM2.57. This compares to RM2.20 previously.

According to Hong Leong, it arrived at the higher TP amid less concerns on major overcapacity in the sector as Malaysian Airline System Bhd is being restructured.