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This article first appeared in The Edge Financial Daily, on September 25, 2015.

 

AirAsia X Bhd
(Sept 23, RM0.22)
Maintain buy with a higher target price (TP) of RM0.26 from RM0.22 previously:
Yield push driven by capacity rationalisation is coming to fruition with average forward fares for fourth quarter of financial year 2015 (4QFY15) up 15% year-on-year with further upside possible, given the discount between Malaysia Airlines Bhd and AirAsia X (AAX) has increased to 40% from close to none previously.

Load factors picked up from 2QFY15 lows back to above 80% in 4QFY15, enhanced by extensive marketing and tie-ups with travel agents and the peak travel season kicking in.

Average aircraft utilisation is down to 15.7 hours per day compared with 16.3 hours in FY14, but is still healthy with at most one idle plane during off-peak seasons as AAX takes delivery of three new fleet in FY15 and its long-term wet lease contracts expire.

The second half is to focus on breaking even operationally through top-line growth and keeping expenses in check despite the strengthening US dollar. Management noted that at present, only 15% of routes are unprofitable from up to 70% previously.

AAX has thus far launched the Sapporo route and announced it will be flying to Hawaii soon. Management noted that it is looking very closely at another two new unique routes which they will announce in due course.

While all new routes require upfront investments and a typical gestation period of one year to determine its profitability, unique routes could just be the remedy to AAX’s woes.

Taking a look at its mid- to long-haul low-cost carrier (LCC) peer in Europe, Norwegian Air Shuttle, which has been profitable for the most part, we find that 10 out of its 16 long-haul routes face no competition compared with AAX, which only has one long-haul unique route, the Kuala Lumpur-Gold Coast route.

We believe that the beauty of running unique routes is the ability to act as a price maker, serve untapped demand and create a niche segment for itself while enjoying the prestige that comes with flying to exclusive destinations. That said, the key hurdle would be to identify unserved routes that have inherent demand.

We believe that AAX’s key markets of Australia, North Asia and South Asia will continue to perform better after a capacity rationalisation exercise by its major competitor, which commenced in August this year.

In addition, we believe that travel demand to Australia could be preferred compared with destinations such as the United States and Europe. Looking into 2016, we believe that AAX’s natural hedges through the collection of fares in foreign currency which make up 70% of sales will help AAX buffer itself against a stronger US dollar/ringgit exchange rate, as 75% of its expenses such as jet fuel, maintenance, repairs and operations, aircraft leases and finance costs are quoted in US dollars. Our sensitivity analysis suggests that a 5% change in the US dollar/ringgit exchange rate will increase expenses by only 1.1% as a result of the hedges.

Since our last report, AAX’s share price has staged a slight rebound, rising 29% to hit our TP of RM0.22. Looking ahead, we expect 3QFY15 to continue to record a core net loss albeit at a smaller amount of RM40 million and from 4QFY15 to break even and eventually turn profitable in FY16.

For now, we like the initiatives taken by management and we believe efforts to boost AAX’s resiliency are starting to show.  — MIDF Research, Sept 23

AirAsia-X_FD_25Sept15_theedgemarkets

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