KUCHING: The regional aviation sector generally saw a seasonally weaker second quarter (2Q) as loads weakened owning to lower-than-expected demand and airlines come under yields pressure due to intensifying competition.
According to analyst Ahmad Maghfur Usman of RHB Research Institute Sdn Bhd (RHB Research) in a research note, the airlines covered by the research firm generally saw a seasonally weaker 2Q as loads weakened owing to lower-than-expected demand amid aggressive capacity expansion.
“All carriers except Thai Airways and AirAsia X saw double-digit growth year-to-date (YTD) in the first half of the financial year 2013 (1HFY13) in terms of available seat kilometre (ASK) and revenue passenger kilometer (RPK).
“Thai Airways increased its RPK by just 6.2 per cent YTD due to the weak recovery in its long-haul destinations while AirAsia X’s RPK dipped slightly, but this was somewhat distorted as the airline was still serving the routes before these were fully discontinued,” Ahmad Maghfur explained.
Although carriers such as Malaysia Airlines System (MAS), Garuda and AirAsia Bhd (AirAsia) saw improved quarter-on-quarter (q-o-q) loads, the carriers’ yields were sacrificed to boost passenger volume.
On the local front, Ahmad Maghfur highlighted thatAir Asia operations in Malaysia performed within expectations, although associate losses dragged its bottomline. MAS’ performance was widely expected to be disappointing, due to its sharp yield deterioration.
In 2QFY13, the yields of the airlines dipped with MAS suffering the biggest drop as its yield which fell by 10.6 per cent YTD due to intensifying domestic competition, with the emergence of Malindo Air and new foreign carriers, coupled with uncertainty over the date for Malaysia’s general election.
The analyst noted, AirAsia’s yield also declined by 2.7 per cent YTD. Meanwhile, AirAsia X performed positively by raking in a higher YTD yield of 9.9 per cent. This was due to the group’s move in rationalising its routes last year to focus on core markets, and its yield from mature routes increased.
Looking ahead, the analyst outlined that the current respective local currency depreciation – from the exodus of funds on concerns of the Fed tapering down its asset purchase programme – will boost our carriers’ toplines but this will be more than offset by the higher jet fuel cost.
“Long-haul carriers like AirAsia X, Thai Airways and MAS would see higher yields and passenger demand due to the weakening local currency, since airfares and vacation costs would be perceived as cheap by foreigners.
“However, the higher jet fuel charges, which are typically paid in US dollar, would likely more than offset the overall positive impact of higher revenue churn.
“Debt will also be affected by currency risks, as funding for some aircraft purchases are mostly done in US dollar terms. We also note that financing is typically structured by foreign banks. Most sensitive to currency risks, in our view, are carriers with a low earnings base such as MAS, AirAsia X and Thai Airways. Thai AirAsia would be the least affected as it has no foreign borrowings exposure on its balance sheet.”
On the jet fuel costs in 2QFY13, Ahmad Maghfur noted that the costs were generally weaker by an estimated 10 per cent q-o-q, seven per cent year-on-year (y-o-y) and three per cent YTD (for 1HFY13). Nevertheless, the overall cost per ASK rose slightly from an increase in non-fuel costs, notably on staff and adex spending, Ahmad Maghfur outlined.
He further said that despite the recent spike in jet fuel prices due to geo-political tensions in the Middle-East, YTD jet fuel prices were still 2.3 per cent lower compared with the same period last year.
Meanwhile, regionally, Ahmad Maghfur said, with the exception of Nok Airlines, Thai carriers, Thai Airways and Thai AirAsia managed to maintain their yields (which were flat) due to resilient domestic demand.
“The outlook for the Malaysian carrier we cover will continue to be challenging due to stiff competition from Malindo Air – although we think AirAsia has done fairly well in cushioning the downside impact on its yield.
“Furthermore, Malindo Air seems to be shifting its focus to expanding to regional routes – which suggests that it is likely to underperform its profitability target.
“In Thailand, we understand there will be two more new carriers that will offer scheduled passenger services, of which one is City Airways, which has already established its presence in charter flights with AirAsia X and is also setting up a hub in the country,” the analyst opined.
As for the airports division, Ahmad Maghfur said, “Save for Singapore Airport Terminal Services, airports and ground handlers in our coverage (which are Airports of Thailand (AOT), Malaysia Airports Holdings and Cardig Aero Services) posted earnings that were well within our estimates, driven by resilient passenger growth and higher non-aeronautical revenue.”
On a whole, the research firm expects resilient demand, while the recent selldown in the market presents bargain-hunting opportunities for long-term investors.