Passenger growth rate on wish list of aviation sector

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KUCHING: The regional aviation sector, which saw Christmas come early in the form of cheap oil prices, also has hopes for other factors such as passenger growth and cargo to normalise and recover, respectively.

According to the research arm of Maybank Investment Bank Bhd (Maybank IB Research), spot jet fuel price is 39 per cent lower than 2013’s average of US$123 per barrel (bbl).

Maybank IB Research noted that this is great news for the sector and the hope is for it to stay low. It added that some airlines are stuck with higher price fuel hedges albeit only for a limited number of months to go.

“In the bigger picture, all carriers should be beneficiaries on a net basis. The Taiwanese and Chinese airlines are best positioned, as they leave their positions open,” the research arm said.

Maybank IB Research said that 2014 has been tricky for airlines as most of the big names recorded modest if not flat traffic growth numbers.

“Most concerning is the overcapacity issue in Southeast Asia, specifically in Malaysia, Thailand and Singapore.

“There are signs that traffic growth is picking up in Thailand, but Malaysia and Singapore continue to be in negative territory,” it said.

As things normalise, the research arm hopes for more route launches and frequency additions to lift traffic growth to pre-2008 global financial crisis (GFC) levels (+6.5 per cent).

It noted that IATA has forecast Asia Pacific traffic growth will be 6.8 per cent in 2015.

On cargo, Maybank IB Research said that it has been recording sub 50 per cent load for a long time with pathetic yields due to customers switching to sea freight and utilising regional manufacturing and distribution centres.

In short, the research arm said that air cargo priced itself out of the market but still cannot cover its costs.

“Air cargo is the most sensitive to fuel price movements because all the other overheads are minimal.

“As jet fuel prices are much lower of late, this has made air freight feasible for manufacturers and hence the resurgence in demand,” it said.

Touching on the cost of funding to remain competitive, Maybank IB Research noted that the current long-term interest rates and LIBOR are favourable, but less so for swap rates which is important component for aircraft leasing.

“The main concern is on the shrinking supply of aircraft financiers as many banks have decided to bid adieu to the aircraft financing industry,” it said, adding that this has left the airlines predominantly in the lurch of aircraft lessors.

With the exception of Hong Kong which pegs its currency closely to US$, the research arm further noted that most regional airlines are exposed to weakening domestic currencies.

According to Maybank IB Research, roughly 50 per cent-60 per cent of airlines’ operating costs are denominated in US$ and this is proving painful for countries that have seen its currencies fall in value against the greenback, most notably Malaysia, Vietnam and Indonesia.

“On the flip side, a weak domestic currency may spur demand from foreign tourists and spur in-bound traffic,” it said.

Maybank IB Research further noted that airlines are also wishing for aircraft asset to hold its value.

“We’re in a period of transition, whereby new engine options (NEO) complement existing aircraft models such as Airbus A320s, Airbus A330s, Boeing 737s and Boeing 777s.

“The problem is these NEOs aircraft are still one to three years away (depending on model) from fruition, but it has already caused a breakdown in residual value for the existing model aircraft,” it said.

The research arm added that aircraft that are susceptibly vulnerable are those one year away from the launch of the NEO model.

It gave an example of Airbus A320 NEO which is scheduled to enter service in October 2015, and the current model of A320s has seen its book value plunge by circa 10 per cent the moment it leaves the factory floor.

“This is causing a massive headache that an aspirin can’t cure,” it said.

As for the Asean Open Skies 2015, Maybank IB Research noted that there is much to cheer upon the launch. However, it said that upon closer scrutiny, many of the advertised benefits are just a mirage.

For example, the research arm noted that open skies exist for capital cities, but there is a cap on slots so it amounts to no net benefit.

“Furthermore, the granting of fifth-freedom rights remains arbitrary and dependent on the host country,” it said.

Maybank IB Research wishes the tentacles of bureaucracy could be crimped and that things move in a more cohesive manner, much like in the European Union (EU).

“However to be fair, the EU Open Skies took 52 years to complete, whereas ASEAN Open Skies is barely 18 years old.

“Hopefully, there will be more deregulations and the region will be more single market-centric in the near future,” it said.

On airlines hoping airport infrastructure to improve, Maybank IB Research noted that airports such as in Jakarta and Manila are grossly under-sized and is limiting the ability for strong airlines to grow.

The research arm said that poor airport and grossly expensive infrastructure remain issues in India. It added that in China, airports are generally sufficient sized but the backlog is in the skies with the way airspace has been managed.

The two misfortunes that befell Malaysia Airlines were truly tragic, according to Maybank IB Research, and it offers its deepest condolences to the families and friends of the perished victims.

“It serves as a reminder that in the aviation industry, you can never sleep easy, and it doesn’t matter if it is not your fault,” the research arm said.

It added that insurance premiums are set to rise given these mindboggling air disasters and the on-going geopolitical tensions in the Middle East and Russia.

All in, Maybank IB Research stayed ‘overweight’ for record industry profits in 2015. It concluded that profit taking activity is the general trend across the region on thin volumes, which is expected for this time of the year.

“Majority of the stocks that enjoyed strong gains in the past one two weeks have retracted the most,” it said, adding that the standout gainers are Garuda and AirAsia Bhd.

Meanwhile, on the recent AirAsia Indonesia QZ8501 incident, as markets are close for the weekend, aviation market observers have yet to make remarks on the incident and on how it will impact the market in the coming week and into 2015. However, Airbus has confirmed that it is assessing the situation, national news portal Bernama reported it as saying.