KUCHING: The aviation sector has seen persistent positive growth in leisure travel demand, but partially moderated by the continuous high fuel price and weakening of regional currencies.
With a reiterated ‘neutral’ recommendation on the sector, analyst Chua Boon Kian of the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) places ‘buy’ calls on AirAsia Bhd (AirAsia) and AirAsia X Bhd (AirAsia X), ‘neutral’ rating on Malaysia Airports Holdings Bhd (MAHB), and a ‘sell’ on Malaysia Airline System Bhd (MAS).
Chua highlighted that AirAsia is gearing up expansion abroad by revamping the operations of its Philippine associate, opening a new hub in Thailand, and expanding in India now that it has earned the No Objection Certificate (NOC) clearance.
As part of its integration process with Zest Air, Philippine AirAsia (PAA) has been rebranded into AirAsia Zest (AAZ).
The combined entity, Chua said, is expected to command 16 operating aircrafts by the end of this year. In addition, a series of restructuring exercises are being rolled out to turnaround the loss-making associate.
“AAZ will transfer its entire flight capacity at Clark Airport to Manila Ninoy Aquino International Airport (NAIA). It also plans to add new routes to few Japan destinations, making it as part of its route expansion plan,” Chua outlined.
As for Thailand AirAsia (TAA), it has received traffic boost from the influx of China tourists. TA’s second quarter of 2013 (2Q13) passenger traffic grew by 25 per cent year on year (y-o-y) to 2.4 million and its load factor improved by three percentage points (ppts) to 82 per cent.
“The optimistic outlook had prompted TAA to take delivery of eight aircrafts in financial year 2013 (FY13) and open a new hub in Chiang Mai,” the analyst highlighted.
Indonesia AirAsia also experienced double digit growth in term of passenger numbers and capacity in 2Q13.
Nonetheless, the weakening of Indonesian rupiah would likely inflate import cost of fuel and erode its operating margins.
As for its India expansion, India AirAsia had on September 26, gained the NOC from the India ministry of civil aviation.
The venture, which has stepped into the final stage with impending approval of Aircraft Operating Permit (AOP), is expected to launch its first flight by this December.
“We expect the operation in India would suffer some start-up losses but the coveted market offers a huge potential for AirAsia due to its sheer size in population,” Chua projected.
As the group is in the midst of gearing up its overseas expansion, the research arm viewed that AirAsia will rely less on the Malaysian market in the future amid declining domestic yield and intensified competition.
As for AirAsia X, the setting up of Thailand AirAsia X is on track as it spreads its wings into Thailand.
AirAsia X recently entered into a 49:41:10 joint venture (JV) with TAA’s chief executive officer (CEO), Tassapon Bijlevald, and the advisor to Thai Prime Minister, Julpas Kruesopon.
On top of the initial capital outlay of US$3.3 million for the setting up of a new hub in Thailand, AirAsia X will also infuse circa US$17.2 million into the new JV.
With the JV, AirAsia X is expected to capture the early-mover advantage and is expected to capture the budget long haul market between Northern Asia and Australia.
“We view that AirAsia X should benefit from the budget long haul market which is still largely underserved as compared to short haul.
“With the untapped growth opportunities, we expect AirAsia X’s aggressive expansion drive to contribute to earnings growth within the next few years,” Chua opined.
As for MAHB, the booming aeronautical revenue has been backed by improving operating statistics.
Having experienced double-digit growth in passenger movements in the past seven consecutive months, MAHB is expected to deliver another breakneck aeronautical revenue growth for the remainder of FY13, the analyst noted.
“Despite the high growth in aeronautical revenue, we opine that the numbers would not necessarily contribute to the bottomline.
“The airport operator would face a spike in user fee expenditure as it fully settled the residual amount owned by GoM as well as higher staff costs due to the recruitment of new personnel to prepare for the opening of KLIA2,” Chua said.
As for MAS, the analyst explained, the airline still has a declining yield base, but at a slower pace.
MAS registered a remarkable improvement in term of passenger load factor, spiking by 6.6 percentage points to 80.2 per cent in August 2013.
“As the group has adopted a ‘load active, yield passive’ strategy, we expect the ticket yield to continue to be under pressure, following the declining yield base of its regional peers.
Based on the yield disclosure in 2Q13 result, MAS would have to attain a load factor of 93.3 per cent to breakeven.
Overall, MIDF Research opined that the industry headwind is too strong amid the domestic capacity expansion by other local carriers and the declining yield base of other regional carriers including Singapore Airlines Limited (SIA) and Thai Airways (trading name of Thai Airways International Public Company Limited).