Tuesday, July 7

Fleet expansion bodes well for AirAsia, demand to rise

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KUCHING: AirAsia Bhd’s (AirAsia) move to expand its fleet garnered positive views from analysts as it coincides with encouraging travel statistics which could indicate a growth in demand for air travel.

To note, AirAsia recently announced that it has placed an order for 14 A320ceo aircraft from Airbus, to meet higher than expected near-term growth of the carrier’s regional network. On top of that, in the financial year 2017 (FY17), AirAsia is scheduled to add 27 aircraft on a net basis, which includes 21 Airbus A320neo variants.

MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) opined, “In the coming quarters, we expect (AirAsia’s) available seat kilometres (ASK) growth to gather pace, and average at 10 per cent for FY17.

“Healthy growth in air travel demand underpinned by firm domestic consumption and robust tourist arrivals would augur well for AirAsia’s load factors, in our view.”

It explained that AirAsia’s fleet expansion and increased utilisation rate of aircraft lends support to AirAsia’s 10 per cent ASK growth target. It noted that with the additional 14 A320ceo aircraft, AirAsia’s outstanding order backlog would be at approximately 420 aircraft. Aside from that, the research team said, AirAsia is aiming to raise the utilisation rate of its aircraft from 14.1 hours per day to 16 hours per day.

“Increasing the utilisation rate of its aircraft is beneficial as the additional revenue generated outweighs the marginal cost incurred for aircraft already in its stable,” it commented.

MIDF Research also highlighted that the overall tourist arrivals to Malaysia remained positive, with March 2017 registering a growth of 1.8 per cent year-on-year (y-o-y).

“In the coming months, we believe that arrivals could trend higher coinciding with the summer holiday season kicking off in the Northern Hemisphere and the SEA Games in August.

“Meanwhile, KLIA2 registered an average growth of 14.2 per cent y-o-y for the months of April and May 2017, indicating that both AirAsia and AirAsia X performed well in terms of passengers carried as both airlines contribute circa 95 per cent of KLIA2 pax,” it added.

Aside from that, MIDF Research believed that the bulk of the new capacity would be allocated to new routes, which was announced during the first six months of 2017 (6M17).

“From January to June 2017, AirAsia and its associates (excluding AAX) have announced 17 new routes, which have surpassed the 13 routes announced for the whole of 2016.

“While new routes typically require a 1-1.5 years gestation period to turn profitable, we opine that a steady pipeline of new route launches is necessary in order for AirAsia to carve out new markets and drive earnings growth,” it added.

Overall, MIDF Research maintained a ‘buy’ call on the stock with an unchanged target price of RM3.94 per share, derived from a forward price-to-earnings ratio of 10-folds FY18 earnings per share.

“Airasia remains our top aviation sector predicated on: 1) stable demand growth with conservative ASK expansion of 10 per cent, monetisation of Asia Aviation Capital (AAC) that could potentially lead to special dividends, further consolidation of all air operator’s certificates (AOCs) under the AirAsia Group could provide better clarity on combined performance of all AOCs as opposed to MAA,” it added.