Falling jet fuel price a boost for LCCs

PETALING JAYA: Jet fuel prices which have fallen by 22% since January this year as a result of cheaper crude oil prices will benefit low-cost carriers (LCCs) such as AirAsia Bhd and AirAsia X Bhd (AAX).
AllianceDBS analyst Tan Kee Hoong said LCCs' earnings are more sensitive to changes in jet fuel prices since half of its operating expenditure is from jet fuel cost compared to about 40% for full service carriers (FSCs).
"Additionally, the low oil price environment will also serve to further entrench the LCCs' cost advantage against the FSCs, as a greater proportion of the former's operational expenditure would be controllable non-fuel costs," he said in his report yesterday.
Acccoring to Tan's analysis, for every US$1.00 drop in jet fuel price per barrel, AirAsia's earnings would rise by RM18 million in the financial years ending December 31, 2015 and 2016.
Likewise he assumed that AAX earnings would increase by RM13 million to RM15 million for every US$1.00 decrease in jet fuel price.
"These imply earnings sensitivity of 2.1% for FY15, 1.6% for FY16 for AirAsia and 27% for FY15 and 20% for FY16 for AAX, respectively," said Tan, adding that AAX's extreme earnings sensitivity is due to marginal profits expectations in FY15-16.
Tan speculated that if the benchmark jet fuel price were to be revised to US$95 and US$92 for FY15 and FY16, AirAsia's earnings would rise by 15% and 17% for FY15 and FY16 and AAX's will go up 77% and 118% for FY15 and FY16 respectively.
He noted that AAX's earnings are more sensitive to jet fuel prices due to its low base effect.
Tan however retained earnings projections for airlines under his coverage pending the upcoming earnings season, adding that any earnings revision is not expected to alter their recommendations.
Despite AAX's higher earnings sensitivity to jet fuel prices, Tan kept AirAsia as his top pick.
"Incorporating the lower jet fuel price assumptions would reduce AAX's valuation to 20 times for FY15 and 11 times for FY16 price-to-earnings (PE), which is still unattractive.
"Meanwhile, AirAsia's valuation would drop to 7 times for FY15 and 5 times for FY16 PE, if this scenario materialises. Existing unchanged forecasts implies AirAsia and AAX FY15/16 PE of 8 times /6 times and 36 times /24 times respectively," Tan said.