AirAsia X most vulnerable to PSC hike

PETALING JAYA: The hike in passenger service charge (PSC) rates, which will be implemented next year, will affect the passenger volume growth of low-cost carriers (LCC) in the near term, said Affin Hwang Capital.
"While consensus has been expecting PSC hike by end-2016, we were surprised by the steep quantum, based on the figures quote by theSun. Immediate impact could lead to passengers' volume loss for both airlines under our coverage," it said in its report last Friday.
"AirAsia X (AAX) is especially vulnerable to any load factor loss, given it has barely broken even in 2Q16. AirAsia will be impacted as well, but of lesser extent given its more intra-Asean centric portfolio," it said.
Last Thursday, theSun reported that the new PSC rates have been approved by the Cabinet. The new PSC rates would be RM11 for domestic flights, RM35 for flights to Asean countries and RM73 for international flights out of both KLIA and klia2.
The current rates are RM9 for domestic flights and RM32 for flights to Asean countries while international flights out of KLIA and klia2 are RM65 and RM32 respectively.
Transport Minister Datuk Seri Liow Tiong Lai confirmed the hike last Friday, saying that the new rates will be implemented from Jan 1 next year. Details are to be announced by the Malaysian Aviation Commission (Mavcom) in due course.
"The new PSC rates attempt to standardise the charges at all airports in Malaysia, most notably the huge difference in KLIA and klia2. All categories will likely see an increase in the range of 9-128%, with the biggest quantum hike for international PSC (ex-Asean) in klia2. Apart from domestic and international categories, the new PSC rate structure will feature a new category for intra-Asean flights," said Affin Hwang Capital.
It expects the move to affect AAX more, as any material drop in passenger load factor could tilt the carrier back to losses, given the breakeven level is close to current load factor.
Although LCC passengers segment have price elasticity, there could potentially be some contraction in volume growth for AAX as the costs of flying would be materially higher after the PSC hike.
However, AirAsia is unlikely to be materially impacted. Although 77% of klia2 passengers transit in Asean routes through AirAsia, the real figure should be closer to the region of 60-70%, as the airline also runs non-Asean routes namely, some southern cities in China, which are not wholly-covered by AAX.
"Bulk of klia2 flights are still dominated by AirAsia Group with up to 98% capacity being deployed for the group, according to management. We do not have the breakdown of AirAsia capacity deployed on non-Asean routes, but it's unlikely to be substantial as a whole. AirAsia still runs on an intra-Asean business model and its capacity is unlikely to be materially impacted by the PSC hike."
The new PSC structure will benefit airport operator Malaysia Airports Holdings Bhd (MAHB), as it will lead to a blended 23% increase in PSC-related charges, which contributes close to 20% of the group's revenue after netting off Turkey's operations.
Although near-term passenger movements will likely be negatively impacted, the quantum of the hike would likely be more than enough to offset the volume drop.
"We do not expect significant impact to the extent that it impedes growth and we do not expect a contraction to follow thereafter. The hike quantum is relatively affordable and reasonable on absolute basis, apart from international passengers flying out of klia2," said Affin Hwang Capital.
It does not expect the 12% increase in KLIA to materially disrupt passenger movements, as full service carrier passengers are likely to be least price sensitive, compared with LCC passengers in klia2.
"The PSC hike will lead to step-up increase in topline, but not all charges will flow to the bottomline due to the standing revenue sharing agreement with the government in the range of 8-10%. Our back-of-envelope calculations show that MAHB's FY17E earnings could potentially more than double year-on-year, largely due to the low base effect and its high operating leverage," it said.
It maintained its sector weighing at "neutral" and made no changes to the ratings and earnings estimates for companies within its coverage, pending Mavcom's official announcement.
"All things being considered, we believe the PSC hike is a reasonable and conscious decision by the authorities to standardise the charges across the airports. The hike was also in part to compensate MAHB as a fair investment return for the RM4.5 billion price tag for the construction of klia2, and to ensure quality upkeep of the airports," it said.
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