AirAsia still on solid ground

PETALING JAYA: The year 2017 is shaping up to be a challenging year for aviation due to aggressive expansion by regional players, but both AirAsia Bhd and AirAsia X Bhd look well positioned to weather yield pressure with their cost competitiveness superiority and dominant market share.
AffinHwang Capital said both AirAsia and AirAsia X posted record profitability in 2016, bolstered by declining fuel prices, robust passenger-demand growth and benign industry-capacity additions.
“Heading into 2017, we expect industry headwinds from heightened competition on the re-invigoration of Malaysia Airlines and aggressive expansion by Malindo Air to pressure industry yields, leading to revenue per available seat kilometre (RASK) decline,” it said in a report yesterday.
AffinHwang Capital expects AirAsia to weather the impending yield pressure with its cost competitiveness superiority, underpinned by higher aircraft-utilisation hours and process digitalisation to protect yield spreads. The successful turnaround of the previously loss-making affiliates in Indonesia and the Philippines should stem the decline in Thailand, and provide bottom-line support amidst intensifying competition in Malaysia.
“We also expect the upcoming sale of its leasing arm at US$1 billion (RM4.4 billion) to provide much-needed capital to pare down its borrowings and fund the 21 aircraft additions to its fleet in 2017. The potential listing of its Asean affiliates and Holding Company at the Hong Kong Stock Exchange/New York Stock Exchange could crystallise the embedded value and rerate the share price.”
It is upgrading AirAsia to a “buy” recommendation due to improving affiliate contribution and the imminent sale of its leasing arm, while maintaining its “buy” call on AirAsia X as it remains confident on its earnings turnaround sustainability.
“We see room in cutting CASK (cost per available seat kilometre) further via higher aircraft-utilisation efficiencies, which should also see a corresponding 25% increase in RASK with incremental flight frequencies and potential new routes. We continue to favour AirAsia X for its turnaround story and continuous drive for cost optimisation,” said AffinHwang.
It however has a sell rating on Malaysia Airports Holdings Bhd (MAHB) as it sees downside risks from its Turkey operation due to declining passenger growth and believe operational-cost escalation could hurt earnings.
Istanbul Sabiha Gokcen is not expected to break even at least until 2019, and this should continue to be a key drag on MAHB’s earnings. Despite the recent passenger service charge revision and concession-agreement extension, shareholder-return generation remains unappealing with less than a 5% return on equity and low 1-2% dividend yields.