Commendable quarter for AirAsia despite bloated fuel costs
KUALA LUMPUR: AirAsia Bhd (AirAsia) recorded a cumulative core net profit of RM612.1 million for its first half of fianncial year 2018 (1HFY18), which came in below expectations generally of analysts who kept an optimistic eye on the group.
This comes as AirAsia announced a core net profit of RM366 million for its second quarter of FY18 (2Q).
Affin Hwang Investment Bank Bhd (AffinHwang Capital) saw that revenue for the quarter rose 10 per cent year on year (y-o-y) amid seasonally lesser travel period as capacity increased by 17 per cent.
“Influx of capacity eased seat load factor by three percentage points to 86 per cent as average fare was three per cent lower y-o-y, translated into lower revenue per average seat per kilometer (RASK) of three per cent to 14.83 sen,” it said in a report yesterday.
“Geographically, growth was spearheaded by The Philippines growing 33 per cent. While Malaysia sailed to a robust 2Q18 11 per cent y-o-y growth, Indonesia's underwhelming three per cent revenue contraction was due to prolonged volcanic activities,” AffinHwang Capital added.
Meanwhile, the low cost airlines experienced a rise in operating expenditures (opex) particularly due to the increase in aircraft fuel expenses.
Following the surge in average fuel price of 29 per cent to US$89 per barrel coupled with capacity expansion of +14.9 per cent in 2QFY18, MIDF Amanah Investment Bank Bhd (MIDF Research) saw that AirAsia's 1HFY18 fuel expenses were up by 26.9 per cent to RM1.8 billion.
“While we note that fuel costs factor could become a concern, we are on the view that risk will be minimised via the group's fuel hedging policy and gradual adjustments in airfare,” it highlighted in a separate report.
On the other hand, AffinHwang Capital opined that margin erosion would likely to persist going forward as AirAsia has only hedged 12 per cent of 2018 fuel requirement at US$69 per barrel.
On a more positive note, an uptick in maintenance and leasing was offset by suppressed staff cost, resulting in lower CASK.
“Increasingly challenging operating conditions saw competitors, Malindo and Malaysia Airlines reduce weekly flights by 37 per cent and nine per cent respectively,” addeed AffinHwang Capital, saying that this could enhance AirAsia's seat load factor going forward.
“Management emphasised on cost reduction measures as one of the top priorities and actively reducing their staff numbers through automation as well as route rationalisation by reducing/ terminating unprofitable routes.”
While management remained in high spirit that a lower passenger service charge (PSC) from airports would further lower their operational cost, the research team at Kenanga Investment Bank Bhd (Kenanga Research) was less optimistic as it awaits the outcome from the PSC study conducted by Malaysian Aviation Commission (Mavcom).
“Apart from cost rationalisation, management are also looking to revise its average fares upwards and maintains a load factor target of 85 per cent.
“Post results, there are no changes to our FY18- 19E core earnings as we are anticipating a strong 2H18 performance, especially in 4Q18.”
Both MIDF Research and Affinhwang Capital maintained their buy calls on AirAsia, pegging a target price of RM4.47 and RM3.44 per share respectively. Kenanga Research kept its outperform call on the stock with a target vprice of RM3.44 per share.