AirAsia X faces headwinds from rising fuel prices

KUALA LUMPUR: AirAsia X Bhd (AirAsia X) continues to face major headwinds from rising fuel prices as the first nine months of financial year 2017 (9MFY17) saw fuel prices climbing +28.1 per cent year over year (y-o-y) higher.

According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), cumulatively, this amount accounted for 40.9 per cent of total revenue, which was 8.5 points higher y-o-y than in 9MFY17.

This contributed to AirAsia X recording a net loss in 9MFY18 of RM213.4 million. This was unexpected as the normalized net loss of RM238.6 million exceeded expectations by a variance of more than 10 per cent.

MIDF Research said the negative variance was steered by an increase in operation expenditure due to the rise in fuel expenses and provision of doubtful debts.

“Volatile fuel cost remained a major headwind to the long-haul business model, impacting the RPK in 3QFY18 which dropped -3.3 per cent y-o-y,” it detailled in a report.

“In 3QFY18, we noted that CASK ex-fuel was little changed, only increasing by +0.5 per cent y-o-y, attributable to higher provision of doubtful debts for AirAsia X Indonesia amounting to RM138 million,” said the research arm.

However, based on previous trends, MIDF Research believes that fuel prices will make a rebound and AirAsia X will be able to reap benefits by hedging its jet fuel requirement more moving forward.

Looking forward, while the drop in average fares would weigh down earnings, MIDF Research believes that recovery for AirAsia X is on the horizon as its core routes are starting to gain better tracking moving forward in addition to its newer ones.

“AirAsia X has also exercised prudence by shifting some of the future capacity into other core markets namely, Japan, South Korea and India to factor in the slower growth from the China segment.

“Consequently, we believe further improvement in cost structures such as flights to more cost-effective airports i.e. Avalon Airport, Melbourne could sustain earnings in the long run,” said the research arm.

Despite this optimism, MIDF Research is still adjusting their earnings forecasts downwards to a higher net loss of RM46.9 million in FY18 and a lower net profit of RM105.4 million in FY19.

“We expect full year earnings to stage a recovery in FY19. This could be possible through further cost cutting initiatives and better capacity utilization. Despite our lower assumptions of the FY18 and FY19 performance, the headwinds faced by AirAsia X is tempered by its prospect which is tied to its long-term strategic plan of: further reduction in CASK following expansion plan and stronger focus in core markets.

“This will be supported by AirAsia X's gradual shift to modern fleet operation. However, we are cognizant of the volatility in oil prices given the uncertain outlook as Saudi plans to reduce global supplies while President Trump is in favour of increased production,” shared the research arm.