Analysts: 2021 still a dim year for local airlines

KUALA LUMPUR: Despite recent positive developments of the Covid-19 vaccines and Malaysia government securing supply for circa 40 per cent of its population, analysts believe it is still a long road ahead to recovery for Malaysia’s aviation industry and its local airlines.

In its sector update, the research team at Hong Leong Investment Bank Bhd (HLIB Research) pointed out despite positive news on the vaccines, there would likely be hiccups from both supply (vaccines from the Efficacy-3 hogged mainly by high income nations) and demand (wait and see approach to getting jabbed).

It expected Malaysia to achieve an immunization level of 20 per cent of population by end-2021.

“As such, we expect that Covid19 will still very much be around in 2021 . Moreover, the recent implementation of stringent MCO 2.0 measures across Malaysia has further impeded the hopeful recovery of air travel, given the fast spread of 3rd wave of the pandemic.

“Bulk of Malaysians (as well as other nations) will likely still have to contend living in this “new normal” that is; limited travel and continued cross border restriction in place for 2021,” it opined.

As such, for 2021, it forecast a conservative 64.1 per cent low base recovery in MAHB’s Malaysia traffic, assuming recovery in the second half of 2021 (2H21).

For airlines, HLIB Research noted that domestic based airlines are facing profitability and cash flow liquidity issues, severely affected by Covid-19 pandemic and implementation of restricted movement (including border closure) leading to a drastic drop in air passenger traffic (down 75.5 per cent yearon-year in 2020).

“All the airlines are currently undertaking restructuring exercises involving cost-cutting (including retrenchment/ furlough/lower salary), renegotiating with suppliers, requesting for debt haircut and raising new funds (equity and borrowings) in order to survive this difficult period,” it said.

It also noted that Malaysian

Aviation Commission (Mavcom) has projected a few scenarios for Malaysia’s domestic airlines which includes a possibility whereby Malaysia Airlines Bhd (MAB) ceases all operations or all international operations while Firefly, AirAsia, AirAsia X and Malindo continue to operate but with limited route networks.

Despite Mavcom’s projection, HLIB Research believe the overall outcomes are relatively negative to the aviation sector, as these scenarios highlighted the severe degree of impact to the sector within one year (or less).

“As we expect continued limited demand for air travel in the near term in 2021, the sector will continue to face liquidity risk and subsequently liquidation risk without any support from the government,” it remarked.

It also pointed out that airlines could face higher jet fuel cost, in line with the movement in global crude oil price.

“Our O&G analyst expects average crude oil price (Brent) to trade averaging US$55 per barrel for the full year 2021, indicating jet fuel price to average at US$58 to US$60 per barrel in 2021.

“Jet fuel cost historically constitutes circa 40 per cent of AirAsia Group (AAG) operating cost structure. Hence, airlines’ operation costs will be affected by the higher jet fuel costs in 2021,” it added.

On the other hand, the positive forex market for Malaysia ringgit could bode well for airlines.

It explained: “We expect the ringgit to appreciate further against US dollar to average 4.00 level in 2021 (compared with an average of 4.21 in 2020).

“A stronger RM is overall positive to the airlines (AirAsia Group and AirAsia X), given the 40 to 60 per cent (under normal environment) of operating costs is denominated in US dollar.”

However, it also noted that the ringgit could depreciate against the euro in 2021 to an average of 4.9075 level (according to Bloomberg’s forecast).

“MAHB will recognise lower translated expected losses in ringgit term from ISGA (denominated in euro),” it said.