AAX’s robust capacity growth to be supported by healthy demand
KUCHING: AirAsia X Bhd’s (AAX) capacity expansion met with positive reactions from analysts as they believe that the airline’s expansion could be supported by healthy demand.
The research arm MIDF Amanah Investment Bank Bhd ( MIDF Research) noted that AAX added three aircraft on a net basis in 2016, bringing its fleet size to 30 aircraft.
It added, average seat per kilometre (ASK) growth resumed in the financial year 2016 (FY16) and would likely exceed 30 per cent year- on-year (y- o-y) in FY16 after falling six per cent y- o-y in FY15.
“Henceforth, AAX’s fleet will stay unchanged until early-2019 when it takes delivery of A330neo aircraft being the first airline to fly the new variant.
“Despite not adding any new aircraft in 2017, AAX could still increase ASK by another 30 per cent. The increase in ASK could come from higher utilisation of aircraft from an average 15.4 hours in 2016 to 16.5 hours by the second half of 2017 (2H2017).
“In addition, AAX could reduce its wet lease operations to both its parent Airasia Bhd and external parties,” it said.
Meanwhile, MIDF Research noted that AAX is not ruling out the possibility of leasing or pur- chasing older A330ceo aircraft should demand growth outweigh supply growth by a reasonable margin.
On traffic demand, the research team said the domestic outbound market remained the largest contributor to AAX’s revenue at 65 per cent, followed by China and Australia.
“We believe that AAX’s load factor in 4QFY16 could have matched 4QFY15’s 83 per cent as travellers set aside concerns on the weaker ringgit to travel abroad amid an improvement in consumer sentiment. This is encouraging considering that capacity rose 30 per cent y- o-y,” it opined.
It also pointed out that the positive traction in load factor could extend into 1QFY17 with load factor for January 2017 potentially reaching as high as 90 per cent due to the Chinese New Year ( CNY) holidays.
“This would indicate that demand remains resilient, in spite of headwinds such as the passenger service charge (PSC) hike amounting to RM18 which makes up 3.4 per cent of the first nine months of FY16’s ( 9MFY16) average fare of RM531.
“Also, this supports our view that consumers have become less elastic to price changes for travel as the PSC hike was passed on to consumers,” it added.
Overall, MIDF Research viewed the North Asian sector, with China, could be AAX’s most important sector in 2017.
“Currently, AAX flies to seven destinations in China making up 24 per cent of AAX’s total network of 29 destinations. Both Airasia and AAX have built a presence in the Chinese market, being the largest Southeast Asian LCC with a 55 per cent market share.
“Through January to September 2016, Chinese tourist arrivals increased an annual 41.2 per cent y- o-y totalling 1.6 million arrivals and would likely exceed 2.1 million for the full year,” it explained.
It noted that the amount of Chinese tourist arrival could expand by 50 per cent in 2017 with a three million target.
“We do not think this target is far- fetched considering MalaysiaChina ties have reached new highs. This would bode well for AAX which has scope to increase flight frequencies and potentially two new routes to secondary cities,” it said.
On the flip side, MIDF Research cautioned, amid AAX’s planned capacity increase, it expected the company to face some pressure on average fares which could affect yields ( RASK).
“In addition, competitors are also set to expand capacity at a double- digit growth rate in 2017 with MAB potentially adding five to six per cent and Malindo adding 10 new aircraft to its fleet,” it added.
Nevertheless, it said, “Allaying some of our concerns, management noted that they are currently not experiencing major fare dumping by competitors as the industry shifts its focus on becoming profitable.
In addition, we gather that AAX could be better positioned to face increased competition as its net gearing has come down significantly to 0.78x as at 9MFY16.
“Moreover, AAX does not have any new aircraft coming into its fleet until 2019.”
All in, the research team pegged a ‘buy’ call on the stock.