Aviation: Benefit from recovery in travel demand

The aviation sector’s 1QCY17 result was generally within estimates, with Malaysia Airports Holdings Bhd (MAHB) and AirAsia Bhd coming in broadly in line and in line with Kenanga Research’s expectations, respectively.

During the quarter post reviewing April passenger estimates for MAHB, the research arm had upgraded the group’s FY17-18E earnings by three to five per cent on the back off stronger Malaysian passenger growth estimates of 10 per centt (from six per cent) while keeping eping its Turkey estimates tes unchanged at sevenen per cent.

Al l i a nc eDBS Research noted that Malaysian air passenger traffic is turning around with 10 to 13 per cent growth in 4M17 and 2H16 after around 24 months or two years of growth averaging less than one per cent.

“This sugests recovery in travel demand following the after-effects of airline incidences in 2014 plus scaling down by Malaysia Airlines (MAB),” the research house said.

Theresearchhousethusexpected MAHB’s2017passengergrowthtobe dec ent in 2017 at 7.5

per cent, compared to six per cent in 2016.

As for AirAsia, Kenanga Research remained positive on the group on the back of capacity expansion in FY17 and targeted increase in aircraft utilisation rate from 12.5 hours to 14 hours.

Despite the increased capacities from other airlines, the research arm believed AirAsia will still be able to maintain healthy load factors of more than 85 per cent on the back of strong travel demand and extensive route options with opt“optimal frequencies.

“While we note there could be som some pressure on yields, it would be ppartially offset through higher anc ancillary charges,” the research arm said.

“Coupled with their planned divestment of their leasing arm AAC which will lighten AirAsia’s balance sheet in addition to a special dividend, we believe that AirAsia will continue to chart a sturdy performance supported by decent jet fuel cost which is 75 per cent hedged at US$ 59 per barrel.” Yields to see pressure from larger industry capacity

According to AllianceDBS Research, yields (fares/revenue passenger kilometres (RPK)) will see pressure from larger industry capacity, given the recovered growth ambitions of Malaysia Airlines (MAB), while AirAsia and Malindo are ramping up capacity after a slower 2016.

The research house noted that airline airlines may leverage on routes on which they have a larger market share, or seek out unique routes to mainmaintain average yields.

“2012017 jet fuel spot prices of aroun around US$ 60 to US$ 65 per bbl are higher y-o-y than the 2016

ave average of US$ 52.9 per bbl, in line with crude oil prices,” AllianceDBS Research said.

“Airlines’ unit costs will be pushed slightly upwards as fuel makes up 20 to 40 per cent of operating costs, though this is partially mitigated by hedges where most have covered more than half of requirements.”

It added that the persistence of a strong US dollar is also a cost risk as the majority of costs are US dollar-denominated.

Overall, the research house expected thinner margins for airlines.

AllianceDBS Research also noted that stronger Malaysian traffic will benefit MAHB though the group faces earnings risks from its Turkish operations.

The research house said that AirAsia requires an accretive divestment to re- rate amid a general contraction in margins while AirAsia X Bhd is more exposed to fuel and currency factors and faces the risk of losses in the event of severe yield deterioration.