Analysts: AirAsia well geared for geopolitical shocks
AirAsia Group Bhd (AirAsia Group) is well geared to manage itself in mind of any uncertainties surrounding Brent crude oil prices caused by geopolitical shocks – such as that by the US airstrike near Baghdad airport last week.
MIDF Amanah Investment Bank Bhd (MIDF Research) opined that there might be an increase in the amount of jet fuel consumed this year by AirAsia Group as the firm did not discount the possibility that it will be adding more capacity and routes in conjunction with the Visit Malaysia Year 2020.
This comes as geopolitical turbulence dominated headlines late last week following a US airstrike near Baghdad airport. The airstrike rattled markets including commodities, pushing the Brent crude oil price by nearly US$3 per barrel last Friday to settle at US$68 per barrel – a level not seen since September 2019.
An escalation of tensions in the Middle East could disrupt the flow of crude and push oil prices further as both Iraq and Iran pumped more than 6.7 million barrels per day in December 2019, representing more than onefifth of total OPEC output.
“Assuming if the geopolitical tensions between the Middle East and the US prolong, pushing the Brent crude oil price up to around US$75 to US$D80 per barrel, we estimate that the unhedged portion of fuel costs could decrease by one per cent year on year (y-o-y) or RM3 million in FY20,” it said in a note yesterday.
“Nevertheless, AirAsia Group’s prudent hedging strategy means it could weather the expected rise in oil prices. In FY20, AirAsia Group is hedging 72.8 per cent of Brent crude oil price at US$60.22 per barrel.
“Meanwhile, we expect AirAsia Group’s total fuel cost to be 13.8 per cent y-o-y higher in FY20, which does not vary much from the percentage increase in expected jet fuel consumed of 9.5 per cent y-o-y during the same year.”
Under a situation where none of AirAsia Group’s fuel requirements were hedged, MIDF Research estimated that the total fuel cost could increase as much as 25.7 per cent y-o-y (assuming that Brent crude price were to hit US$75pb).
In contrast, a 100 per cent hedge on its oil requirements would result in only a 9.4 per cent y-o-y rise in AirAsia Group’s total fuel cost in FY20.
“Nevertheless, it would be important to have a buffer in a situation where Brent crude oil price could go below the hedged amount. Hence, we reiterate that AirAsia Group’s current hedging strategy serves as a tool to prevent fuel costs from inching higher,” it added.
MIDF Research continued to like AirAsia as the company continues enhance its cost structure, along with its efforts of rationalising revenue and cost via digitalisation efforts.
“Our positive outlook on the AirAsia Group also hinges on its more prudent hedging policy, stable operations with added capacity and continuous improvement to drive its nonairline ancillary business,” it added.
“Meanwhile, the adoption MFRS 16 will be a headwind in the next coming years as the majority of AirAsia Group’s fleet are leased.
“Nonetheless, AirAsia Group is expected to gain from lower amount of interest beyond the fifth year of the lease term. We opine that passenger growth in Malaysia to remain intact despite the departure levy which took effect in September 2019 as the levies gazetted are lower than regional peers such as Thailand and Hong Kong.
As for low cost carriers such as AirAsia Group, the percentage of departure levy from the total ticket price is still immaterial at around 1.6 per cent on average for normal fares. All in, we maintain our buy call with an unchanged target price of RM2.04 per share.”