Aviation stocks take nosedive

Shares in Malaysia Airline System Bhd (MAS) and AirAsia Bhd (AirAsia) fell yesterday to RM1.80 and RM2.47 respectively on concern over higher fuel prices and uncertainty in major destinations such as the Middle East and Japan.

MAS share price dropped six sen from the previous day’s closing of RM1.86, with 2.18 million shares traded, while AirAsia saw its share price shed seven sen, with 6.4 million shares done.

Other major airlines in the region also traded lower in line with a broader selldown on most of Asia’s stock markets, with Singapore Airlines (SIA) lower at S$13.10 (RM31.26) after dipping as much as 54 cents, Thai Airways was traded lower by 1.75 baht to close at 38.25 baht (RM3.85), while Garuda Indonesia was unchanged at 550 rupiah (19.2 sen).

An analyst at HwangDBS said the high oil prices could hurt air travel as airlines would be forced to pass on the cost to customers in the form of higher fuel surcharges. She expected MAS to do so but doubted that such a move could support its bottom line much.

“We believe it would not be sufficient to support its (MAS) bottom line since fuel accounts for 40% of its total operating costs,” she explained, adding that MAS’ load factor could be hurt as customers, dismayed with higher surcharges, would shift to low-cost carriers.

Even though FireFly, a unit of MAS which operates low-cost short-haul flights, may benefit from the higher costs imposed by MAS and other full service carriers, its small fleet size won’t contribute a significant gain to MAS.

HwangDBS trimmed MAS’ FY11F-12F profit by 19% to 27%, after raising jet fuel cost assumptions by 17% to 20% to US$125 (RM382.50) and US$131 per barrel for the respective years. Nevertheless, it projected MAS to turn around this year on higher revenue.

“MAS should be able to pass on some of the higher costs, and from non-fuel cost savings mainly leasing costs, as it would be owning more new aircraft this year and retiring some existing leased units,” she said.

MAS reported a lower-than-expected core net loss of RM28.5 million for FY10 on the back of an improvement in overall margins in 2H, as overall costs per unit of available seat kilometres came in relatively lower, according to an OSK Research note.

However, the numbers were disappointing q-o-q as earnings remained volatile on the back of higher fuel costs and uncertainty in the Middle East and North Africa (MENA) regions. The recent massive earthquake and tsunami which struck Japan’s north-eastern coast added to the uncertainty.

The higher fuel surcharges imposed by full service carriers could shift the demand to cheaper, short-haul flights offered by low-cost carriers such as AirAsia, whose load factor could be more sustainable, said the HwangDBS analyst.

However, AirAsia’s earnings could still be jeopardised by higher fuel costs due to lower fuel recovery rate per barrel.

“While passenger volume may increase this year, earnings could be hit by higher jet fuel costs as higher yields and a weakening US dollar may not be sufficient to offset the impact,” she noted.

Fuel accounts for 50% to 60% of AirAsia’s total costs.

HwangDBS also slashed AirAsia’s forecast earnings for FY11F-12F by a staggering 46% to 49% respectively, after raising jet fuel cost assumptions by 17% to 20% to US$125 and US$131 per barrel for the respective years.

“We expect AirAsia FY11F earnings to fall 39% y-o-y due to circa 40% rise in jet fuel prices and only 6% increase in yield of ticket sales, while load factor will remain flat at 75%,” stated the research firm.

AirAsia has hedged 21% of its fuel requirement up to 2Q11, but this may be insufficient to support earnings, the report stated.

AirAsia is also poised for lower ancillary income per pax to RM40 due to lower spending expected by customers as fares rise. This would affect AirAsia’s revenue as it derives 90% of its ancillary revenue from flight-related services.

On Monday, Deutsche Bank AG cut AirAsia’s profit forecasts for 2011 and 2012, by 18% and 15% respectively, as fuel price continued to rise.

HwangDBS downgraded both MAS and AirAsia to fully valued. It cuts MAS’ target price to RM1.50 from RM1.85 based on 15 times FY11F earnings per share (EPS), while reducing AirAsia’s target price to RM2.00 from RM3.75 based on 11 times FY11F EPS.

“We are concerned about potential downside risk to MAS’ yields and load factor given the recent increase in oil prices,” the research firm said, adding that it is crucial for MAS to generate higher earnings consistently to serve its future capital and debt requirements, as its net gearing is expected to rise over the next two years as it would own more new aircraft.

On AirAsia, the analyst expected its stock to continue to slide in the near term, after having fallen for about 17% from its peak in January.

However, as the stock is among the most liquid ones on Bursa Malaysia, with a foreign shareholding level of 51% as at Jan 11, its movement would be largely be determined by foreign investors’ perception of the performance of the airline.

Other airlines in the region are also facing the same problems of rising jet fuel and uncertainty in major market destinations such as MENA, as well as the earthquake and tsunami which hit Japan.

SIA, for example is slated for a lower load factor of 15% to 18% of total capacity, as it has a high flight capacity exposure to Japanese cities, such as Nagoya, Osaka, Fukuoka and Tokyo-Narita, said analysts. - by Kamarul Azhar of theedgemalaysia.com