Licence revocation unlikely for Indonesia AirAsia, says analyst

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KUALA LUMPUR (Jan 6): AirAsia Bhd continued to freefall in morning trades on Tuesday, on possible kneejerk reaction to the likelihood of regulatory action against Indonesia AsiaAsia (IAA) which is being investigated for possible breach in licence terms, following the crash of flight QZ8501.

AirAsia’s share price fell as much as 9 sen to RM2.53, with some 11 million shares done as of 10.30am.

However, AmResearch’s aviation analyst Hafriz Hezry said that as final investigation outcome was still pending, a check with the AirAsia management suggested there was unlikely to be a licence revocation as IAA was operating within its allocated rights for the Surabaya-Singapore route.

In a note today, Hafriz said that following the suspension of the Surabaya-Singapore route, majority of passengers were opting for re-routing via KL, which should have minimal impact as AirAsia operates high frequency flights for both Surabaya-Kuala Lumpur and Kuala Lumpur-Singapore routes.

The research house maintains its “buy” call on AirAsia with an unchanged fair value of RM3.10.

Hafriz opined that given the steep share price correction, Airasia now trades at 10 times financial year 2015 (FY15) forecast earnings.

“This isolated incident aside, underlying industry fundamentals are improving (better capacity management, cheaper fuel cost). Airasia is a key proxy to this recovery,” he added.

He said Airasia indicated that there had been “minimal” decline on daily sales (on year-on-year basis) while groupwide, daily sales are actually improving.

“There is always the possibility of negative yield impact on Airasia’s regional operations as a result of the incident – every 1% change in our yield assumption impacts financial year 2015 (FY15) forecast earnings by 8.6%,” Hafriz said.

Nonetheless, he believed that the improved cost dynamics now creates more room for Airasia to manage pricing pressure. Every 1% fall in yield can be offset by a 3.6% fall in fuel price. Since its last result (3Q14), fuel price has fallen by 35% and more as crude oil continues plumbing new lows.

Hafriz also pointed out that both AirAsia and Malaysian Airline System Bhd (MAS) which suffer two disasters in 2014 did not experience much yield impact.

“While it seems to be defying the odds, this has to be taken in context with the exceptionally stiff price competition among Malaysian carriers since the first quarter 2013 (1Q13) whereby yields are already at depressed levels, comparable to the 2009 financial crisis, as well as the gradual correction in MAS’ strategy of aggressive capacity deployment,” he said.

MAS yield trends (revenue per passenger mile) continued to improve post 1H14 disasters; it had improved from negative 7.0 in 1Q14 to negative 1.8% in 2Q14.