Tuesday, January 6, 2015

Airasia ... Why The Selldown !!!

The selldown is possible due to 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.

However, observers said that as final investigation outcome was still pending and AirAsia management suggested there was unlikely to be a licence revocation as IAA was operating within its allocated rights for the Surabaya-Singapore route.

There are concerned that some RM1.3bil in receivables from Indonesia AirAsia (IAA) could be at risk. Aside from reputational risks, there is also the question of indemnity cover for IAA, if it indeed operated unauthorised flights.

An ongoing investigation will determine if IAA had violated its route permit. This will have ramifications on indemnity against claims on the aircraft and other liabilities.

Although AirAsia has a 49% stake in IAA, it will not face a direct liability as it is a separate legal entity.

While AirAsia’s equity stake in IAA has already been written down fully, the latter still has payables of about RM1.3bil to AirAsia, which could be impaired. This amounted to 47 sen per share as at September 2014 or about 24% of its estimated 2014 book value.

While AirAsia has done an admirable job in handling the crisis, there is a reputational risk for the AirAsia group. Collectively, the AirAsia group holds 58% of intra-Asean low-cost carrier (LCC) capacity and about 34% of total intra-ASEAN seat capacity.

This share could erode in the coming months from Jan 2015 if events deteriorate further. At the very least, this could lead to lower loads or lower pricing power.

Nevertheless, 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.

Airasia now (06 Jan 2015) 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.

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.

Nonetheless, the improved cost dynamics now (Jan 2015) 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 (06 Jan 2015).

Both AirAsia and 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”.

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.

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