PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 5 Jun 2020, 9:37 AM


Airlines - Temporary Hibernation of Aircraft

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AirAsia Group (AAGB) and AirAsia X (AAX) yesterday announce to temporarily suspend its flights in 2QFY20, in light of the Covid-19 pandemic that has led to unforeseen extensive and increasing border restrictions by various countries. Nevertheless, we understand that its non-airline businesses remain operational despite the Movement Control Order (MCO) i.e. Santan, Teleport, Ourshop and BigPay. As a result, we further reduce our average seat per kilometer (ASK) forecast for FY20 by an average of 11% and 23% for AAGB and AAX respectively. Correspondingly, we cut our target price on AAGB to RM0.78 (previously RM1.21) and AAX to RM0.03 (previously RM0.06), based on 1x book value. As such, we maintain our Neutral call on AAGB, and Trading Sell call on AAX. We maintain our Underweight call on the sector as near term outlook remains challenging i.e. uncertain when the travelling restrictions will be uplifted.

  • Temporary flight suspension in 2Q20. For AAGB, its Malaysian operation (MAA) will suspend all its international and domestic flights from 28 March 2020 to 21 April 2020. Other airlines within AAGB have similarly reduced the frequency of their flights; 1) Philippines (PAA) - all international and domestic flights from 20 March 2020 to 14 April 2020 during the community quarantine period in Luzon, as well as in other parts of the country, 2) Indonesia (IAA) - significantly reduced international flights frequency; domestic operations continue at reduced frequency, 3) Thailand (TAA) - all international flights from 22 March 2020 to 25 April 2020; domestic operations continue at reduced frequency, 4) India (AAI) - all flights from 25 March 2020 for 21 days adhering to the government suspension of all domestic flights. To note, it currently only flies domestic routes. Meanwhile, AAX will temporarily hibernate most of its aircraft at its hub in Kuala Lumpur from 28 March 2020 to 31 May 2020.
  • Impact to earnings. We cut our ASK forecast for AAGB and AAX by an average of 11% and 23% respectively, resulting in earnings adjustments of more than 100% for both airlines. We understand that for AAGB, about 70% of its cost are variable. It expects to maintain its earlier guidance of Group-wide load factor of 77% and 76% for 1Q20 and 2Q20 respectively. We caution for further downside risks should this situation prolong. Our target price for AAGB is reduced to RM0.78, based on 1.0x P/BV (previously RM1.21), while AAX is now reduced to RM0.03 (previously RM0.06). The Group will continue to evaluate the situation closely and prepared to reinstate the services as soon as the situation improves, subject to the necessary regulatory approvals.

Source: PublicInvest Research - 27 Mar 2020

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