Investment Highlights

• We maintain our HOLD recommendation on AirAsia Group (AirAsia) with an unchanged fair value of RM2.97/share pegged to an 8x post-special dividend FY20F PE plus 90 sen special dividend (that will be distributed in Aug 2019).

• We attended AirAsia’s Operations Day yesterday, visiting the back-end operations of the low-cost airline in RedQ, Sepang that showcases its effort in ensuring efficiencies and managing cost in the airline’s day-to-day operations.

• Key highlights of our visit are as follows:

1. Aircraft ground handling: On average, AirAsia’s aircraft turnaround time is 25 minutes in the airport, allowing it to optimize the aircraft utilization per day, which translates into higher frequencies, thus bringing in higher revenues.

2. Ground Team Red (GTR) control centre: This is the fully digitalized airport control centre which was launched less than a year ago. It tracks aircraft handling by converging real-time information on passenger boarding, baggage reconciliation and ramp-loading activities through a digital dashboard, enabling the operation team to maximize efficiencies and achieve the 25-minute aircraft turnaround time. The digital solutions provide an organized view of all baggage and cargo loads for the flight with 100% accuracy on weight and balance readings. This allows the airline to handle its empty aircraft belly space more accurately, thus lending credence to the viability of AirAsia’s plans in utilizing empty aircraft belly space to generate additional income under its logistics arm, Teleport.

3. Self-Bag Drop (SBD) facility: The SBD facility has been in use since around a year ago. It was part of the cost-saving initiative to automate airport operations. AirAsia has set a 10% headcount rationalization target along with other costs reduction measures (i.e. closure of contact centres). According to AirAsia CEO Riad Asmat, the transition to SBD was a very tough process as staff educated and assisted customers during the transition period. However, the hard work was well worth it as SBD will not only result in cost savings, it will also help improve AirAsia's passengers travelling experience by avoiding long queues and make their journey a seamless one.

• Overall, we are impressed with AirAsia’s back-end operations. We believe its constant efforts in optimizing efficiencies and reducing costs via continuous innovations are keys to its success, making AirAsia one of the largest LCCs in Asia today. AirAsia’s ventures into digitalization and automation have shown promising results. We reiterate our HOLD call on AirAsia.

• We like AirAsia as it is a good proxy to the growing low-cost air travel market in the region, underpinned by rising per capita incomes and a young demographic. Its strong market presence (in terms of the number of routes, and frequencies for each route) enables it to compete effectively against its rivals (both low-cost and full-service). However, we are mindful of its higher cost structure arising from its planes that are now largely leased vs. owned previously. This will be partially mitigated by its strategy to aggressively grow its topline, with a tailwind from the positive outlook for Malaysia’s tourist arrivals (+8.8% to 28.1mil in 2019F based on Tourism Malaysia’s forecast) over the immediate term as Tourism Malaysia rolls out promotional efforts ahead of Visit Malaysia Year 2020.

Source: AmInvest Research - 17 Jul 2019