• AirAsia Japan (AAJ), a 33%-owned associate of AirAsia Group (AirAsia), has announced that it is ceasing operations due to highly challenging operating conditions, effective 5 October 2020.

• We are mildly positive on the decision as we believe this can reduce the cash burn of AAJ, as the airline operator is striving to survive amidst the pandemic. However, we believe the impact on AirAsia’s earnings is negligible.

• To recall, AirAsia has posted a core net loss of RM1.6bil in 1HFY20, on the back of a revenue passenger kilometres (RPK) contraction of 64% as air travel demand slumps during the worldwide lockdown to contain the pandemic. Meanwhile, AAJ has recorded a net loss of ¥2,110.9mil (approximately RM83mil) in 1HFY20. Based on our estimation, AAJ contributes only less than 2% of AirAsia’s core net losses.

• As at the end of 2019, AAJ’s RPK is less than 1% of the group’s total RPK, with total net liabilities of RM158mil, which include 3 aircraft leased from Asia Aviation Capital (AAC). The airline is awaiting further clarification from lawyers regarding matters on winding up its assets.

• We are maintaining our forecasts, fair value and SELL recommendation for AirAsia based on 6.5x FY22F EPS, at a 50% discount to its global peers (Ryanair and Southwest Airlines) to reflect AirAsia’s relatively smaller size.

• We expect the recovery in the air travel industry to be bumpy given the uncertainties surrounding the reopening of borders and urgent need for airlines to recapitalise their balance sheets on the massive losses they have suffered amidst a collapse in air travel since the pandemic.

• Zooming in on Asia, we believe the pandemic has thrown a spanner in the works to its strategy to aggressively grow its top line to cushion the impact of the higher cost structure following the recent sale-and-leaseback of its fleet. We are mindful of a potential steep downwards adjustment to AirAsia’s share price in the event of a highly dilutive equity-raising exercise.

Source: AmInvest Research - 6 Oct 2020