- We maintain our HOLD call on AirAsia (AA) at an unchanged fair value of RM2.50/share following a recent post-results discussion with management.

- AA’s aircraft sale plan (or fleet renewal plan) will kick-start a progressive aircraft debt reduction cycle. From a 15% average equity in the current fleet, some of the new NEOs will entail 40% equity coming from old A320 sales proceeds (net of USD20mil per aircraft). The impact however, will be very gradual. The first 4 NEOs will be delivered in FY16 but the majority will be delivered in FY17 and beyond at a rate of 24-34 per annum vs. sales of 6-9 old A320 per annum.

- Unit cost (CASK) is targeted to be reduced by 4% to 5% in FY14. Measures include reduction in fuel uptake, merging operational functions with AAX, and renegotiation of engineering contracts. However, the savings are in MYR terms and these might be negated by the strength of the USD; YTD average at MYR3.3:USD vs. FY13F average of 3.15. Our model factors in RM3.20:USD. Every 10sen weakening in the MYR:USD impacts bottomline by 7%. Management has no plans to hedge operational forex requirements currently.

- Two key revenue strategies:- (1) Ancillary income; and (2) Project Emirates. Ancillary revenue to increase RM5-7/pax to RM47 via:- (i) allowing pre-bookings up to 60 minutes before flight; (ii) incentives for travel agents; and (iii) bundling of other transportation modes. New ancillary initiatives to add further RM3/pax; i.e. on-board Wi-Fi and Duty Free products. Our projections model in RM47-RM49/pax of ancillary income over FY14-16F.

- Project Emirates to increase loads by 2ppt to 82%. Key midterm strategy is to leverage on KLIA2 and better connectivity from Fly-Thru to grow corporate base from 2% currently.

- The delay in KLIA2 completion does not result in incremental cost to AA, according to management. However, we think it is a constraint on AA’s capacity expansion. AA is slowing capacity growth, with deferred deliveries of seven A320s in FY14 and 12 in FY15; these will be converted into NEOs. FY14F ASK growth is expected at 4% vs. 9%-14% in the past 2 years.

- Listing plans for Indonesia AirAsia will likely be shelved as management prefers instead to consolidate all its units under one holding company. However, this may take time as it requires approval and lobbying of individual governments that AA operates in. The idea in the past was for the mature associates to recapitalise and undertake their own on balance sheet aircraft, and create a ring fence around AA from further sub-funding.

- While AA fares well relative to local peers, earnings momentum has slowed significantly given competitive pressure, constraints to expand and a weaker MYR which might offset a big part of the group’s unit cost reduction drive.

Source: AmeSecurities