- AA released its 2Q14 operating statistics yesterday. Traffic and capacity growth for the quarter was flattish and 1H14 was short of our estimate making up just 46% of our FY14 RPK and ASK forecasts. AA’s 1H and 2H performance is usually quite even - 1H statistics accounted for 49% of actual full year performance in FY11-13.

- This is a scope for downgrade, but we prefer to hold back for actual results release later this month and management’s guidance that may transpire. Next key variable to look at would be yields, to determine if AA’s passive capacity expansion has had any positive impact.

- However, MAS was still aggressive in 2Q14, registering total ASK growth of 9% YoY (Domestic: +4%, International: +9%). RPK growth was flat, which could mean more price aggression to drive loads (which is -ve for AA), or a pullback in capacity plans (+ve for AA). MAS guides for FY14F ASK growth of 10%, which although is less than FY13’s 17%, is still elevated relative to FY08-FY12 average of -2.2%.

- Malaysia AirAsia (MAA) will only have four net aircraft addition this year vs. double the figure in FY12-13, which also means there is constraint for AA to compete for pax share. Competitive pressure is now shifting to regional routes. MAS previously guided that FY14F capacity growth will focus on international routes, mainly within the region vs. FY13 expansion that saw a fair amount on domestic routes (+20% vs. international: +17%).

- Furthermore, flattish 2Q14 raw passenger traffic (+1% YoY) growth means AA needs to work harder to increase “per pax spend” to drive ancillary income. Actual capacity grew by just 1% in 2Q14, while the bulk of the 3% ASK growth was driven by increased stage length. To recap, 1Q14 saw ancillary revenue grow 4% YoY, which was in line with pax growth in the period.

- AA’s share price has underperformed, but admittedly, the strong earnings growth seen in the past has moderated significantly while new risk is inducted via new ventures in India and Japan. MAS’ restructuring plan is likely to have a bearing on AA’s yield prospects and appetite for expansion in the near-term. Maintain HOLD at unchanged FV of RM2.50/share.

Source: AmeSecurities