- Airasia released its 3Q14 operating statistics yesterday. While raw passenger traffic and RPK showed moderate growth of only 1% and 2% YoY respectively, load factor is now showing positive growth, up by 0.7% (vs. 2Q14’s -0.4% YoY). On a sequential basis, all parameters were down as 3Q is a seasonally weak quarter for Airasia given the Raya festivities and fasting month that fall within the period.

- Aircraft utilisation situation had slightly worsened in 3Q14 vs. 2Q14. Aircraft utilisation (on an ASK/aircraft basis) dropped by another 1.4% QoQ and 14% YoY. This means that Airasia’s 3Q14 costs (depreciation, interest cost) are still bloated as a portion of the 81 aircraft at Malaysia Airasia were still not delivered to associates and sold yet. The situation is temporary as four aircraft are to be taken out for Airasia India and another six are slotted into the pool of aircraft for sale by end- FY14F.

- Another positive point for 3Q14 earnings is that it will likely capture the start of the downtrend in fuel cost. Average jet fuel price in the quarter of USD116/barrel is 4% QoQ and 5% YoY cheaper. This should be even more pronounced in 4Q14 and 1Q15 when Airasia runs down existing hedges. The group has hedged 40% of remaining FY14F requirements at USD118/barrel.

- Yield trends will be the key focus from here on, rather than outright traffic volumes. The contraction in yields is moderating and seems to have bottomed in 4Q13. While still in negative growth territory, we think Airasia could be close to positive yield growth given a managed fleet growth at Airasia and an already contracting capacity trends seen at MAS, particularly for its domestic sector.

- Latest traffic and load factor trends suggest that Airasia’s earnings inflexion point (on a YoY basis) looks more or less firm from 4Q14 onwards, whereas 2Q14-3Q14 earnings will likely mark bottom.

- We foresee good opportunity to collect Airasia at an attractive entry point should there be share price weakness post 3Q14 earnings. FY14 earnings weakness is well anticipated by the market (given falling yields, elevated jet fuel price, strong USD) and we think this has been largely written off judging by consistent share price weakness in the past 12-24 months. Maintain BUY at an unchanged FV of RM3.10/share.

Source: AmeSecurities