- Singapore Airlines (NOT RATED) released its October 2014 operating statistics yesterday and positively, Silk Air is seeing gradual recovery in pax traffic and load factor (see Exhibit 3).

- Silk Air operates Singapore Airlines’ regional routes (mainly Southeast Asia, which competes directly with Airasia, albeit as a full service carrier).

- The sustained improvement in Silk Air’s load factor (and traffic as well as capacity at the same time) in October 2014 is a positive indication and provides a good backdrop for yield improvement for airlines with a focus on Southeast Asia (such as Airasia), we think.

- The trends at SIA’s short haul unit is in contrast to SIA’s long-haul arm, which is still showing deteriorating numbers.

- Airasia will announce 3Q14 results tomorrow. Although cost will be inflated by an artificially oversized fleet (of 81 aircraft vs. 66 aircraft in 3Q13), this is temporary as 11 of these aircraft will be take out by end of the year – part of them for sale and about four for Airasia India. Once the associates take delivery of these aircraft, they will start paying lease to Airasia and this will offset the inflated depreciation and interest cost.

- While Airasia’s 3Q14 traffic and load factor growth was mediocre (see report dated 11 Nov 2014), spot jet fuel and USD rates were much better YoY (see Exhibit 1). This should also help offset part of the inflated depreciation and interest cost base from additional aircraft in 3Q14.

- Regardless, 2Q14 or 3Q14 should mark the bottom for Airasia’s earnings and 4Q14/1Q15 should show a sharp recovery due to cheaper fuel and yield improvement.

- Maintain BUY at unchanged FV of RM3.10/share.

Source: AmeSecurities