- We maintain our BUY call on Airasia with an unchanged fair value of RM3.10/share. Airasia’s share price took a beating yesterday (after a very gradual recovery since the QZ8501 incident). We suspect this is due to new concerns on regulatory action against Indonesia Airasia (IAA), particularly, licence revocation and route suspension arising from allegations that IAA was operating outside of its approved slots.

- Final investigation outcome is still pending, but our check with management suggests there is unlikely to be a licence revocation. Airasia was operating within its allocated rights for the Surabaya-Singapore route. Prior to the recently imposed suspension on the route, IAA operated 4x weekly flights but used to operate 7x weekly up till June 2014.

- More importantly, actual flight times operated are similar to what has been approved by the Indonesian authorities, which is the regulator’s primary concern. For the meantime, the Surabaya-Singapore route has been suspended.

Passengers are either re-routed via KL or can opt for a credit shell; the majority is opting for the former, which should have minimal impact as Airasia operates high frequency flights for both SUB-KUL and KUL-SIN (7days/week, multiple flights daily) vs. the 4x weekly SUBSIN route).

- Airasia indicated that there has been “minimal” decline on daily sales (on YoY basis) while groupwide, daily sales are actually improving. There is always the possibility of negative yield impact on Airasia’s regional operations as a result of the incident – every 1% change in our yield assumption impacts FY15F earnings by 8.6%.

- Nonetheless, the improved cost dynamics now creates more room for Airasia to manage pricing pressure. Every 1% fall in yield can be offset by a 3.6% fall in fuel price. Since its last result (3Q14), fuel price has fallen by 35% to the current USD71/barrel.

- Surprisingly, MAS, which suffered two disasters earlier in 2014 did not experience much yield impact (See Exhibit 2). While it seems to be defying the odds, this has to be taken in context with the exceptionally stiff price competition among Malaysian carriers since 1Q13 whereby yields are already at depressed levels, comparable to the 2009 financial crisis (See Exhibit 4) as well as the gradual correction in MAS’ strategy of aggressive capacity deployment.

- Given the steep share price correction, Airasia now trades at 10x FY15F earnings. This isolated incident asides, underlying industry fundamentals are improving (better capacity management, cheaper fuel cost). Airasia is a key proxy to this recovery.

Source: AmeSecurities