CEO Morning Brief

Local Airlines May Feel Heat From Rising Oil Prices as Middle East Tensions Simmer — Analysts

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Publish date: Wed, 17 Apr 2024, 09:03 AM
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TheEdge CEO Morning Brief

KUALA LUMPUR (April 16): Malaysian airlines will be hurt by higher fuel costs, even as escalating geopolitical tensions in the Middle East are not expected to dent ticket sales, analysts said.

Fuel costs typically account for 40% to 45% of local airlines’ operating expenses on average, said TA Securities analyst Tan Kam Meng, who covers the aviation sector. Airlines have already begun imposing fuel surcharges to combat margin compression, he noted.

“Travel to countries in the Middle East is only a fraction of total tourists, but we are watching the oil price closely, as it would dent airline’s profitability,” he said.

Shares of aviation-related stocks have declined. At the time of writing, shares in Capital A Bhd were down one sen or 1.47% to 67 sen, valuing the group at RM2.85 billion. AirAsia X Bhd, meanwhile, were trading five sen or 3.85% lower at RM1.25, giving it a market capitalisation of RM558.84 million.

Brent, the global benchmark for crude oil, has climbed above US$90 per barrel, as Iran launched retaliatory strikes on Israel over the weekend. The Iranian strikes were in response to an airstrike on the Iranian consulate in Damascus, Syria on April 1, attributed to Israel, which killed several military officers and some civilians.

Airlines may still see some margin compression on the back of the higher fuel costs, after passing on most of the costs to travellers, said Apex Securities head of research Kenneth Leong.

Fuel costs made up 43.7% of Capital A’s operating expenses and 69.8% for AirAsia X’s (AAX) in the financial year ended Dec 31, 2023 (FY2023). Capital A’s aviation segment logged an average fuel price of US$125 per barrel for 4QFY2023, while AAX noted an average of US$131 per barrel.

While travellers may avoid the Middle East, other regions such as Southeast Asia may benefit from the change in destinations, said Areca Capital chief executive officer Danny Wong, who manages assets worth RM4.18 billion.

“Some would suggest to avoid travelling, but some may consider other regions like Asean as an alternative destination,” he said.

Brent potentially has room to rise

In the meantime, market watchers are worried that oil prices may potentially breach the US$100 per barrel level or even further to US$140 under a worst-case scenario.

However, an escalation in the conflict that sees Israel forcefully responding to Iran’s counter-attack could result in oil prices jumping to more than US$100 per barrel, Moody’s Analytics warned.

“We believe that the immediate risk of a direct confrontation has been contained — at least for now,” said Benjamin Hoff, global head of commodities research at Societe Generale. “At the same time, the tail of the event risk distribution has just become heavier, with pathways to escalation involving the US increasing.”

Since Iran’s attack, the risk of direct military action unfolding between the US and Iran has risen to a 15% probability from 5%, and Brent prices will spike well above US$140 under such a scenario, he said.

Several global leaders and representatives including the European Union's foreign affairs chief Josep Borrell, French President Emmanuel Macron, German Chancellor Olaf Scholz and British Foreign Secretary David Cameron have called for restraint from further escalation, according to Reuters.

Source: TheEdge - 17 Apr 2024

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