Highlights

AirAsia X (AAX) is the leading long haul low-cost carrier in Asia Pacific region (key growth market), with the lowest unit operating cost (CASK) of US¢3.74 and US¢1.90 (excluding fuel) in 2012.

Closely linked to AirAsia, it has the advantage of leveraging on AirAsia’s strong brand name and customer base as well as the extensive short-haul network that provide vital traffic feed to and from KLIA hub.

AAX seeks to exploit significantly under-served segment of price-sensitive air travellers on long-haul routes.

It currently operates 9 A330-300s and 2 A340-300s, flying to 12 destinations across Asia Pacific and Middle East (See Figure #2). It has ordered another 24 A330-300s and 10 A350-900s to increase flight frequency and expand network.

AAX will focus on markets with strong prospects of profitability and prioritize capacity towards launching new routes and expanding frequency into Australia, China, Taiwan, Japan and Korea.

Strong ancillary income at RM141/pax (FY12), and expected to grow further as AAX introduce more and better innovative products to customers.

Comments

The commencement of KLIA2 by end-2013 is expected to provide the necessary facilities to support the expansion strategy of AAX. We do not expect the delay in KLIA2 to affect consumer demand for long-haul air travel.

Similar to AirAsia, AAX also enjoyed Investment Allowance of 60% on capital expenditure incurred within 5 years (Sep 2009 - Aug 2014). We believe AAX will succeed in extending the tax exemption benefit following the expiry in 2014.

Creating new hub outside Kuala Lumpur (i.e. Thailand and Indonesia), which will increase AAX’s reach and provide additional cost savings from economies of scale, while penetrating new markets.

However, we expect yields to trend down as regional airlines (especially FSCs) continued to restructure their routes, and focus on Asia Pacific markets. Even some other LCCs (i.e. Scoot, Cebu and Lion Air) have set up divisions targeting medium-long haul segment.

The current high jet fuel price environment at US$115/bbl remained a major threat to the LCCs especially long hauls, due to the high percentage of ~50% of overall operation costs.

Risks

• High jet fuel price.
• World crisis i.e. war, terrorism, epidemic outbreak etc.
• Slowdown in world (especially Asia Pacific) economy.
• Emergence of other long-haul LCCs i.e. Scoot, Jetstar etc.

Forecast

We expect AAX to turn profit at RM139m in FY13, RM200m in FY14 and RM250m in FY15.

Valuation

We advise clients not to subscribe for the AAX IPO for anything above RM1.20, which is at 14.3x of FY14 P/E, in line with the highest valuation of Easyjet, but relatively expensive as compared to the average of 10.5x other airlines and 11.7x LCCs.

Source: Hong Leong Investment Bank Research - 14 Jun 2013