Results

In line - Reported core loss of RM55.1m for 1Q14, as compared to HLIB’s FY14 forecasted RM51m loss, but below consensus RM75.8m profit. We expect stronger earnings for the remaining quarters, as 1Q is seasonally weakest and the market will be able to absorb the lower capacity growth for the upcoming quarters.

Deviations

None.

Dividends

None.

Highlights/ Comments

1Q14 revenue improved to RM749.5m (+40.0% yoy; +10.3% qoq) on the back of increased ASK capacity (+60.1% yoy; +3.5% qoq), as well as higher chartered flights and maiden lease income of RM8.3m from associate TAAX.

However, 1Q14 average yields (fare/RPK) has dropped to 9.45sen from 12.34sen (1Q13) and 9.86sen (4Q13), given the significant increase in capacity in 1Q14. We expect yield to remain depress in 2Q14, before improvement in 2H14 as the market absorb the additional capacity.

Average ancillary income dropped to RM137.3/pax (1Q14) from RM141.0/pax (4Q13) due to changes in passenger mix as well as higher fly through take-up rates i.e. connecting flights (one passenger only charged once for connecting flights as compared to twice if the passenger booked the flight separately).

Despite +60.1% yoy capacity increase, fuel cost has increased substantially by 76.8% yoy to RM401.0m in 1Q14 mainly due to higher number of chartered flights (no ASK recorded) and depreciated RM against US$.

AAX has been able to control its non-fuel costs and achieve economy of scale, reducing it to cost/ASK of 5.91sen in 1Q14 vs. 6.27sen in 1Q13.

AAX has also been affected by MH370 incident, especially on Beijing routes. However, management is guiding for recovery in recent weeks.

AAX incurred additional cost from higher charges in KLIA2 (migrated since 9 May), usage of aerobridge and cost to manage wider spread of operating space. AAX has introduced additional RM3/pax for each travelling passenger from KLIA2 to recoup the additional cost.

TAAX is only expected to commence operation in June with 2 A330s, focusing on Korea and Japan, while IAAX by year end with only 1 A330. Both associates are expected to incur losses for the year.

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.
• Depreciation of RM against US$.

Valuation

N.A. (Not-Rated)

Source: Hong Leong Investment Bank Research - 20 May 2014