Results

In Line – Reported 1Q14 core earnings at RM126.6m, achieving 21.9% of HLIB’s FY14 forecast and 18.2% of consensus. We expect yields to remain depress in 2Q14, before improving in 2H14 on seasonally stronger demand.

Deviations

None.

Dividends

None.

Highlights

1Q14 average yield (including surcharges) has dropped by 11.7% yoy, but has recovered slightly by 1.4% qoq to 13.8sen/RPK. Average ancillary income improved slightly by 0.2% yoy to RM42.1/pax (excluding other income). AirAsia expects yields to improve from current level as the market absorb the overcapacity and airlines become more rational in capacity expansion, while ancillary income is on track to achieve RM50/pax from various new initiatives.

AirAsia is embarking on routes rationalization and capacity management (aircraft deliveries) to optimize profitability, given the current irrational market environment. It is negotiating with Airbus to defer more aircraft and convert CEO to NEO (more fuel efficient).

AirAsia is targeting to consolidate the whole group accounts by year end and plan to release pro-forma consolidated numbers in 2015.

Aircraft disposal plan (average 9 years old) is on track, with initial target of 6 A320s (from Malaysia). The management expects RM550m net cash proceeds from the sales, which will be used to fund new A320s for replacement fleet.

TAA was affected by the political unrest, which saw its 1Q14 net profit dropped by 66.9% yoy to THB224.7m. TAA is hopefull of a strong recovery from heightened marketing effort, focusing on North Asia routes and capitalizing on TAAX (by June).

IAA remained affected by weak Indonesia Rupiah and Indonesia general election. 1Q14 losses expanded to IDR454.3bn. IAA is restructuring its routes (cut loss making routes and focus on trunk routes) and strategizing for turnaround in 3Q14.

PAA remained loss making in 1Q14. Rebranding exercise is in place and new routes to Korea and Japan will be introduced, which will boost average fares. New hub Kalibo will be introduced by June.

Risks

World crisis (ie. war, terrorism and epidemic outbreak), prolong surge in jet fuel price and high speed train infrastructure between Singapore and Pulau Pinang.

Forecasts

None.

Rating

HOLD

Positives – 1) Beneficiary of strong air traffic into Malaysia, in line with government initiatives to boost tourism sectors; 2) Largest and lowest cost LCC in Asia with strong brand name; and 3) Strong ancillary income.

Negatives – 1) High jet fuel cost; 2) Strengthening of US$; and 3) Stiff competition from MAS and Malindo Air.

Valuation

Maintained Hold with unchanged Target Price of RM2.22 based on 20% discount to SOP.

Source: Hong Leong Investment Bank Research - 21 May 2014