AirAsia Group (AirAsia) has decided to temporarily suspend all international and domestic flights operated by AirAsia Malaysia (from 28th March to 21st April 2020) and the other airlines within the AirAsia Group will similarly reduce their flight frequencies. The drastic move highlights the dire operating environment faced by the airline industry. We slashed our earnings forecasts, expecting AirAsia to report steeper losses in excess of RM1.1bn in 2020E. In tandem, we lowered our 12-month price target to RM0.49 based on an unchanged 0.5x 2020E price-to-book. Maintain SELL.

AirAsia to Drastically Reduce Flight Frequencies

In light of the Covid-19 pandemic that has led to unforeseen extensive and increasing border restrictions by various countries, AirAsia has decided to temporarily suspend all its international and domestic flights operated by AirAsia Malaysia from 28th March 2020 to 21st April 2020. Meanwhile, Philippines AirAsia, Thai AirAsia, PT Indonesia AirAsia and AirAsia India have similarly reduced their flight frequencies.

Management and Senior Employees Have Volunteered for Salary Cut

To further manage and contain costs, the management and senior employees of AirAsia have volunteered for a salary cut, ranging from 100% at the very top to 15%.

We Expect AirAsia to Negotiate With Suppliers to Cut Cost

We are surprised by AirAsia’s decision to drastically suspend operations. The move highlights the dire operating environment faced by the airlines industry. To further contain its costs, we expect AirAsia to negotiate with its suppliers to reduce their operating costs (ie. operating leases, airport charges, fuel, operation and maintenance costs).

Expecting Larger Losses, Cutting PT to RM0.49, Maintain SELL

We now expect AirAsia to report larger losses in 2020-21E after incorporating: (i) lower revenue in view of the temporary suspension of flights and dire industry outlook; and (ii) lower operating costs arising from savings in staff cost, operating leases, fuel and O&M expenses. In tandem, we cut our 12-month price target to 0.49 based on an unchanged 0.5x 2020E book value. Maintain SELL. Key upside risk: faster and stronger than expected recovery in the aviation industry.

Source: Affin Hwang Research - 27 Mar 2020