• AirAsia reported a record quarterly net loss of RM993m in 2Q20 (core net loss of RM1.1bn) due to a 98% (yoy) plunge in revenue
• In view of the lethargic recovery in passenger volume, we cut our 2020-22E earnings forecasts and lower our price target to RM0.46.
• Maintain SELL. While we expect AirAsia to continue running its business as a going concern, in anticipation of a liquidity boost from new loans and equity raising, its business environment remains very challenging.

2Q20: Record Net Loss of RM993m Due to 98% Plunge in Revenue

AirAsia reported a disappointing 2Q20 headline net loss of RM993m and core net loss of RM1.1bn. The group’s revenue plunge by 98% yoy to RM68m (from RM2.8bn in 2Q19) due to lower travel demand and a drastic cut in capacity in response to the travel restrictions imposed by various countries. The plunge in revenue was partly cushioned by lower operating expenses across all key items, including staff cost (-38%), fuel expense (-74%), maintenance and overhaul (-93%) and user charges / related fees (-82%). On a cumulative basis, AirAsia’s 6M20 core net loss of RM1.6bn was below market and our expectations due to lower-than-expected revenue. To recap, the market was expecting AirAsia to report RM1.6bn of net loss for FY20 while we were anticipating a core net loss of RM1.9bn.

Extensive cost reduction exercise; gradual pick-up in passenger volume

To weather this severe downturn, management has implemented an extensive cost reduction exercise, expecting to save up to 50% in operating costs including: 20% in maintenance cost, 30% in staff cost, 50% on fuel and user charges, and 60% on operating leases. Elsewhere, management sees encouraging month-on-month pickup in passenger volume (domestic travel). By 4Q20, AirAsia expects to recover 70- 75% of the pre-Covid domestic capacity for the Malaysia market and 75% for Thailand. However, recoveries in Indonesia, the Philippines and India are expected to be slow. Note: Malaysia AirAsia carried 35m passengers in 2019 while Thailand carried 22m; Indonesia, Philippines and India carried 8-9m each during 2019.

AirAsia Digital continues to see revenue growth, but remains loss-making

AirAsia has reported higher revenue across its non-airline businesses (airasia.com, BigPay and Teleport). While these businesses were still loss-making in 2Q20, management remained bullish on their long-term prospects and have multiple plans in place to continue growing these ventures

Source: Affin Hwang Research - 26 Aug 2020