- We maintain BUY on AirAsia Bhd (AA) with an unchanged fair value of RM4.20/share, ahead of 1Q12 results announcement on 23 May. Our fair value continues to peg AA at 12x FY12F earnings. From an operating perspective, AA defied industry trends in 1Q12, registering a 12% YoY growth in raw passenger traffic to 4.8mil (Malaysian operations). Traffic in terms of RPK (revenue-passengerkilometre) grew by 9% given shorter average stage length. Loads were maintained at 80.3% (1Q12) versus 80.1% (1Q11). 

- Growth was driven by the introduction of new routes, e.g. KL-Danang, KL-Semarang, KL-Surat Thani and KLPalembang. AA's 1Q12 operating statistics underpin  our view that demand for low cost flights remains resilient compared to FSCs. MAS as a comparison has shown a 10% RPK contraction and 5% load factor deterioration in 2M12. 

- We foresee yield improvement in FY12F driven primarily by the exit of Firefly's jet operations from November 2011. As a yardstick, AA's yields grew 8% YoY in 4Q11, reversing a 2%-21% YoY yield contraction in the past 2 years. Assuming a seasonal contraction of 8% in 1Q vs. 4Q (historical 3-year trend), we estimate 1Q12 yields at 15.5sen/RPK, implying an 11% YoY growth.

- Despite a 10% higher fuel price YoY, we estimate that 1Q12 core earnings may register flattish YoY growth at RM160milRM170mil. Buffers to the higher fuel prices are:- (1) An 11% YoY yield growth, partly inflated by the absence of fuel surcharge in 1Q11; (2) 9% YoY pax traffic expansion. At our estimated net profit, AA's 1Q12 will account for 21%-22% of our FY12F earnings of RM767mil and 17%-18% of consensus FY12F estimates of RM920mil (consensus numbers may have included TAA and IAA contribution).

- Fuel price is a key risk to our projections. In 1Q12, jet fuel averaged US$132/barrel vs. our full-year forecast of US$125/barrel (ex-hedging). However, jet fuel price peaked in March and has now eased to US$125/barrel levels (See Chart 1). Any further easing of jet fuel price underpins AA's earnings expansion in subsequent quarters. Every US$1/barrel drop in jet fuel improves earnings by 1.4%.

- Thai AirAsia (TAA) performed well in 1Q12 ' RPK +14% YoY, pax traffic +17% and load factor +1.3pp YoY to 85.6%. Indonesia AirAsia (IAA), however, saw loads contract 2ppts to 77% given IAA's initiative to strengthen its Surabaya hub by improving connectivity, resulting in a +19% YoY capacity.

- From a valuation standpoint, AA is cheap at an implied 10x FY12F earnings (ex-associate value of RM0.96/share). LCC peer, RyanAir in comparison trades at 13x forward PE.

Source: AmeSecurities