The Malaysian-owned budget airline, AirAsia, announced their 3rd quarter 2016 (3Q16) earnings on Thursday, beating analyst’s consensus.  The surprise was from their Indonesia unit, which turned profitable on the back of intense cost cuts. 

Event

• AirAsia's 3Q16 core profit of RM389mn (+195% YoY) is 6% ahead of MQ Research’s estimates. 9M16 core profit of RM1.2bn represents 76% and 86% of MQ Research’s and consensus FY16E estimates. MQ Research considers the results are in-line with their estimates but ahead of consensus.

‌Impact

• Revenue of RM1.7bn (+11% YoY) was 2% ahead of MQ Research’s estimates. MQ Research saw some elements of discounting (pax yield -3% in the quarter) to achieve a 7ppt higher load factor of 89%.

• Expenses (+3% YoY) were in line with MQ Research’s estimates. Lower fuel cost offset increase in non-fuel expenses. Unit cost marginally increased by 2%, but non-fuel unit cost increased 18% YoY. Non-fuel cost has been growing at a double-digit rate in the past four quarters, given Ringgit weakness.

• Indonesia AirAsia turned profitable, on the back of intense cost cuts. Revenue -26%, expenses -44%.
• Philippines AirAsia remains loss-making. This isn't a surprise given seasonality.

• Outlook: Management remains positive on future prospects given strong demand and a better fare environment. The company forecasts a high load factor of 89% for its Malaysian business in 4Q16. Company has hedged ~70% of 2017 jet fuel requirements at US$60/bbl.

Action and recommendation

• Outperform maintained.

Source: Macquarie Research - 28 Nov 2016