None will be spared if a full blown war erupts

As geopolitical tension rises in the Middle East, we postulate their potential impact on the Malaysian aviation sector. For MAHB, we estimate that up to 26% of earnings and TP are at risk should passenger traffic to and from the Middle East cease. For CAPITALA/AAX, we estimate that every USD1/bbl hike in jet fuel prices (and on a full-year basis) will negatively impact our earnings estimates by c.MYR50m/c.MYR14m and TP by 3sen/24sen. Our earnings estimates, calls and TPs are under review.

MAHB – up to 26% of earnings and TP at risk

As an airport operator, it goes without saying that MAHB has little to fear from higher jet fuel prices. That said, we fear that pax traffic to and from the Middle East will impact its Malaysian and Turkish operations. MAHB has not released its 2023 airport statistics which details pax traffic from that region. Examining its 2019 (pre-pandemic) airport statistics, pax traffic to and from the Middle East accounted for 7% of international pax traffic at KLIA and 28% of international pax traffic at Istanbul Sabiha Gokcen (Fig. 1). Under a worst case scenario where all pax traffic from the Middle East ceases, we estimate that our earnings will be cut by 26% on a full year basis and our DCF-TP will be cut to MYR6.61 (-26%).

CAPITALA – moderate sensitivity to jet fuel price hikes

To the best of our knowledge, none of CAPITALA’s 4 airlines fly to Middle East destinations. Thus, our main concern for CAPITALA is higher jet fuel prices. At press time, spot jet fuel prices have not deviated far from our forecast of USD105/bbl at USD104/bbl (Fig. 2). Yet, we estimate that every USD1/bbl increase in jet fuel price will widen/trim our core net loss/profit estimate by c.MYR50m and trim our SOP-TP by 3sen. That said, we gather that CAPITALA can pass on higher fuel cost to passengers given that MYAirline (Not Listed) has suspended operations in Oct 2023. Thus far, Malaysia AirAsia (MAA, which contributes >80% to group earnings) has been able to charge higher fares without overly impacting load factor (Fig. 3).

MYAirline (Not Listed) has suspended operations in Oct 2023. Thus far,

Malaysia AirAsia (MAA, which contributes >80% to group earnings) has been able to charge higher fares without overly impacting load factor (Fig. 3).

AAX - high sensitivity to jet fuel price hikes

AAX does fly to Jeddah, Saudi Arabia but we understand that this destination accounts for only 5-7% of its total available seat kilometres (ASK). Like CAPITALA, our main concern for AAX is higher jet fuel prices. We estimate that every USD1/bbl increase in jet fuel price will lower our core net profit estimates by c.MYR14m and lower our SOP-TP by 24sen. While we gather that AAX also has the ability to pass on higher fuel cost to passengers, we gather that it will not be as successful as MAA as demand for its medium to long haul flights (as exemplified by load factor) is not as high as MAA’s short haul flights (Fig. 4). Historically, MAA’s load factor exceeds AAX’s by an average of c.5ppts at 85%.

Source: Maybank Research - 28 Apr 2024