• AirAsia remains our top aviation pick

• Fleet expansion and increased utilisation rate to drive ASK

• New routes announced in 6MCY17 have exceeded 12MFCY16

• Travel statistics remain encouraging, supporting demand

• Maintain BUY with TP of RM3.94

AirAsia remains our top aviation pick. Short-haul low cost carrier (LCC) AirAsia performed up to mark in the first quarter of 2017, with consolidated core profits meeting our expectations at 22% of our latest full year forecast. Positively, AirAsia (consisting of MAA, IAA and PAA) was able to fill its aircraft seats, recording load factors of 89% amid conservative ASK growth of +2%yoy. In the coming quarters, we expect ASK growth to gather pace, and average at +10% for FY17. Healthy growth in air travel demand underpinned by firm domestic consumption and robust tourist arrivals would augur well for AirAsia’s load factors, in our view. Hence, we continue to be upbeat on AirAsia’s prospects and maintain our BUY call on the company with an unchanged target price of RM3.94.

Fleet expansion and increased utilisation rate of aircraft lends support to AirAsia’s +10% ASK growth target. In FY17, AirAsia is scheduled to add 27 aircraft on a net basis, consisting of 21 Airbus A320neo variants which consume 15% less fuel. At the ongoing Paris Air Show, AirAsia placed an order for an additional 14 A320ceo aircraft, expanding its outstanding order backlog to ~420 aircraft. Apart from that, AirAsia is aiming to raise the utilisation rate of its aircraft from 14.1 hours per day to 16 hours per day. Increasing the utilisation rate of its aircraft is beneficial as the additional revenue generated outweighs the marginal cost incurred for aircraft already in its stable.

New routes announced in 6MCY17 have exceeded 12MFCY16. We assess that the bulk of the new capacity would be allocated to new routes. From January to June 2017, AirAsia and its associates (excluding AAX) have announced 17 new routes, which have surpassed the 13 routes announced for the whole of 2016. While new routes typically require a 1-1.5 years gestation period to turn profitable, we opine that a steady pipeline of new route launches is necessary in order for AirAsia to carve out new markets and drive earnings growth.

Demand underpinned by encouraging travel statistics. We gather that overall tourist arrivals to Malaysia remains in positive territory, with March 2017 registering a growth of +1.8%yoy. In the coming months, we believe that arrivals could trend higher coinciding with the summer holiday season kicking off in the Northern Hemisphere and the SEA Games in August. Meanwhile, KLIA2 registered an average growth of +14.2%yoy for the months of April and May 2017, indicating that both AirAsia and AirAsia X performed well in terms of passengers carried as both airlines contribute ~95% of KLIA2 pax.

Maintain BUY with unchanged TP of RM3.94. Our TP derived from a forward price-to-earnings ratio of 10x FY18 EPS. Airasia remains our top aviation sector predicated on: 1) stable demand growth with conservative ASK expansion of +10%; 2) monetisation of AAC that could potentially lead to special dividends; 3) further consolidation of all AOCs under the AirAsia Group could provide better clarity on combined performance of all AOCs as opposed to MAA.

Source: MIDF Research - 23 Jun 2017