INVESTMENT HIGHLIGHTS

• ASK and RPK declined by more than 5.0%yoy for 2QFY19

• Drop in ASK and RPK amidst capacity management

• Nevertheless, load factor remains resilient at 80.0% in 2QFY19

• Earnings estimates unchanged

• Maintain NEUTRAL with an unchanged TP of RM0.22 per share

2QFY19 preliminary ASK and RPK took a breather. In 2QFY19, AirAsia X’s ASK declined by -6%yoy while its RPK dipped by -5%yoy as capacity amidst capacity management and operation of shorter stages routes compared to last year. The destinations involved were Gold Coast and Taipei. As such, capacity to Gold Coast post-termination of Auckland in February 2019 was reconciled, in line with AAX’s goal of network optimisation.

Load Factor remains reasonable at 80.0% for 2QFY19. Despite the drop in ASK and RPK in 2QFY19, AAX’s load factor remained reasonable at 80.0%. The commendable load factor was partly attributable to the commencement of the Kuala Lumpur-Lanzhou route in the quarter under review, AAX’s fourth unique route in Greater China. Meanwhile, the frequency to Honolulu was increased back to seven times in May 2019 following a temporary reduction to four times in April 2019 due to the lean season.

Average stage length was little changed. AAX’s average stage length was little changed at -0.2%yoy in 2QFY19 in spite of the -6.0%yoy decline in capacity. Moreover, we expect more benefits of AAX’s prudent hedging policy to be realised in 2QFY19 following the average -8.0%yoy drop in the Singapore jet kerosene price during the same quarter, effectively bringing the Singapore jet kerosene price lower by -6.1%yoy on average for 1HFY19.

AirAsia X Thailand faces blip in load factor. For AAX Thailand, the +12.0%yoy increase in passenger carried in 2QFY19 was underpinned by additional seat capacity and inauguration of new routes during the quarter, namely Shenyang and Tianjin in China. Flights to Brisbane also commenced in the same quarter, which serves as AirAsia X Thailand’s first venture into Australia. Nevertheless, the ample capacity introduced led to a drop in load factor to 76.0% compared to 90.0% in the previous quarters.

Earnings estimates. No changes made to our earnings estimates.

Maintain NEUTRAL. We remain with our stance of AAX’s ability to record black ink for FY19. This could be possible through various cost reduction initiatives and better capacity utilization with no planned addition of aircraft for AirAsia X Malaysia. We opine that passenger growth in Malaysia to remain intact despite the outbound levy which is expected to take effect in August 2019. For AAX itself, we do not discount the possibility of consumers shifting from a pricier full service carrier to a low cost carrier such as AAX especially if similar destinations are offered. However, the adoption MFRS 16 would be a concern as the majority of AAX’s fleet are on operating lease and this will keep financing costs elevated in the immediate term. All in, we maintain our NEUTRAL call with an unchanged TP of RM0.22 per share.

Source: MIDF Research - 24 Jul 2019