KEY INVESTMENT HIGHLIGHTS

• AAX enters into PSA with AAB for the transfer of two slots of the KUL-SIN route

• KUL-SIN route is the busiest short haul route in the world and one of the most profitable for AAB

• Average utilisation of AAX’s widebody aircraft to be increased by 0.2 hours

• Plans on leveraging on other high density short hauls expected to kick off in 1QFY20.

• Maintain NEUTRAL with an unchanged TP of RM0.17 per share

Profit sharing agreement for KUL-SIN route. AirAsia X (AAX) announced that it has entered into a profit sharing agreement (PSA) on 10 November 2019 with AirAsia Berhad (AAB) with regard to the transfer of two slots of the Kuala Lumpur-Singapore (KUL-SIN) route from AAB to AAX. Both parties agreed to share 50% of the net operating profit for each calendar month for a one year term which may be renewed for another year.

Why KUL-SIN route? KUL-SIN is one of AAB’s most profitable routes as its market share of 26% is the largest amongst the other carriers operating the route (Malaysia Airline, Silk Air, Jetstar Asia, Malindo Airways, Scoot, and Singapore Airlines). Moreover, the KUL-SIN route is the busiest international route in the world with more than 30,187 flights according to the Official Aviation Guide (OAG) for the period from March 2018 to February 2019 with an average of 82 flights per day.

Benefits for AAX flying KUL-SIN route. The direct impact for AAX would be increased utilisation of its widebody aircraft by 0.2 hours from its current 14.4 hours. Small pockets of unutilised aircraft time will be used along with capacity being doubled to 377 seats with the Airbus A330 compared to 180 seats using the Airbus A320. Furthermore, load factor of KUL-SIN route which we opine is higher than 80% will be further boosted through the increase in fly-thru passengers into Singapore from core markets, i.e. China, India, Japan and Korea.

Financial impact. Financially, an annual net operating profit (excluding tax) of RM2.42m from the PSA was projected. As we pro-rate this profit for the remaining of FY19, the net profit attributable to AAX is roughly RM0.3m which is unable to offset the -RM8.1m loss we forecasted for FY19. Meanwhile, we estimate approximately RM1.53m worth of net profit to accrue in FY20, which is minimal from the full year forecast of RM45.6m.

Similar plans in the pipeline. In addition, AAX will be launching four weekly flights from Kuala Lumpur to Taipei to Okinawa (KUL-TPE-OKA) in 1QFY20 subject to regulatory approvals. The rationale of doing so is to leverage on the high-density short-haul route between Okinawa and Taipei. We do not discount the possibility of more flights being introduced by AAX to serve Okinawa in the future.

Earnings estimates. We make no changes to our earnings estimates due to the expected immaterial impact from the PSA.

Source: MIDF Research - 12 Nov 2019