While last round’s fuel surcharge abolishment led to a  15% YoY drop in yields,  this  round  differs  on  encouraging  load  factors  with  yields already  lower than GFC levels  since  FY13. Maintain  BUY,  with  our  TP adjusted down to MYR3.39  (from MYR3.47),  21.9% downside,  premised on  an  unchanged  12x FY15F  P/E  as  we  lower  FY15/FY16  forecasts  by 2.4%/6.4% after factoring a grim earnings outlook for Indonesia AirAsia.

Fuel  surcharge  abolishment.  The  group  collectively  announced  the abolishment  of  fuel  surcharges  given  the  sharp  drop  in  jet  fuel  prices. The  last  round  of  abolishment  was  on  11  Nov  2008  during  the  global financial crisis  (GFC). The surchrge  was  reintroduced on 3  May 2011. As  of  today,  amongst  the  Malaysian  carriers,  only  AirAsia  and  Firefly have abolished fuel surcharges.

What  happened  the  last  round?  Malaysia  AirAsia’s  underlying  yields dropped 15% YoY in FY09. The sharp  drop in yields was an attempt to stimulate  demand  against  the  backdrop  of  a  weak  economic environment amidst its aggressive fleet expansion. Load factor, as per its annual report (measured by revenue passenger  km  divided by available service km)  was  weaker then,  hovering at  a  75-76% range in FY08-10 before  approaching  80%  in  FY11.  We  think  the  downside  will  not  be severe this time: i) as  underlying yields have  already hit GFC lows since FY13  no  thanks  to  Malaysian  Airline  System’s  (MAS)  irrational  pricing strategy,  and  ii)  with  MAS  trimming  capacity  (on  domestic  flightsnotably),  we  see  demand  outstripping  supply,  thus  cushioning  the downside impact on yields from the fuel surcharge abolishment.

Forecasts.  While we do not expect a sharp drop in yields, we still see downside in underlying yields YoY n FY15, which we now expect to drop by  2%  YoY  (earlier  expectation:  +5%).  Along  with  other  adjustments, notably on lower jet fuel and  wider share of losses at Indonesia AirAsia(to MYR100m from MYR30m), the net downside adjustment in earnings is only 2.4% (FY15) and 6.4% (FY16) (see Figure 5).

Maintain BUY,  with  a  MYR3.39  TP (from MYR3.47).  This is  premised on  an  unchanged  12x  FY15F  P/E  after  lowering  our  forecasts.  Post QZ8501, we have factored a tougher outlook on yields and weaker load factor for Indonesia AirAsia, which is now  reflected in  the wider losses we  estimated.  A  possible  license  suspension  is  highly  unlikely,  noting that  the  flight  being  unauthorised  was  acknowledged  to  be  a misunderstanding  on  the  process  workflow.  Potential  law  suits  dependon the outcome of the black box investigation, which could take a year.  

Source: RHB