As  competition continues to intensify, it would be unlikely that AirAsia X will be able to afford  a further  cut in  yields as this could  deepen therisk of losses. It is still a SELL, although we lift  our TP to MYR0.61 (1.5x FY15  P/BV,  10.2%  downside)  from  MYR0.58.  We  raise  our  earnings estimates but pare  down our  projected yield growth due to the lower jet fuel costs.

No  more  fuel  surcharges.  Yesterday,  the  AirAsia  Group  announced that it will abolish fuel surcharges due to the sharp drop in jet fuel prices. The group last abolished fuel surcharges back in 11 Nov 2008 during the global financial crisis (GFC), before reintroducing it in 3  May 2011. As of today,  amongst  the  Malaysian  carriers,  only  AirAsia  and  Firefly  have abolished fuel surcharges.

What happened  during  the last round?  Malaysia AirAsia’s underlying yields fell  15% YoY in FY09 due to  its attempt  to stimulate demand in  aweak economic environment while  it grew  its fleet aggressively. Its load factor, according to  its annual report  (measured by revenue passenger kilometer divided by available service kilometer), weakened to 75-76% in 2008-2010 before approaching 80% in 2011. We think the downside maynot be  as  severe this time  around. First, underlying yields have  already hit lows similar to GFC levels since FY13, no thanks to Malaysia Airlines’ (MAS) irrational pricing strategy. Second, with MAS cutting its capacity  –notably for domestic flights – we expect demand to exceed supply, whichwould  cushion  the  negative  impact  on  yields  arising  from  the abolishment of fuel surcharges.

Forecasts.  It is unlikely  that AirAsia X would be able to afford  a  further cut  in  yields  as  this  could  deepen  the  risk  of  it  incurring  losses.  We believe  the  removal  of  the  fuel  surcharge  could  be  offset by  higher  air fares  for  the  airline.  Nonetheless,  the  overall  impact  would  lower  our FY15 overall yield growth estimate to 6% from 8%.  Consequently, in line with  the  AirAsia  Group’s  move,  we  also  trim  our  jet  fuel   assumptions.The lower jet fuel costs could result in the carrier recording a small core net profit in FY15 (see Figure 8).

Reiterate SELL. While we lift our earnings estimate to where the carrier would record a profit in FY15 (vs  a loss earlier), we remain concerned over its ability to return to the black  –  which remains unproven till now. Maintain SELL, with our TP of MYR0.61 premised on an unchanged 1.5x FY15 P/BV. MAS’ on-going cheap air fare campaigns for its mid- to longhaul flights just shows that competition has yet to die down.

Source: RHB