AirAsia Berhad (AIRA:MK) – Key Takeaways from 1Q17 Results

25 May 2017, Malaysia – AirAsia just reported a net profit of M$584m in 1Q17, down 22% y/y on a pro-forma basis. Here are our key takeaways:

1Q17 strong headline results were driven by several sizeable one-off items. These included M$214m re-measurement gains from the consolidation of AirAsia Indonesia and AirAsia Philippines (which were previously equity accounted for), M$127m negative goodwill on consolidation, M$57m forex gains which more than offset the M$63m mark-to-market loss on derivatives and M$17m deferred tax.

  • Excluding these one-off items, AirAsia would have earned a recurring profit of around M$266m in 1Q17, 37% lower y/y on a pro-forma basis
  • Recurring profit margin was around 12% in 1Q17, down from 21% in 1Q16 (on a pro-forma basis) but still an impressive level of profitability (considering that average spot jet fuel prices rose 49% y/y during the quarter), ahead of AirAsia’s competitors.

Ancillary income per passenger finally reached M$50, up 2% y/y: This contributed 20% of AirAsia’s total revenue. This, along with higher passenger load factors (+4ppts y/y to 89%), helped to lift AirAsia’s revenue per ASK (RASK) by 3% y/y in 1Q17 notwithstanding the 2% y/y decline in average fare to M$171 in 1Q17.

  • Excess baggage fees continue to be the largest contributor at 46% of total ancillary income. However, fly-thru/connecting and convenience fees achieved the most rapid growth, rising 23% and 11% y/y in 1Q17.
  • Management targets to raise AirAsia’s ancillary income per passenger to M$60 by the end of this year. However, this target of a 20% increase within a year is on the ambitious side considering that AirAsia took 3+ years to raise ancillary income per passenger by 20% from M$40 in 2013 to M$48 in 2016. (26th May 2017 Update: AirAsia has clarified that it targets to raise AirAsia’s ancillary income per passenger to M$60 in two years.)

Chart: AirAsia’s ancillary income contribution (1Q17)

Chart: AirAsia’s ancillary income contribution (1Q17)

Well-protected against fuel price volatility for the full year 2017: AirAsia has already hedged 80% of its 2017 fuel requirements at an average price of US$59/bbl jet kerosene and its full year average effective cost is expected to be around US$62/bbl in 2017.

  • This will reduce AirAsia’s earnings risk should fuel prices spike up more significantly. The fuel hedges have also been locked in at favourable rates compared to the current and ytd average spot jet fuel price of US$61/bbl and US$63/bbl respectively.

The sharp rise in unit cost in 1Q17 is a concern: Unit cost per ASK rose 14% y/y while unit cost excluding fuel rose 9% y/y in 1Q17. This was mainly driven by higher pilot salaries, higher user charges, the one-off cost for RedQ and the weaker Malaysian ringgit.

  • Management is targeting to reduce Group costs by US$45m (or M$193m) through various initiatives. AirAsia also expects to reap cost synergies (from joint procurement, shared back-office services) as the Group consolidates its various airlines.
  • AirAsia still has the lowest cost structure in the industry with unit cost excluding fuel of US$0.0229 which is its biggest competitive advantage.

Planned capacity growth will accelerate this year: AirAsia Group plans to add 29 aircraft this year, raising its fleet size to 201, implying a 17% y/y increase.

 

  • This is a marked increase from its average Group fleet growth of only 4% per year in the past 3 years, mainly driven by its expansion plans in AirAsia India and AirAsia Japan. Excluding these two carriers’ expansion, AirAsia Group’s planned fleet growth is a more moderate 5% y/y to 181 aircraft in 2017. AirAsia Group’s longer term planned fleet capacity growth is 8%-10% per annum.

Update on joint venture airlines’ developments: AirAsia Thailand is seeing a recovery in passengers from China from 2Q17 and is expected to raise fares further from 1st June. Management targets to consolidate AirAsia Thailand in 2Q17. AirAsia Indonesia and AirAsia Philippines’ operating performance have improved. AirAsia India is performing better than expected with improving load factors and RASK. Management targets to operate international flights in 2018 when its fleet size reaches 20 aircraft. Targets to launch AirAsia Japan in 2H17. 

  • We believe AirAsia’s main growth opportunity will be on international routes for its joint venture airlines in India, Indonesia, Philippines and Vietnam as dominant and highly cost competitive domestic low cost carriers are already present in these markets – IndiGo (in India), Lion Air (in Indonesia), Cebu Air (in Philippines), VietJet (in Vietnam).
  • Low cost carrier market penetration remains relatively low in Japan and China; they therefore offer large untapped domestic and international markets for AirAsia Group. However, the key challenges are the competitive incumbent airlines with strong financial backing, vastly different cultures and regulatory framework. In addition, AirAsia’s management resources may be spread too thinly given its large number of geographically spread-out joint venture airlines.   

Balance sheet has strengthened with net debt-equity down to 93% at the end of 1Q17. AirAsia generated positive free cash flow of M$330m (or M$206m excluding the consolidation-related “acquisition of subsidiaries, net of cash” line item). Separately, the proposed sale of Asia Aviation Capital leasing house is in the final negotiation stage.

  • AirAsia could potentially distribute part of the sale proceeds related to AAC as a special dividend to shareholders. Management still targets to further unlock value in the Group over time, including the proposed IPO of AirAsia Indonesia, AirAsia Philippines and Asian Aviation Centre of Excellence (AACE) flight crew training centre.
  • However, this needs to be balanced against the future capital requirements of the newly formed joint venture airlines AirAsia Vietnam, AirAsia China, AirAsia Japan, AirAsia India, as well as AirAsia Indonesia, AirAsia Philippines, AirAsia Thailand and AirAsia Malaysia.

35% of AirAsia’s US dollar borrowings are unhedged: All of AirAsia’s US dollar loans have either fixed interest rates or have interest rate swaps in place.

  • This will help reduce the negative earnings impact on AirAsia should the Malaysian ringgit weaken again and/or interest rates rise.

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