Rising oil price impact analysis on all 33 listed airline equities in the Asia Pacific – Nov 2017 Update

10 November 2017, Asia Pacific – Jet fuel prices have spiked up 12% in the past one month and risen 31% y/y, negatively impacting the airlines in the Asia Pacific as fuel cost is their single largest cost component, accounting for 30% of their total operating cost on average. 

Only one-third of the Asia Pacific airlines are well-hedged and the average fuel hedging ratio of the Asia Pacific airline sector is only 27%. Every 1% rise (fall) in jet fuel price cuts (raises) the Asia Pacific airlines’ net profit by 2.6% on average on a full year basis based on our estimates. Asiana Airlines (020560:KS), China Airlines (2618:TT), Jet Airways (JETIN:IN), Vietnam Airlines (HVN:VN) and Philippine Airlines (PAL:PM) suffer the greatest negative earnings impact from higher oil prices among the Asia Pacific airlines due to their limited fuel hedging levels and small earnings base. Qantas (QAN:AU), Virgin Australia (VAH:AU), Air New Zealand (AIR:NZ), Japan Airlines (9201:JP) and ANA Holdings (9202:JP)’s earnings are the most well-protected against higher oil prices.

We analyse all 33 listed airline equities in the Asia Pacific (the most comprehensive analysis available on the Street) to assess their varying level of fuel hedging as well as their earnings sensitivity and share price correlation to jet fuel price movements. 

4Q17 MARGINS COULD BE SQUEEZED DUE TO LAGGING FUEL SURCHARGE LEVIES AND INDUSTRY OVERCAPACITY KEEPING PASSENGER YIELDS UNDER PRESSURE

Jet fuel prices have spiked up 12% in the past one month and risen 31% y/y. This is negative for the Asia Pacific airlines as fuel cost is their largest cost component, accounting for 30% of their total operating cost on average.

To put things into context, the current jet fuel price is still 45% below its level five years ago. Nevertheless, the recent spike in jet fuel price is still incrementally negative for the Asia Pacific airline sector if it continues.

Airline profit margins could therefore be squeezed in 4Q17 as there is a lag in the implementation of fuel surcharges on passenger tickets. Moreover, the industry overcapacity is keeping passenger yields under pressure, preventing the airlines from passing on the higher fuel prices to their customers completely.

Chart: Spot jet kerosene price (2013 to 2017)

Chart: Spot jet kerosene price (2013 to 2017)

ONLY ONE-THIRD OF THE ASIA PACIFIC AIRLINES ARE WELL-HEDGED ON FUEL

Only Qantas (QAN:AU), Virgin Australia (VAH:AU), Air New Zealand (AIR:NZ), Singapore Airlines (SIA:SP), Cathay Pacific (293:HK), Thai Airways (THAI:TB), AirAsia (AIRA:MK), AirAsia X (AAX:MK), Asia Aviation (AAV:TB), Bangkok Airways (BA:TB) and Cebu Air (CEB:PM) have substantial fuel hedging in place. 

The rest of the Asia Pacific airlines are nearly completely exposed to the volatile fuel prices. 

Airlines operating younger and more fuel efficient aircraft fleet and those with a stronger local currency such as the Chinese airlines Air China (753:HK), China Eastern (670:HK), China Southern Airlines (1055:HK) help mitigate this negative earnings impact as fuel costs are largely paid in US dollars.

 

MOST ASIA PACIFIC AIRLINES’ EARNINGS ARE HIGHLY SENSITIVE TO OIL PRICE MOVEMENTS

We expect Asiana Airlines (020560:KS), China Airlines (2618:TT), Jet Airways (JETIN:IN), Vietnam Airlines (HVN:VN) and Philippine Airlines (PAL:PM) to suffer the greatest negative earnings impact from higher oil prices among the Asia Pacific airlines. Every 1% rise in jet fuel price cuts these carriers’ net profit by 14%, 11%, 8%, 6%, 5% respectively on an annual basis based on our estimates. This is due to their lack of/limited fuel hedging and thin profit margins.

 

AUSTRALIA/NEW ZEALAND AND JAPANESE CARRIERS HAVE THE MOST DEFENSIVE EARNINGS AGAINST HIGHER OIL PRICES

The earnings of Qantas (QAN:AU), Virgin Australia (VAH:AU), Air New Zealand (AIR:NZ), Japan Airlines (9201:JP) and ANA Holdings (9202:JP) are the most well protected against higher oil prices.

Qantas, Virgin Australia and Air New Zealand have higher than sector average fuel hedging levels at 86%, 83% and 71% of their FY18 fuel consumption respectively while Japan Airlines (9201:JP) and ANA Holdings (9202:JP) are hedged 40% and 30% respectively.

Chart: Net profit (loss) impact for every 1% rise in average jet fuel price on an annual basis

Chart: Net profit (loss) impact for every 1% rise in average jet fuel price on an annual basis

 

INVESTORS TEND TO AVOID AIRLINE STOCKS WHEN OIL PRICES RISE – NEARLY 90% OF THE ASIA PACIFIC AIRLINE STOCKS HAVE HISTORICALLY BEEN NEGATIVELY CORRELATED WITH SPOT JET FUEL PRICES

Asia Pacific airline stocks tend to fall when spot jet kerosene prices rise as investors generally avoid the sector due to the airlines’ large fuel cost exposure.

Historically, Virgin Australia (VAH:AU), Singapore Airlines (SIA:SP), Qantas (SIA:SP), Shandong Airlines (200152:CH) and Japan Airlines (9201:JP)’s share prices have had the strongest negative correlation with spot jet fuel prices in the past 5 years among all the listed Asia Pacific airlines notwithstanding their hedged fuel positions (apart from Shandong Airlines). This is mainly because other extraneous factors apart from oil prices also played a part in driving their share price performance.

Interestingly, the share prices of AirAsia (AIRA:MK), Thai Airways (THAI:TB), Philippine Airlines (PAL:PM) and Spring Airlines (601021:CH) have historically been positively correlated with spot jet fuel prices in the past 5 years, again partly driven by extraneous drivers outside of oil price movements. 

Chart: Asia Pacific airlines share price correlation to spot jet fuel price (2013 to 2017)

Chart: Asia Pacific airlines share price correlation to spot jet fuel price (2013 to 2017)

 

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