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Air Asia Sees Brighter Skies
Malaysia Perspective | 01 October 2010

By Joshua Lim

Air Asia posted a record quarter earnings as its second quarter 2010 core net profit jumped 45% y-o-y to RM198.9million, driven by stronger ancillary income and yield. Coupled with higher Revenue Passenger Kilometres (RPK) (+15%) and load factor (+2ppts), ticket sales rose 20% to RM673.3million. AirAsia was also able to garner higher ancillary income, capitalising on its growing passenger volume and its large visitor web base. Total ancillary income recorded strong 76% growth to RM167.0 million in the second quarter of 2010, while ancillary income/pax improved by 59% y-o-y to RM43. This was probably supported by the new ancillary revenue streams as well and higher baggage fees as more passengers carried luggage during the quarter.

Its revenue jumped to RM1.819 billion from RM1.545 billion previously. AirAsia said the group’s cash from operations was at RM188 million, a decrease of RM108 million against the immediate preceding quarter ended March 31, 2010. The company saw a 11 percent growth in passenger volume and an average fare that was 8 percent higher at RM173 compared with RM160 in previous year’s quarter. AirAsia, Asia’s biggest budget carrier by fleet size, said load factor, or the percentage of seats filled, rose 2 percentage points to 77 percent in the quarter.

“Load factors achieved in the month of July were in line with the prior year, while there have been significant improvements in yield,” AirAsia said in a statement.

Dividends and Other News

It has been announced that AirAsia might be looking at a dividend policy by the third quarter of 2010. Although this is positive for AirAsia’s shareholders, its yields are not expected to be attractive considering AirAsia’s huge capital commitment as it is still at its expansion phase.

Analysts say despite announcing that it is willing to pay dividends to its shareholders, the company does not have a dividend policy. They believe it is time for Air Asia to restructure its Thai and Indonesian operations which are currently leveraging on its balance sheet, rather than announce dividends. In addition to this, AirAsia has a short and long-term borrowing of RM7.58bil as opposed to deposit, bank and cash balances of RM858.1mil.

Bernama announced that AirAsia will take delivery of six A320 aircraft in the third quarter of the year, two of which will be operated in Malaysia and four in Thailand. In the fourth quarter, four A320 aircrafts will be delivered, one of which will be operated in Malaysia and three in Indonesia, it said. The new aircraft will be used to replace the B737s and provide additional capacity across the network. However the airline announced that it would defer delivery of seven A320s from 2011 to 2015.

“Capacity concerns … are one reason for the deferments,” CEO Tony Fernandes said in a statement. “Another is our strategy to lower our gearing ratio, ensure we have the sufficient revenue from our operations to fund the purchase of aircraft.”

In the meantime, AirAsia announced on 19 August that it would resume flights between Hat Yai and Kuala Lumpur in a pre-emptive move that might just prompt rival Firefly to rethink its plan to link the two cities towards the end of this month. AirAsia will then become the second carrier, after Singapore-based budget airline Tiger Airways, to operate out of the southern Thai city.

AirAsia will offer a daily flight from the Kuala Lumpur Low Cost Carrier Terminal (LCCT) to Hat Yai International Airport, on an Airbus single-aisle jet, the A320, capable of seating 180 passengers. It would mark the return of AirAsia to Hat Yai after a few years of suspension as traffic demand to the Thai city famous for its entertainment and shopping, especially among Malaysians and Singaporeans, slumped due to security concerns and insurgent attacks in southern Thailand.

Analysts Remain Buoyant

Analysts are buoyant on the near-term future of the airline and have issued a “Maintain Buy” with RM1.95 TP based on 9x CY11F EPS. Analyst’s think current valuation is unjustified with AirAsia being the largest low cost carrier in the region. Additionally, AirAsia’s ability to fund new aircraft purchases and repay loans should no longer be a major concern, as operating cash flows should strengthen on stronger earnings and limited downside risks.

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