KUCHING: The aviation sector has garnered an ‘overweight’ rating from analysts due to AirAsia Bhd’s (AirAsia) high passenger load factors amidst an improved earnings outlook for Malaysia Airports Holdings Bhd (MAHB).

According to Kenanga Investment Bank Bhd (Kenanga Research), AirAsia is looking to expand their aircraft fleet this financial year by a net growth of 27 planes — seven for Malaysia, six for Thailand, two for Indonesia, three for Philippines, six for India and three for Japan.

“Apart from the increase in fleet size, AirAsia is also targeting a higher aircraft utilisation rate from 12 hours to 14.5 hours,” Kenanga Research said.

While this will be a significant boost to existing capacity, the research arm believes AirAsia is able to maintain healthy load factors of more than 85 per cent. This is backed by strong travel demand, coupled with their extensive route options with optimal frequencies.

However, the research arm expects some yield pressure from AirAsia’s increased capacities and competitions from other airlines.

While yields might be pressured arising from the increase in capacity, Kenanga Research remained confident that AirAsia should be able to maintain the group’s revenue per available seat kilometre (RASK) leveraging on the use of technology.

This will enable them to mitigate the yield pressures through increased ancillary income from more targeted marketing/sales – which they have targeted RM55 per pax in FY17 and RM60 per pax by FY18 (versus RM48 per pax in FY16).

Despite the rising fuel costs, the research arm believed AirAsia’s fuel risks were greatly minimised as circa 80 per cent of the group’s FY17 fuel was hedged at US$59 per barrel, comparable to FY16’s average effective fuel costs of US$56 per barrel.

While FX (US dollar-ringgit) might be a concern as well, Kenanga Research noted that AirAsia’s FX risks were partially mitigated through ticket sales which were 37 per cent denominated in foreign currency and 47 per cent US dollar borrowings for planes hedged at 3.2 US dollar-ringgit.

The research arm’s analysis indicated that a 10 sen depreciation of ringgit against US dollar would decrease FY17E core net profit (CNP) by 2.6 per cent.

On to MAHB’s passenger growth estimates, total passenger movement for Malaysia and Turkey registered growth of 6.3 per cent year on year-year to date (y-o-y-YTD) (till February 2017) were in line with Kenanga Research’s estimates of 6.3 per cent (the research arm’s targets of six per cent growth for Malaysia and seven per cent growth for Turkey).

However, on an individual country basis, the research arm noted that growth was mainly supported by MAHB’s Malaysian operations, which were up 9.9 per cent while Turkey was down 5.5 per cent.

“Malaysia’s passenger growth remains robust supported by improved load factors from strong travel demand and new foreign airlines and Malaysia Airlines Bhd operating at increased frequencies,” the research arm said.

“Meanwhile, Turkey’s travel statistics remain subdued, still reeling from the bombing incidents and travel threats, which have severely affected their international passenger growth, registering monthly negative growth rates since June 2016.”

For now, Kenanga Research kept its six per cent and seven per cent estimates unchanged for Malaysian and Turkey, respectively, pending a review on March 2017 Passenger traffic before deciding whether to trim Turkey estimates.

Should Kenanga Research cut its FY17E Turkey estimates to three per cent growth, the research arm noted that this would lower its FY17E core net profit (CNP) by circa 10 per cent.

“That said, we note that the impact might be cushioned as we might have an upward revision towards our Malaysia passenger growth target considering the stronger-than-expected travel demand in Malaysia year to date,” it said.

All in, for MAHB, Kenanga Research maintained its positive stance, as the research arm believed the newly improved passenger service charge (PSC) structure coupled with the extension of Operating agreement would provide better earnings visibility for the group.

Meanwhile, AirAsia is expected to continue registering high load factors post fleet expansion on the back of strong travel demand coupled with their dynamic pricing of tickets.