Aviation Sector: Assessing the Impact of Costlier Jet Fuel (OVERWEIGHT)
Jet fuel price has hit fresh 2-year highs, sparked by the unrest in Libya, which has stoked fears of a global supply shortage of oil. As fuel represents as much as 30-35% of airlines’ expenses, we see earnings possibly at risk, as a US$1 increase on our base jet fuel price assumption would hit earnings by 0.6%-7.2% over the next two years. No airline will be spared, although SIA commands pricing power on its fuel surcharge in the premium segment while budget carriers can offset the adverse impact via higher ancillary fees and their “no fuel surcharge” marketing gimmick. As we believe the situation is only temporary and travel demand will continue to be buoyant, we maintain our OVERWEIGHT call on the aviation sector, with AirAsia being our top pick.
Jet fuel price scales to 2-year high. Jet fuel price is scaling new highs sparked by unrest in Egypt, and then Libya, which could potentially spill over to other oil-rich Middle East countries stoking fears of oil shortage globally. Jet Fuel YTD is up by 18% to US$123.6/bbl (2010: US$90.60), surpassing our key assumption of an average US$110 for 2011 and 2012.
Unrest could prolong. Recent news reports on the unrest in Libya do not provide indications of any easing in tension, which means that the situation may prolong. Nonetheless, Gulf countries such as Qatar, Kuwait, UAE, Oman and Saudi are less inclined to political unrest given their high GDP per capita.
Impact on airlines. High jet fuel price does not bode well for airlines, as the commodity makes up as much as 30-35% of total expenses. We estimate that a US$1 increase in jet fuel price against our base case jet fuel assumption of US$110/bbl would shave earnings by some 0.6- 7.2% in FY11 and 1.4%-5.3% in FY12 in assuming no further surcharges are implemented.
Prefer SIA and budget airlines. In our view, airlines with strong balance sheets and which are not highly leveraged such as SIA would be able to withstand the higher oil prices. In addition, SIA commands pricing power in the premium segment (for business travel) despite its higher fuel surcharge, which offsets the negative impact of higher jet fuel prices. SIA had earlier raised its fuel surcharge for the first time since the last oil crisis in 2007. While bookings have leveled off, the carrier’s recently released January stats continue to show strong momentum, with RPK rising 2.9% YoY on the back of encouraging load factor of 78%.
AirAsia and Tiger Airways would be more affected by higher jet fuel as budget carriers may be more reluctant to impose fuel surcharges and would rather raise ancillary fees to cushion the impact. Furthermore, their marketing claims of ‘no fuel surcharge’ despite the higher air fares would be favorable for budget carriers in drawing passengers away from full service carriers, which proved to be successful back in 2007-2008. We have BUY ratings on AIRASIA (TP: RM3.86), TIGER (TP: SGD2.24) and SIA (TP: SGD17.20). On the other hand, we are negative on MAS with its low earnings base given the higher possibility that its FY11 and FY12 performance would continue to be in the red. We maintain our SELL (TP: RM1.58) call on MAS.
Maintain OVERWEIGHT on Aviation. We believe the current situation is only temporary as travel demand remains buoyant given the healthy load factors recorded so far. We maintain our OVERWEIGHT call on Aviation, with AIRASIA as our top pick. Nonetheless, given the global nature of the risk and AirAsia’s high foreign ownership, the stock is more susceptible to a selldown from foreign funds.
Source/转贴/Extract/: DMG Research