Wrestling with competition
MAS is keeping up the pressure on AAX as it injects more capacity on a number of the routes that both carriers serve. Base yields are, therefore, likely to dip in 2014. AAX will have to bank on an improving ancillary yield to pick up the slack, which is far from certain.
Our maintain our Hold call and keep our target price unchanged, based on the sector average of 11x CY15 P/E. Base yields are likely to fall next year as competition on the KL-Australia route heats up. AAX's earnings are highly sensitive to yield changes so further yield weakness will dampen its growth sharply.
AAX's 3Q13 core profit of RM7m was weaker than expected as it failed to fully recoup the RM26m loss in 2Q13. Promotional campaigns for both matured and newly-launched routes caused overall yield to decline 1.6% yoy and RASK to fall 2.7% due to a 1% pt reduction in loads. The yield weakness on mature routes was probably due to competitive pricing by MAS and the yen and A$ weakness. Promotional fares on new routes to Shanghai and Busan also contributed to the lower yield. The underlying passenger yield fell 3.3% yoy and the impact on AAX would have been worse had it not succeeded in pushing up ancillary yield by 5% on price revisions, higher Fly-Thru take-up and new products. Given the yield decline, 3Q13 core net profit was down 43% yoy despite ASK and RPK rising by 30-32%.
What to expect for 2014
MAS is creating "hyper competition" on KL-Australia routes, adding third daily flights to Sydney and Melbourne. The Australian region is hence beginning to underperform North Asia and AAX estimates that it will need 6-9 months to "wash out" the yield pressures. Thai AAX will also commence operations early next year, which we believe will result in a RM22m loss for AAX's share in the venture.
No reason to jump in
Stay on the sidelines. We think that AAX's share price is likely to tread water in 2014 as MAS keeps up the pressure. Base yields are likely to dip next year, compensated by an improvement in ancillary yields. Earnings expansion will be driven by capacity growth, which we expect to be in the region of 54% in 2014. AAX's net profit is extremely sensitive to yield changes, so further deterioration in yields will dampen its growth significantly.
Publish date: 24/01/14