Aviation Sector Still Flying At Low Altitudes

There was a sequential deterioration in the recently concluded second quarter results as both aviation stocks under Kenanga’s coverage missed forecasts vs. one within and one below in 1QCY22.

Air travel rebounded on the reopening of the economy and international borders but fell short of expectations. While tripling YoY to 34m, MAHB’s total passenger throughput in 1HFY22 only accounted for 37% of the full-year forecast (and 51% of 67m recorded in 1HFY19 prior to the pandemic). Likewise, while surging 4x, Capital A’s 1HFY22 revenue passenger km (RPK) only made up 35% of our full-year forecast (and 27% of 31b recorded in 1HFY19 pre-pandemic).

It is expected that further improvement in MAHB’s passenger throughput in 2H 2022. Already, the total passenger traffic of its entire network of airports continued to gain traction in July 2022, recording 7.8m, bringing 7MYTD number to 42m (+175%). Kenanga expects the traffic trajectory to grow exponentially from a low base in subsequent months driven by domestic seat capacity nearing 90% of pre-Covid level from July and international seat capacity is expected to recover to at least 50% of pre-Covid level during the same period.

AirAsia and Scoot Airlines are the first international airlines to resume services to Kota Kinabalu International Airport on 16th and 29th April, respectively, after a two-year lull. Among the airlines that have resumed services are Thai AirAsia, AirAsia X, Vietjet Air, and AirAsia covering Bangkok, Incheon, Hanoi, and Hat Yai. Royal Brunei Airlines has resumed services to Kota Kinabalu from Bandar Seri Begawan, utilising Airbus 320neo with two-time weekly frequencies. Nonetheless, post 2QCY22 results, Kenanga cut;s its FY22F passenger throughput assumption by 13% to 70m (and reduced its FY23F assumption by 13% to 101m).

Similarly, Kenanga shares CAPITAL A’s optimism that its passenger demand will continue to rise in 2HCY22, judging from the
encouraging load factors recorded at 159 international routes re-launched in this period. In August, AirAsia operated
108 aircraft and will operate 160 by end of the year. Nonetheless, similarly, post 2QCY22 results, FY22F RPK is cut on the assumption by 15% to 23b (and reduced FY23F assumption by 14% to 50b).

Meanwhile, each player has their own unique set of problems. For MAHB, a much-needed tariff hike does not appear to be forthcoming in accordance with a recent consultation paper published by MAVCOM which does not augur well for its ability to generate enough cash flow for capex purposes, particularly for airport expansion and maintenance. While MAVCOM also proposes a mechanism for AIRPORT to recoup during the later years the losses incurred during the initial years, the research house is concerned over AIRPORT’s cash flow over the immediate term.

Meanwhile, for CAPITAL A, the clock is ticking on a more viable and holistic regularisation plan to lift it out of the PN17 status. It will have until January 2023 to do so.

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