AirAsia shares retreat as search for jet continues

Kuala Lumpur

AIRASIA units AirAsia Bhd and AirAsia X Bhd were heavily sold down on Monday in the wake of the group's first major aviation mishap.

AirAsia Bhd fell nearly 13 per cent in early trade, but retraced some ground to close at RM2.69 or 8.5 per cent lower, for a market capitalisation of some RM7.5 billion (S$2.8 billion). Its loss-making long-haul unit AirAsia X ended 8 per cent down at RM0.63.

Flight QZ8501, an Airbus A320-200 run by Indonesia AirAsia (IAA), is believed to have run into bad weather on its Surabaya-Singapore flight and crashed into the Java Sea on Sunday with 162 people on board. Search and rescue operations are on-going for the plane.

AirAsia Bhd owns 49 per cent of IAA, with the balance held by Indonesian investors.

With two aviation tragedies involving Malaysia Airlines' aircraft this year, investors had been expected to be spooked by the loss of QZ8501, the third disaster to hit the country's aviation sector in nine months.

Despite AirAsia's enviable safety record over the past 12 years, its reputation and branding have taken a hit.

But most analysts believe the sell-down could be a knee-jerk reaction.

AffinHwang Capital said that the "unfortunate tragedy" might cloud AirAsia's reputation and result in the airline offering even more competitive fares that could erode the already-slim yields brought about by intense competition with rival Malaysia Airlines. However, it maintained its target price of RM3.25 - on the grounds that the airline's fundamentals remained intact.

RHB set a RM3.47 target price, but acknowledged that the incident could cap expectations of yield upside. "Although this will likely be more pronounced for IAA, we do not rule out that this would possibly impact yields for the whole group, notably Malaysia AirAsia."

Before the weekend, the region's largest budget carrier had outperformed the benchmark KLCI, gaining a third against the KLCI's decline of about 5 per cent in the year to date.

Taking a contrary position, AllianceDBS downgraded the stock to a "hold" from a "buy", with a target of RM2.80. Even then, it said, possible foreign exchange losses were its main concern.

Although unit costs would ease on lower jet fuel prices of less than US$90 a barrel, cost savings would be offset by the impact of a weaker ringgit, as dollar-denominated costs would be higher in local currency terms.

A strong US dollar would exert more pressure on the airline's profitability as about 57 per cent of its cost base and 86 per cent of its borrowings are denominated in the greenback. In the year to date, the dollar has gained 6.7 per cent. Since around early September, the USD has recorded an even sharper increase of 11 per cent, as it went from a year's low of 3.14 to 3.49 now.

The dollar has surged on expectations of further money tightening in the US; the ringgit has weakened because the sharply lower oil prices are seen hurting oil-exporting Malaysia.