Fall in jet fuel prices may lift AirAsia profits

Kuala Lumpur

THE decline in the price of jet fuel by more than 17 per cent since the first half of 2014 is likely to boost the profitability of low-cost carrier AirAsia at a time when the airline is in danger of being downgraded by aviation analysts.

Jet fuel prices have dropped to US$100 now from roughly US$121 a barrel in the first quarter of the year. The dip is consistent with the overall plunge in global crude oil prices as a result of higher supply against subdued global demand over economic slowdown in Europe and China.

In a report released on Tuesday, Hong Leong Investment Bank said that it expected jet fuel prices to remain at current levels during the last quarter of 2014 and the whole of next year.

That's great news for an airline whose first half had been disappointing, the result of stiff regional competition and higher jet fuel and maintenance costs. In addition, the airline's subsidiary in Thailand is struggling while new startups in India and Japan have yet to turn a profit.

To compound matters, demand has also declined. Among the reasons: the two Malaysia Airlines tragedies; the kidnapping incidents in Sabah; a stronger US dollar against the baht, rupiah and ringgit; and the higher cost of living in Malaysia.

According to the investment bank, every 5 per cent decline in jet fuel cost would add almost 12 per cent and 9.3 per cent to AirAsia's earnings per share in 2015 and 2016 respectively.

That has to be considered against the near 7 per cent appreciation of the greenback against the ringgit since January. Like most airlines, AirAsia's major costs - fuel, maintenance and leases - are all denominated in US dollars. Cumulatively, they hurt the airline in an environment of a weakening ringgit.

Every 5 per cent decline in the ringgit will trim the airline's earnings per share by 18 per cent in 2015 and 15 per cent in 2016. Hong Leong Investment Bank, however, predicted that the ringgit would remain steady at current levels for most of next year.

The investment bank thinks that lower jet fuel prices would boost the airline's bottom line. "After imputing for potentially lower yields, lower jet fuel costs and a higher US dollar, we have increased FY15 and FY16 earnings by 2.8 per cent and 5 per cent respectively," it concluded.

As a result, the bank upgraded the budget airline's stock to a "trading buy" with a target price of RM2.57. AirAsia shares were flat at RM2.35 apiece.