AirAsia - Aircraft delivery accelerated, yield dilution risk rising HOLD

- AA released its 3Q12 results last night. The group reported a core net profit of RM197mil for its 3Q12, bringing 9M12 core earnings to RM468mil. This accounts for 66% of our estimates, but we leave our numbers unchanged for now as 4Q is seasonally the strongest quarter for the industry (accounting for 34%-40% of full-year earnings in the past).  The 9M12 results accounted for only 49% of consensus estimates. Jet fuel trends (which have remained elevated) will also critically affect achievability of market earnings expectations in 4Q12.

- 3Q12 earnings were up 10% YoY due to higher traffic (+7% YoY) and yields (+11%), though margins contracted due to higher aircraft maintenance and rental cost. Positively, the high yield base this time around sets more comfortable grounds ahead of competition next year. Prior to Firefly jets’ entry in Jan 2011 (dismantled in 2H11), AA’s yields were hovering around 15-16sen/RPK vs. 16-17sen currently.

- However, acceleration in aircraft delivery in 2013 suggests that any price war arising from new competition could be severe – AA is increasing aircraft delivery in Malaysia to 10 from an indicative 4 previously for 2013. AA has already increased frequency on flights to East Malaysia a few months back, after the announcement of Malindo’s entry. 

- Recall that Malindo is bringing forward its launch date to mid-March 2013 from the earlier indication of May 2013. Malindo is targeting to deploy 12 aircraft in Malaysia by end-2013 and add 12 aircraft per annum thereafter. 

- While it is yet to be seen how effectively Malindo can compete on a cost basis with AA – Malindo has the advantage of having a strong network in one of the largest markets in ASEAN to feed it with the required traffic and to back it with the required cash flows. Notably, arrivals from Southeast Asia account for 45% of KLIA traffic and 35% of this comprises arrivals from Indonesian cities (based on 2010 statistics). 

- We maintain our HOLD call on AA with an unchanged fair value of RM2.80/share given increasing earnings risk and peaking yield cycle from the entry of new competition, particularly with the initial impact coming from the KL-East Malaysia routes, which is the most profitable route for domestic carriers.  

Source: AmeSecurities