AirAsia to gain from current lower jet fuel prices

Analysts at TA Securities Holdings Bhd (TA Research) upgraded its earnings projection for AirAsia Bhd (AirAsia) following a drop in jet fuel prices.
According to the Singapore Jet Fuel Swaps – a jet fuel price indicator – jet fuel prices closed at its lowest level since November 2003. Year to date, it has resumed the fall by another 24.8 per cent to US$33.1 per barrel on Jan 22, 2016 following a drop of 38.4 per cent in 2015, mirroring the downtrend in crude oil price.
Accordingly, TA Research upgraded its financial year 2016 (FY16) to FY18 earnings projections for AirAsia by 1.9 to 8.9 per cent after the change in assumptions for jet fuel price to average at US$50 per barrel for 2016 to 2018 as compared with our previous forecasts of US$65 per barrel for 2016 to 2018.
This also includes a 90 per cent of cost reductions from lower jet fuel price assumptions to be passed on to passengers through lower airfares.
“Although we are only one month into 2016, we reckon that our jet fuel price assumptions of average US$65/bbl for 2016 could be overly bullish, as Iran’s oil exports, after the economic sanctions were lifted, are expected to accelerate the glut in the market,” the firm said in a report yesterday.
“As such, we are revising our jet fuel price assumptions lower in the advent of revised budget 2016 announcement, which the government is expected to trim its expenditure based on a more realistic oil price assumption.”
Meanwhile, TA Research called on investors not to “read too much” into the AirAsia privatisation.
The news about privatising AirAsia first came to the market in October 2015 and recently repeated by AirAsia X, citing that taking the carriers – both AirAsia and AirAsia x – private is an option but both AirAsia and AirAsia X have not received any offers.
“Again, we do not spend much time to look into it as we believe taking AirAsia, one of the world’s best low-cost airlines, private is not an easy task without roping in strategic investors like the Employee Provident Fund, who has a strong financial muscle, to assume the mounting liabilities that AirAsia currently has.
“We upgrade AirAsia’s target price to RM1.72 and upgrade to buy from sell.”