June 13 (RM2.75)Maintain add with an unchanged target price of RM4.15: Investors whom we spoke to on AirAsia Bhd’s order of A321neos have generally been cautious about the potential orders, fearing that AirAsia is once again over expanding. Investors did not like the additional 100 orders which come at a list price of US$125.7 million (RM499 million) each, as they come on top of the undelivered 304 A320neo orders. However, we believe that the orders are good for the AirAsia group, and there is no need to fear.
From an operational perspective, the A321neos are good for AirAsia. A321neos usually seat 220 passengers, but from 2018, a new version with 240 seats will be offered. The A320s currently seat 180, but this can be raised to 186 under a new configuration. So, the new A321neos offer 33% more capacity than AirAsia’s current fleet, and can help AirAsia optimise the service of existing high-density routes.
This will be important for AirAsia on routes such as Kuala Lumpur to Kota Kinabalu, where it had wet leased several of AirAsia X’s A330s this year to cater to the strong demand at specific flight timings. A higher-capacity aircraft can also help AirAsia reduce its unit flying costs, which will improve flight profitability for thick routes.
Airport congestion is also a major issue that is being faced by Asean airports. For instance, Cebu Pacific Air currently has 30 A321neos on order, against a fully delivered fleet of 38 A320s. This is important since the Manila airport is very congested, and also affecting AirAsia Philippines.
Thai AirAsia is facing similar congestion issues at Bangkok Don Muang, and Indonesia AirAsia in Jakarta. So we think a good number of the A321neos may be placed outside Malaysia.
Also, history has shown that AirAsia has significant flexibility to negotiate deferrals with Airbus when needed, so the orders placed today are meant to secure the future delivery slots. Should demand slow in future, we are confident that AirAsia will be able to defer the deliveries to avoid overcapacity.
The A321neo orders may be parked under the leasing arm Asia Aviation Capital (AAC). We expect this to boost the valuation of AAC to above the US$1 billion which is already on the table from a potential Chinese buyer, as it locks in future delivery slots at what we expect to be attractive prices.
A higher valuation for AAC has the potential to boost upcoming special dividends upon the partial sale of AAC.
If and when a formal announcement on the A321neo orders are made, we would look at several details including: i) over how many years the 100 A321neo orders will be delivered; ii) when the A321neo deliveries will start; and iii) whether the 100 new A321neo orders will replace some of the A320neos that are currently on order.
If the orders are spread out over many years and deliveres do not start until several years later, we expect current investors’ concerns to be alleviated. The major risk to AirAsia is if there is a terrorist attack on Malaysian soil, which could impact inbound travel demand into Malaysia, much like the Erawan shrine bombing in August 2015 which affected tourist arrivals into Thailand. — CIMB Research, July 12
http://www.theedgemarkets.com/my/article/a321neo-orders-good-airasia
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