SINGAPORE (Jan 31): Airlines in the region which can control their yields successfully are expected to lift their earnings this year while players like airports and maintenance players are expected to see positive developments as traffic growth persists, says DBS Group Research.
According to a Wednesday DBS report, fuel prices will be a key focus for airlines this year, having crossed US$75/bbl compared to an average of US$64/bbl in 2017.
With less hedging coverage, average costs per available seat-kilometre (ASK) is expected to rise for two straight years.
This means players who embark on yield management strategies will stave off margin pressures, supported by peak load factors, having risen over the past three years, adds DBS.
Sector-wide capacity expansion appears to have slowed to a less aggressive pace this year as many key players adopt a more cautious pace.
This will be sufficient to match a normalised clip of demand given growth of price-sensitive air passengers is expected to be minimised.
All in, load factors are expected to take a breather, adds DBS.
"A potential catalyst may lie in the Thailand market, as tourist arrival figures has staged a sharp rebound since 4Q17 and may well flow through to 2018," says the research house.
Key recommendations for the sector include AirAsia and Malaysia Airports which have value-enhancement opportunities augmenting their steady earnings fundamentals.
Stocks like China Aviation Oil (CAO) will also be a good proxy to air travel demand.
With monopoly on the supply of bonded jet fuel to China’s civil aviation industry, CAO should benefit from the long-term growth of China’s international air travel market, says DBS.
Furthermore, with the backing of SOE parent China National Aviation Fuel Group (CNAF), CAO has expanded its business to marketing and supply of jet fuel at 43 international airports outside China, and further growing its reach, volumes, and ultimately achieving greater economies of scale.
"Maintain CAO at 'buy' with a target price of $2.08, based on 13x FY18 earnings," says DBS.
As at 12.46pm, shares in CAO are trading 1 cent lower at $1.64.
AirAsia is expected to maintain its earnings momentum after emerging as the outperformer in 2017.
More potential divestments this year will boost ROAEs like its stake in AirAsia Expedia and leasing unit Asia Aviation Capital; while its Philippines unit seeks to emulate the listing of its Indonesian associate.
Its majority market share in Malaysia is expected to help increase yield as domestic competition remains rational.
"We are also not overtly concerned by its fleet expansion pace, as its recent load factors top the sector at near 90%; in addition to the flexibility to move aircraft among its regional associates," says DBS who has a target price of RM4.80 or 1.5 times FY18 book.
Meanwhile, DBS is maintaining its "hold" on Singapore Airlines as yields need to reverse decline and grow to offset higher fuel costs.
But as the price of jet fuel has risen to nearly US$85 per barrel currently, this could further threaten SIA’s profitability.
"We see currently valuations as already pricing in 3%-4% yield increase per annum over the next two years, which is fair." says DBS.
