PETALING JAYA: Volatility in oil prices and a possible oversupply in capacity within the Asia-Pacific over the next few months will likely cap the earnings growth of local airlines.

Some analysts are adopting a cautious stance on local airlines, AirAsia Bhd and Malaysia Airlines (MAS), having either downgraded these stocks recently or cut their earnings forecast for this year due to higher fuel bills.

Maybank Investment Bank (IB) Research said in a report yesterday that the oil price volatility could be more damaging than actual high oil prices since airlines normally priced their tickets one to three months forward, and these forward “profits” were easily wiped out due to ferocious oil price swings.

The research house said airlines were better equipped at handling higher fuel prices if the price escalation was on a gradual scale; they were generally unable to manage steep oil price changes.

Malaysia Airlines is likely to report tomorrow losses in the first quarter due mainly to higher fuel price.

A foreign research analyst covering the sector agreed, adding that it was difficult for airlines to price their tickets, not knowing where oil prices would be in a couple of months.

“We have seen oil prices rise by some 40% within the year, and then retreat. However, airline ticket prices have not gone up by a similar amount,” the analyst told StarBiz.

Maybank IB Research also said that capacity supply had exceeded demand in the Asia Pacific since last December and it reckoned that airline yields would come under pressure.

“The civil unrest in the Middle East and North Africa (MENA) region and the Japanese disasters are partially responsible both markets have a combined 12% of global capacity. This impact should be temporary and we think the traffic growth momentum will resume to normal levels in the last two quarters. Unfortunately, quarters two and three are the peak period that airlines receive their new aircraft orders.

“This is likely to exacerbate the current oversupply situation for at least three to five months,” it said.

The foreign research analyst also added that strong passenger demand would be seen in the fourth quarter, as consumers become more confident after assessing the impact on domestic living costs as a result of a possible electricity tariff hike and rise in petrol prices.

Although AirAsia is expected to post strong first-quarter numbers today, Maybank IB Research has downgraded it from a “buy” to “hold” as its target price of RM3.36 per share is within reach and its future earnings may be eclipsed by oil price volatility. There is also increasing evidence of an oversupply in capacity within the industry.

While AirAsia has re-instated fuel surcharge to offset some of the impact of higher jet fuel, the impact will only be seen later in the third quarter. The bulk of the airline's tickets for the second and third quarters have already been sold without any fuel surcharge embedded in them.

“We do not foresee AirAsia as being able to achieve profit growth in the second and third quarters. The risk profile for those quarters will be more challenging before reverting to a strong fourth quarter, as benefits of the recently-imposed fuel surcharge seep in,” it said.

Maybank IB Research has estimated that the group's first-quarter 2011 core net income will be RM246.7mil, which represents a growth of 105% year-on-year after adjusting for FRS139 derivative mark-to-market (MTM) and deferred taxation assets. The drivers are higher yields, reversal from losses at the Indonesian operations and efficiency gains.

ECM Libra Investment Research expects AirAsia to make RM1.1bil in revenue and a core net profit of RM211mil for its first quarter, on passenger yield of 21.2 sen per revenue passenger km and unit costs of 12.3 sen per available seat km.

“We expect second-quarter results to be significantly impacted by higher fuel costs. While keeping our estimates unchanged pending the release of first-quarter results, we are likely to cut our financial year 2011 forecast earnings by 14%.”

On the other hand, analysts expect MAS to make losses for its first quarter due to be released tomorrow.

“The first quarter is expected to be loss-making due to the impact from higher fuel price of 35%. The airline is expected to take a hit of RM15mil from the civil unrest in the MENA region and the Japanese disaster. We have revised our target price for MAS to RM1.80 (from RM2.55) per share, based on 14.2 times of the 2011 price earnings ratio,” said Maybank IB Research.