BULL VERSUS BEAR PERFORMANCES: While AirAsia (top) is expected to flourish as it forges more joint ventures to cement its position as Asean’s leading low cost carrier, MAS continues to be in the red as there are lack of detailed plans. — AFP photo

KUCHING: Despite posting weaker year-on-year (y-o-y) and quarter-on-quarter (q-o-q) yields, AirAsia Bhd (AirAsia) seems to fare well amidst a high average jet fuel cost compared with its foe-turned-ally, Malaysia Airlines System Bhd (MAS).

ECM Libra Capital Sdn Bhd (ECM Libra) in its research report yesterday affirmed its optimism on AirAsia despite a higher-than-average jet fuel cost of US$140 per barrel and a seasonally weaker second quarter.

Its commendable RM137 million adjusted net profit was well within the research house’s expectations with average fare remained unchanged q-o-q at RM164 per pax.

Passenger and load factor for the group, on the other hand, had increased by 3.6 per cent and 1.5 percentage points q-o-q respectively.

Despite higher overall cost, the low-cost airline had managed to lower its ex-fuel cost by 1.4 per cent y-o-y and 3.4 per cent q-o-q to 6.5 sen.

To recap, the group’s first half of financial year 2011 (1HFY11) adjusted net profit of RM335.9 million had made up 39 per cent and 40 per cent of the research house’s and consensus full-year estimates.

The group’s 2HFY11 results were expected to be in full swing due to seasonally stronger passenger traffic and an anticipated lower jet fuel costs.

On the other hand, MAS continued to ‘bleed’ red ink with its 2QFY11 results of a reported RM526.7 million loss on the back of higher fuel cost. Together with losses seen in 1QFY11, the group’s year-to-date losses came up to a RM769 million.

The increase in the airline’s traffic growth could not be offset by the 40.7 per cent y-o-y increase in 2QFY11 fuel cost.

“What surprised us was the minimal 1.2 per cent y-o-y increase in revenue yield (revenue/revenue passenger kilometre) to 24.2 sen which suggests that lack of pricing power or predatory pricing to compete with low-cost carriers,” said ECM Libra.

Over the next six months, the group would seek to maximise revenue per available seat kilometer via dual pricing and proactive flight planning.

Over the medium term, the focus would be primarily on the long-haul premium business (with more first and business class seats) while regional routes would be further rationalised. This represented a complete reversal of the previous management’s strategy.

However, despite the ambitious blueprint drawn out by the airline for the consecutive quarters, ECM Libra remained bearish on the airline’s future prospects.

“Despite capacity cut in 3QFY11 and seasonally stronger 4QFY11, we expect MAS to continue reporting losses as fuel cost remain high. While crude oil prices have corrected significantly, jet fuel prices have remained stubbornly high.

Average jet fuel price since July of US$127.2 per barrel has only declined by three per cent.

“We are also not sanguine on MAS’ new strategy at this juncture due to lack of detailed implementation plans as well as continued intense competition by Singapore Airline, the incumbent premium long-haul carrier in Asean, as well as the impending establishment of a new Pan Asian airline by Qantas,” highlighted ECM Libra.

As such, analysts estimated that MAS’ earnings would be like ‘shooting in the dark’ at the moment, given the lack of detailed plans by the group at this juncture.

Hence, ECM Libra had cut its FY11 to FY13 estimates aggressively by 28 per cent to 56 per cent on assumptions of minimal capacity growth.

Selling pressure was expected to resume following a dismal 2QFY11 results and synergistic benefits from the collaboration with AirAsia were anticipated to be realised within the long-term.

While MAS seemed to bear the pessimism, AirAsia appeared to shoulder optimistic ratings as analysts viewed the group in a much positive light.

“Despite commendable growth rates in the past, AirAsia has further room to grow as it forges more overseas joint ventures to cement its position as Asean’s leading low cost carrier. New oversea ventures are expected to commence soon in Philippines (4Q11), Vietnam (1Q12) and Japan (1Q12). It is also eyeing a joint venture in Singapore and another in north Asia,” opined the research house.

Recent collaboration with MAS would also put Air Asia in a more solid position to negotiate new routes as well as airport charges.

ECM Libra Research pegged AirAsia at a target price of RM4.78 per share based on 12 times calendar year 2012 price earnings. The research firm pegged MAS at a target price of RM1.30 per share based on price to book valuation of 1.3 times on current book value per share.