20 August 2019
AIRASIA Group Bhd and its low-cost long-haul affiliate AirAsia X Bhd (AAX) have spent much of the past two years battling rising charges, and it is far from over as a new departure levy kicks in next month.
Come Sept 1, passengers flying out of the country will pay the new tax of RM8 to RM150 in addition to existing taxes such as the passenger service charge (PSC), which varies from RM35 to RM73 according to geographic region, and a regulatory service charge of RM1.
According to a source close to the matter, while the new levy represents a small percentage of the total ticket price, a slight increase in prices could dent demand for low-cost carriers like AirAsia and AAX that target price-sensitive consumers.
“For example, AirAsia’s average fare for the financial year ended Dec 31, 2018 (FY2018)was RM168 one-way and it will increase by 5% (RM8) to RM176 for passengers flying to Asean destinations and by 12% (RM20) to RM188 for those travelling to destinations beyond Asean when the departure levy is imposed,” the source tells The Edge.
“As for AAX, the average fare for FY2018 was RM477 one-way. Passengers flying on its Premium Flatbed business class seats to Asean destinations will pay RM527 when the departure levy kicks in, which is RM50 or 11% more. Its average fare will increase by RM150 or 31% to RM627 for flights to destinations beyond Asean,” the source says.
Already, AirAsia and AAX have removed a RM3 fee placed on its passengers departing from klia2 since January and will stop charging a processing fee for those who pay via online banking and credit card from October.
“While this would lead to less income for the two carriers, the removal of the fees would more or less offset the impact of the impending departure levy,” says the source.
AirAsia and AAX declined to comment.
The government has yet to specify how the departure levy will be collected, but it is understood that, like the PSC, the new levy will be collected by the airlines and passed on to the government upon completion of the flight.
PSC dispute lingers
AirAsia and AAX are also appealing a High Court decision that it must pay Malaysia Airports Holdings Bhd (MAHB) at least RM40.6 million in outstanding PSC for July to December last year. Of the RM40 million, about RM4 million is owed by AirAsia with the balance of RM36 million from AAX.
The lawsuit stems from the airline group’s refusal to collect the additional RM23 from its passengers after the Malaysian Aviation Commission equalised the PSC for non-Asean international passengers flying out of klia2 with that at the Kuala Lumpur International Airport (KLIA) and other Malaysian airports from RM50 to RM73 on July 1 last year.
The source says the uncollected PSC is likely to be absorbed by AirAsia and AAX if the airline group fails in its appeal.
“At end-December last year, the amount of RM40.6 million equalled about one million passengers. The number of passengers travelling out of klia2 who paid RM50 has grown to some five million as at July this year. This translates into RM115 million in outstanding PSC and could grow to RM150 million to RM200 million by the end of the year.
“It is unlikely that AirAsia and AAX will wait until the decision on an appeal. There is also the risk that the Court of Appeal may rule against them,” the source adds.
Last Thursday, AirAsia announced that both it and AAX will start imposing the RM73 PSC on its passengers flying out of klia2 from Aug 9, although it is doing so “under protest” following the recent court ruling.
The source says the move will help ease the blow of an unfavourable final verdict and the departure levy.
The departure levy has come as another blow for airlines, which are already grappling with overcapacity, high fuel costs, a depreciating ringgit and stiff competition.
Maybank Investment Bank Research aviation analyst Mohshin Aziz says while Malaysians are capable of absorbing the departure levy, airlines may suffer from lower yields in the initial one or two quarters as they try to offset the impact by lowering their published fares.
“The Sept 1 implementation date is too close and airlines will not be able to yield manage accurately in the third quarter (3Q2019). Airlines typically sell their tickets two to six months ahead and it is difficult to claw back the passengers that have already paid for the tickets,” he says in an Aug 2 report.
Mohshin sees full-service carriers affected by the departure levy but not low-cost carriers like AirAsia because of their all-economy class configuration. “AAX is the most adversely affected, followed by Malaysia Airlines Bhd and AirAsia,” he says.
“The broader thesis remains that consumer demand is soft and any cost push will further dent demand,” he adds, maintaining a “sell” call on both AirAsia and AAX with a target price of RM2.28 and 14 sen respectively.
Nomura Global Markets Research analyst Ahmad Maghfur Usman says he has not made any changes to its earnings forecast for AirAsia and AAX as he does not think the departure levy will “stir trouble in a big way”.
“My view is that the new levy could result in some short-haul, budget-conscious passengers shifting away from full service to low-cost carriers where AirAsia will benefit. My expectation is that [AirAsia’s] load factor will be slightly better,” he tells The Edge.
Ahmad Maghfur agrees that AAX will be affected but says it is far better off than Malaysia Airlines. “People will consider flying AAX rather than Malaysia Airlines because the latter’s air fares are already expensive and it now has to pay the departure levy.”
He continues to like AirAsia on the back of narrowing losses of its ailing affiliates in Indonesia, the Philippines and India, earnings growth for Malaysia and Thailand and lower fuel cost expectations year on year, which are “comfortably hedged” as far ahead as FY2021.
AirAsia’s net profit rose 21.6% y-o-y to RM1.98 billion in FY2018 while revenue grew 9.2% y-o-y to RM10.6 billion. Ahmad Maghfur also expects AAX to return to the black in FY2019, posting a RM98 million net profit from a net loss of RM312.7 million in FY2018, on the back of lower fuel costs.
“This will be partly offset by the decline in yields on lower air fares because of competition and weak demand for long-haul air travel expected for this year,” he adds.
But he warns in a July 19 note to clients that the court’s decision that AAX must cough up the PSC dues owed could see the carrier’s headline FY2019 net profit of RM98 million shaved by 37%.
Of nine analysts covering AAX, Ahmad Maghfur is the only one recommending a “buy” with a target price of 27 sen. The stock closed at 20.5 sen last Thursday.
Eight of the 18 analysts covering AirAsia have a “buy” call on the carrier while five are calling a “sell”. The other five have a “neutral” call on the airline. Analysts’ consensus 12-month target price for AirAsia is RM1.99, indicating a potential return of 69% from its close of RM1.18 last Thursday.
AAX and AirAsia are due to release their 2QFY2019 results on Aug 22 and 28 respectively.
Source: theedgemarkets.com
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