PETALING JAYA - The local aviation sector can look forward to a more positive outlook, given the slump in jet fuel prices, which have dropped by 50 per cent to US$60 (S$80.7) per barrel.
Maybank IB Research said in a report yesterday that the decline in jet fuel prices, stemming from the fall in crude oil prices, would improve airlines' margins significantly, as jet fuel was the largest cost item for airlines, constituting nearly 45 per cent to 58 per cent of total operational costs.
"The lower fuel price environment will ease the impact of a soft yield market, which will also offset some impact of the goods and services tax (GST) on passenger service charges and on domestic flights," the research house said.
Hong Leong Investment Bank (HLIB) Research is of the same view, reckoning that the slump in oil prices will also outweigh the ringgit's depreciation, which is down 8.5 per cent to RM3.60 to a US dollar.
"This is because a large portion of airlines' operational costs, such as maintenance, leasing, jet fuel, interest expenses and depreciation, are denominated in US dollars," HLIB Research said.
Apart from that, passenger traffic is expected to grow 5.5 per cent, underpinned by real gross domestic product growth of 5 per cent and based on the aircraft deployment plans by the respective airlines.
Maybank IB has selected AirAsia Bhd as its stock pick for the sector due to the effects of lower fuel prices, which will in turn aid its capacity management and sales strategy.
HLIB Research has also maintained its "buy" call on AirAsia, with an unchanged target price of RM3.15.
"We are confident that AirAsia X will turn around in 2015, but we also believe an equity issuance to beef up its balance sheet is a necessity, and therefore it is best to stay on the sidelines until that happens," Maybank IB said.
As airlines slow their capacity growth, HLIB Research expects less yield pressures this year, as air travel demand growth catches up with the current oversupply in the system.
However, air travel demand in the first half of 2015 is expected to be affected by uncertainties like the GST implementation and recent air incidents.
Demand is expected to potentially recover in the second half of 2015, as negative sentiment gradually subsides.
Meanwhile, Maybank IB has a "hold" call on Malaysia Airports Holdings Bhd (MAHB), due to it being at a "capital-heavy stage" of its business, where strong earnings growth will only be seen in the longer term, post-2016.
On the other hand, HLIB Research has maintained a "buy" recommendation on MAHB, with a target price of RM8.35. The stock closed at RM7.16 yesterday.
The target price is based on its sum-of-parts valuation.