Airlines

Airlines: Great deals from cheap fuel prices

Maybank-KE noted that Asian airlines’ shares have fallen in tandem with cheap fuel prices, its traditional driver, since Aug ’15, and opines that this correlation mismatch presents a good entry opportunity.

Typically, lower fuel price is beneficial to sector as it is the biggest cost driver to airlines, thereby share price corresponds inversely to oil prices.

However, the Bloomberg Asia-Pac Airlines Index (BAPAI) showed a positive correlation with oil price since Aug ’15, implying that other negative factors weighing on markets have overshadowed the benefits of cheaper input cost.

One of the key drags is China’s devaluation of the CNY back in Aug last year, spurring a series of currency devaluations across Asian countries. This sparked concerns on USD debts relating to aircraft acquisitions.

To this end, the house thinks that the worries on FX has been too excessive, as markets appear to have overlooked that aircraft are also USD assets, and hence impact to book values is cushioned. Further, FX translation losses are non-cash in nature, and would not pose any impairment risk.

Coupled with the possibility of record profits on low fuel prices, the house views the 39% plunge in BAPAI to crisis-level valuation since its peak in mid-Jun 2015, opens up a bargain hunting opportunity for beaten down airline stocks.

Maybank-KE’s top picks in the region include IndiGo, China Southern, China Eastern, Air China, AirAsia, and Cebu Air amid compelling valuations.