Weaker ringgit will hit airlines this year: Alliance Research

Alliance Research expects the local airline industry to experience deteriorating financial performance this year as unit cost is expected to rise due to a weaker ringgit.

The research firm forecasts the ringgit to average at RM3.30 against the US dollar this year, which is 4.7 per cent weaker vis-a-vis the average of RM3.15 against the greenback in 2013.

"As such we expect airlines' unit cost to inch upwards as a significant proportion of their operating costs are US dollar-denominated.

"Interest costs are also expected to rise in view of the substantial US dollar-denominated financial commitments," it said in a note Monday.

Alliance Research also expects the total capacity growth to increase by only 6.9 per cent this year, the slowest pace since the Global Financial Crisis in 2008-2009.

As such, it expects yields to stabilise this year due to the confluence of natural organic demand growth of three to four per cent and the additional travel demand generated by Visit Malaysia Year 2014, to improve the supply-demand equilibrium.

"The exception to this would be Malaysian Airline System Bhd's (MAS) international routes, where we believe it would continue to experience yield compression and/or fall in load factor in the near term following the tragic MH370 incident.

"We also expect AirAsia X Bhd (AAX) to continue seeing pressure on its Australian yields, as management has indicated that it will need three to four quarters for the market to absorb the additional capacity previously added in the third quarter of financial year 2013," it said.

Alliance Research is downgrading the aviation sector to "neutral" in tandem with its recent downgrades on aviation stocks under its coverage, namely AirAsia and AAX.

"We expect airlines' negative earnings momentum to continue due to a weaker ringgit and a possible delay in the move-over to klia2," it added.

The research house, however, favours Malaysia Airports Holdings Bhd with a "buy" call and a target price of RM9.80, as it represents a lower risk alternative to airlines to ride on the Visit Malaysia Year 2014 investment theme.-- Bernama