The Malaysian aviation sector is experiencing favourable conditions, driven by a marked decline in USD and jet fuel prices. With the RM strengthening to RM4.25 per USD and jet fuel prices dropping to USD86 per barrel, airlines are set to benefit from lower operating expenses. This improvement is particularly significant as 70-80% of airlines' operating expenses are in USD, with jet fuel accounting for 40-50% of costs.

For CAPITAL A, each 5 sen recovery in the RM/USD exchange rate could boost earnings by RM100 million to RM125 million annually, while a USD1 per barrel reduction in jet fuel prices could increase earnings by RM45 million to RM55 million. For AAX, similar changes would add RM25 million to RM30 million and RM13 million to RM14 million to earnings, respectively.

Maybank Stock Broking House maintained a POSITIVE outlook on aviation sector.

In addition to these cost reductions, fare increases are anticipated. Malaysia Airlines' (MAS) recent decision to cut capacity by 18% until the end of the year is expected to drive higher fares. Historically, similar reductions in capacity, such as those following the MH370 and MH17 incidents, have led to fare hikes. This could benefit other airlines, with each RM1 increase in fares potentially adding RM25 million to RM35 million to CAPITALA's earnings, and RM3 million to AAX's earnings.

Forecasts for FY25 earnings are promising under a "blue sky" scenario. If the current trends in the RM/USD exchange rate and jet fuel prices continue, CAPITALA's earnings for FY25 could surge by 93% to RM1.36 billion, leading to a potential target price increase to RM1.38. AAX's FY25 earnings might rise by 123% to RM451.2 million, with its target price potentially reaching RM6.06. This optimistic outlook reinforces the recommendations to maintain BUY calls on both CAPITALA and AAX, reflecting their potential to significantly benefit from the current favourable conditions in the aviation sector.

Source: Maybank
Title: Winds are blowing in the right direction