AirAsia’s hedging strategy buffers geopolitical shocks

Under a situation where none of AirAsia’s fuel requirements were hedged, MIDF estimated that the total fuel cost could increase as much as 25.7% y-o-y, assuming Brent crude prices were to hit US$75 per barrel.

PETALING JAYA: AirAsia Group Bhd is set to be well-geared to buffer further geopolitical shocks with its current hedging strategy.

The group is hedging 72.8% of Brent crude oil price at US$60.22 per barrel for the financial year 2020 (FY20) and MIDF Research is of the opinion that AirAsia’s prudent hedging strategy could weather the expected rise in oil prices.

“Assuming if the geopolitical tensions between the Middle East and the United States prolong, pushing the Brent crude oil price up to around US$75 to US$80 per barrel, we estimate that the unhedged portion of fuel costs could decrease by 1% year-on-year (y-o-y) or RM3mil in FY20, ” it said in a research note.

A US airstrike near the Baghdad airport that killed a top Iranian general on Saturday pushed the Brent crude oil price by nearly US$3 per barrel to settle at US$68.60, a level not seen since September last year.

The research house also anticipated there might be an increase in jet fuel consumption by AirAsia with the possibility of additional capacity and routes in conjunction with the Visit Malaysia Year 2020.

It expected the group’s total fuel cost to be 13.8% higher y-o-y in FY20, which would not vary much from the increase in expected jet fuel consumed by 9.5% y-o-y.

Under a situation where none of AirAsia’s fuel requirements were hedged, MIDF estimated that the total fuel cost could increase as much as 25.7% y-o-y, assuming Brent crude prices were to hit US$75 per barrel.

“In contrast, a 100% hedge on its oil requirements would result in only 9.4% y-o-y rise in AirAsia’s total fuel cost..

“Nevertheless, it would be important to have a buffer in a situation where Brent crude oil price could go below the hedged amount.

“Hence, we reiterate that AirAsia’s current hedging strategy serves as a tool to prevent fuel costs from inching higher, ” MIDF said, adding that it made no changes to AirAsia’s earnings estimates.

It maintained a buy recommendation on the counter with a target price of RM2.04 per share.

It said AirAsia’s operation continue to remain sound and the counter is preferred due its continuous enhancement of its cost structure and the efforts of rationalising revenue and cost via digitalisation.

While earnings in FY19 thus far were below its expectations, the research house said it was due to the effect of MFRS 16, the accounting standard for leases.

The standard will still be a headwind in the next coming years as the majority of AirAsia’s fleet were leased, but MIDF expects the airline to gain from lower amount of interest beyond the fifth year of the lease term.

“Our positive outlook on AirAsia also hinges on its more prudent hedging policy, stable operations with added capacity and continuous improvement to drive its non-airline ancillary business, ” it said.

The counter closed 2 sen lower at RM1.66 yesterday with 3.37mil shares traded.