Middle East conflict may hurt aviation sector

PETALING JAYA – The rising geopolitical tensions in the Middle East could result in potential jet fuel price hikes and lower passenger traffic, thus impacting the aviation sector negatively.

No aviation player will be spared if a full blown war erupts in the Middle East.

Maybank IB Research estimates that up to 26% of earnings and target price (TP) of Malaysia Airports Holdings Bhd (MAHB) are at risk should passenger traffic to and from the Middle East cease.

For Capital A Bhd and AirAsia X (AAX), every US$1 per barrel hike in jet fuel prices (on a full-year basis) will negatively impact earnings estimates by about RM50mil and RM14mil, respectively.

It said the companies’ earnings estimates, calls and TPs are under review.

As an airport operator, it goes without saying that MAHB has little to fear from higher jet fuel prices.

However, Maybank IB Research said it fears that passenger traffic to and from the Middle East will impact MAHB’s Malaysian and Turkyish operations.

MAHB has not released its 2023 airport statistics, which details passenger traffic from that region.

Examining its 2019 (pre-pandemic) airport statistics, passenger traffic to and from the Middle East accounted for 7% of international passenger traffic at KL International Airport and 28% of international passenger traffic at Istanbul Sabiha Gokcen.

Maybank IB Research added that in a worst-case scenario, should all passenger traffic from the Middle East cease, it estimates that earnings will be cut by 26% on a full-year basis and its discounted cash flow-TP will be cut to RM6.61 (minus 26%) a share.

To the best of its knowledge, none of Capital A’s four airlines fly to Middle East destinations.

Thus, the research house’s main concern for Capital A is higher jet fuel prices.

“At press time, spot jet fuel prices have not deviated far from our forecast of US$105 per barrel,” it said.

Capital A can pass on higher fuel cost to passengers, given that competitor MYAirline suspended operations in October 2023.

Thus far, the Malaysian operations of AirAsia (MAA, which contributes about 80% to group earnings) has been able to charge higher fares without overly impacting load factor, Maybank IB Research said.

AAX does fly to Jeddah, Saudi Arabia, but the research house understands that this destination accounts for only 5% to 7% of its total available seat kilometres.

Maybank IB Research said even AAX has the ability to pass on higher fuel costs to passengers.

However, the research house gathers that it will not be as successful as MAA as demand for its medium to long-haul flights, as exemplified by load factor, is not as high as MAA’s short-haul flights.

Historically, MAA’s load factor exceeds AAX’s by an average of about five percentage points at 85%.