Too early to buy?
Oct 1, 2008
IS IT TIME TO POP THE champagne for airline stocks? Share prices of airline companies had
been sold down heavily since last year as crude oil prices soared to a record high of US$
148/barrel, lifting aviation jet fuel prices in the process to its similar high. However, the
commodity's price has since fallen substantially and fell to as low as around the US$ 90/barrel
level recently before settling at around US$ 104 at the time of writing. Given that the rise in
crude oil prices was the dominant reason for the sell-down of airline stocks then, with its current
decline, should investors buy back airline stocks as a counter-play to the falling crude oil prices?
If so, then Malaysian Airline System Bhd (MAS), as the listed national carrier, can certainly be a
stock to watch in the next few months. As it is, its share price has already moved up from its
recent low of RM2.96/share back in January to the current price of RM3.50 (see Chart 1). Could
the share price move further up in the months ahead? While this is a possibility, analysts are,
however, still unconvinced of a big rebound in aviation stocks in the future, and as such, MAS is
still not rated as a `buy' among most analysts despite it benefiting from the falling crude oil price.
Why the continued pessimism?
Demand the party spoiler
Well, it would seem that most analysts now fear that the aviation industry would be hit with
falling travel demand, given the economic crisis now plaguing the developed economies.
According to a recent comprehensive report by local research unit AmResearch, the International
Air Transport Association (IATA) has recently issued a grim warning on the industry, indicating
potentially deepening losses for the airline sector this year.
Its new forecasts see the airline industry's 2008 losses at US$ 5.2 billion versus the previous
estimate of US$ 2.3 billion. This is largely attributable to expensive fuel prices, which is still
64% higher year-on- year (y-o-y) despite the recent softening crude oil prices and faltering
According to the research house, although the increase in the price of crude oil has been a feature
of the industry since 2004, it has all the while been cushioned by efficiency gains and rising
consumer confidence that supported robust demand. The broadening impact of the current
economic crisis in the United States, which has spread to other developed economies such as
those in the Eurozone, has, however, brought this trend to an end.
Air travel demand lowest in five years