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The USD appears to have commenced its long-awaited retracement against Asian regional currencies, down > 8% in the last week against the IDR alone. APAC airline earnings all have singularly negative responses to a rising USD given the large proportion of operating expenses denominated in that currency.
"We acknowledge that jet kerosene prices have risen 6% this week, but we believe that as a weak USD is more beneficial to the sector than a jet fuel price that is still well below where it was when sector stock prices peaked in July', says Credit Suisse.
Outperform-rated stocks, AirAsia X has the greatest leverage to changes in FX, with AirAsia, Singapore Airlines and Asiana also benefiting from recent moves in their home currencies. But in the words of the Rolling Stones 1969 classic, "you can get what you need". It is believed that the airline sector in APAC has everything it needs for a re-rating should the recently observed retracement in the USD against regional currencies persist.
Those currencies that have been worst afflicted in the past 18 months have fared best in the past week, with the IDR particularly strong- rising >8% in the last week-followed by almost 7% for the MYR.
Jet fuel prices might have risen 6% over the same time frame, but these are still 39% lower than where they were this time last year and are well below where they were only in July when the APAC Airline Index peaked.
"Our expectation is for an average Brent price of US$54/bbl, implying an average US$$74/bbl for jet kerosene in 2015: This compares with a YTD average of only US$68.70/bbl. In other words, we will be underestimating airline earnings without a price rise", added Credit Suisse.
Currency, though, is more important than jet kerosene as it affects not just the price of fuel, but also lease costs, landing fees, maintenance, foreign staff and station expenses...the list goes on. Our universe of airlines has a substantial "short" position in the USD, with greenback-denominated opex vastly outweighing USD-based revenues.
