Asian airlines find favor as jet fuel falls

International Air Transport Association (IATA) chief executive Giovanni Bisignani said. “the profile of the recovery in air transport sharply decelerated in March.” Asia-Pacific carriers saw traffic losses of more 2% in March after the earthquake and tsunami stuck northeast Japan on March 11. Air-freight demand contracted by 0.6% on previous year, according to the IATA.

However, in the last month, crude oil has sold off sharply. Brent crude prices have fallen nearly 11% in the past month, while Nymex crude is down by close to 12%, according to data from FactSet.

While jet-fuel remains nearly 40% above last year’s levels, prices are easing back from historical highs. For the week of May 6, the IATA priced aviation jet fuel at $127.3 a barrel, a drop of 8.5% on a one-month basis.

Budget airlines are more leveraged to jet fuel prices in terms of operating costs. The implementation of surcharges by full-service rivals has boosted demand for low-cost carriers, according to Citigroup.

“[Fuel surcharges are]…leading to demand destruction at the premium air travel segment, as passengers trade down to low-cost carriers. Load factors and forward bookings at low-cost carriers look very strong, while load factors at full-service carriers may come under pressure,” the analysts said.

Tiger Airways Holdings Ltd. recorded a load factor of 88% for April – “impressive” in an environment of inclining fuel prices, Citigroup said, and represents potential to increase profit margins.

“Strong load factors provide room for lower cost carriers to raise ticket prices, raise ancillary charges, such as excess baggage, or implement fuel surcharges effectively in order to pass through the rising jet fuel costs to passengers,” Citigroup said.

The analysts have a buy rating on Tiger, but nominate AirAsia Bhd. and Cebu Air Inc. as their picks of the sector, as recent falls in jet-fuel prices relieved downside risks to airlines’ earnings and made low-cost carriers more attractive.

Singapore Airlines

Despite competitive pressures from budget carriers, Singapore Airlines Ltd. SG:C6L -0.41%andnbsp;andnbsp; remains in Merrill Lynch’s favor. Shares are up 3.3% so far in May.The analysts noted the firm’s March quarter results were disappointing — missing consensus estimates by 24%, weighed down by fuel costs and weak revenues.

“Despite Singapore Airline’s focus on the booming premium traffic segment, a combination of declining leisure volumes and weak yields from the strong Singapore dollar meant it was unable to offset the impact of higher fuel prices,” the analysts said.

However, they maintain a buy rating on the stock, arguing lower fuel prices and the likely disposal of U.K.’s Virgin Atlantic – of which it owns at 49% stake — should provide upside catalysts for the stock.

Australian aviation

Dominated by Qantas Airways Ltd. AU:QAN 0.00%andnbsp;andnbsp; QUBSF -3.08%andnbsp;andnbsp; and Virgin Blueandnbsp; Holdings Ltd. AU:VBA -1.64% VBHLF -6.65% , Australia’s aviation sector is buffeting a number of its own challenges, in addition to those weighing on its global peers.

The Australian dollar AUDUSD -0.0753%andnbsp; at record highs is hitting inbound tourism, while the introduction of a carbon tax next year is expected to compromise profit potential for the firms.Qantas itself has been plagued by the threat of industrial action, disrupted services and maintenance issues in recent months.However, despite the headwinds, analysts at Nomura continue to see value in the Australian airline sector.

“Providing economic driven aviation demand and operating efficiencies offset any fuel price elasticity impact, we forecast growth in profitability will be maintained. Qantas and Virgin Blue are trading at discounts to long-run mid-cycle valuation metrics and thus we recommend being overweight the sector,” the analysts said. Qantas shares are down 0.5% this month while Virgin Blue shares are up 7%.

In Asian trading on Tuesday, Japan’s Nikkei Stock Average Index JP:NI225 +0.87%andnbsp; ended the day up 0.1%, Hong Kong’s Hang Seng Index HK:HANGSENG +0.31%andnbsp; was down 0.1%, South Korea’s Kospi index XX:$SEU +1.15%andnbsp; dropped 0.1%, while Australia’s Sandamp;P/ASX 200 AU:XJO +0.42%andnbsp; ended the session up 0.7%.

Source = marketwatch