Even while rising geopolitical tensions in the Middle East are not anticipated to hurt ticket sales, analysts predict that increasing fuel costs would damage Malaysian airlines.
According to Tan Kam Meng, an analyst at TA Securities who focuses on the aviation industry, fuel expenditures normally make up between 40% and 45% of local airlines’ operational costs. He pointed out that airlines have started to impose fuel fees to counteract margin compression.
“We are closely monitoring the oil price, as it would dent airline’s profitability, but travel to countries in the Middle East makes up only a small portion of all tourism,” he stated.
Stocks connected to aviation have seen a decrease in value. Shares of Capital A Bhd were down one sen, or 1.47%, to 67 sen at the time of writing, valuing the company at RM2.85 billion. At RM1.25, AirAsia X Bhd was trading five sen, or 3.85%, lower, bringing its market capitalization to RM558.84 million.
The price of a barrel of crude oil, measured globally, has risen to US$90 due to Iran’s weekend retaliatory strikes against Israel. The Iranian airstrikes were a reaction to an Israeli-attributed airstrike on the Iranian consulate in Damascus, Syria, on April 1. The attack claimed the lives of many military officers and several civilians.
After passing the majority of the cost increases on to passengers, airlines may still experience significant margin compression, according to Kenneth Leong, head of research at Apex Securities.
In the fiscal year that concluded on December 31, 2023 (FY2023), fuel prices accounted for 43.7% of Capital A’s operating expenses and 69.8% of AirAsia X’s (AAX) expenses. For the fourth quarter of 2023, the aviation section of Capital A recorded an average fuel price of US$125 per barrel, whilst AAX reported an average of US$131 per barrel.
While travellers would steer clear of the Middle East, Danny Wong, chief executive officer of Areca Capital, which oversees assets valued at RM4.18 billion, suggested that other regions, such as Southeast Asia, might gain from the shift in vacation destinations.
“While some would advise against travelling, others might think about other areas like Asean as a possible destination,” he stated.
Market observers are concerned that, in the interim, oil prices would surpass US$100 per barrel or, in the worst-case situation, reach US$140.
However, Moody’s Analytics cautioned that if the crisis escalates and Israel uses force to retaliate against Iran’s counterattack, oil prices may soar to more than $100 per barrel.
“At least for the time being, we think that the immediate risk of a confrontation has been contained,” Societe Generale’s global head of commodities research Benjamin Hoff stated. “At the same time, there are more avenues for escalation involving the US, and the tail of the event risk distribution has just grown heavier.”
According to him, there is now a 15% chance rather than 5% of direct military action between the US and Iran following Iran’s attack. In that case, Brent prices are expected to surge much above US$140.
According to Reuters, several international leaders and delegates have urged moderation from further escalation, including German Chancellor Olaf Scholz, French President Emmanuel Macron, British Foreign Secretary David Cameron, and Josep Borrell, the head of the European Union’s foreign affairs.
