HSBC: Cebu Air gets the most out of airline consolidation

Gokongwei-led Cebu Air Inc., operator of low-cost carrier Cebu Pacific Air, is a winner in the ongoing  consolidation of Asia's airline industry, British financial giant HSBC Plc. said in a research note Tuesday. 

 

In “Asian Airlines: What the accounting margins don't tell us,” HSBC maintained an overweight tag for stocks of Cebu Air, meaning to accumulate the issue. 

 

“Our analysis reinforces our positive view on Cebu Air (OW), which we believe is a key beneficiary of industry consolidation,” the research note read. 

 

Last week, Cebu Air got the Civil Aeronautics Board approval for the $15-million acquisition of Tiger Airways Philippines. 

 

HSBC also assigned an overweight on Cathay Pacific and Singapore Airlines (SIA), but was neutral on AirAsia Berhad. 

 

Thai Airways, SpiceJet and Tiger Airways Singapore Pte. Ltd. got underweight ratings, which means the bank advises investors to lighten up their positions in these operators. 

 

To come up with the ratings, HSBC analyzed the books of airlines by scrutinizing how each company measured aircraft depreciation. 

 

“Owning assets tends to be cheaper than leasing, but carries residual value risks, especially as high fuel prices and rapid technological obsolescence are causing the economic life of an aircraft to shrink,” the report read.  

 

“This risk is higher for airlines that under-depreciate their aircraft,” it added. 

 

Among low-cost carriers in Asia, both AirAsia and Cebu Air own a majority of their fleet.

 

On face value, the margins of AirAsia appear to be higher than Cebu Air's, but “adjusting for differences in depreciation reverses the results,” HSBC noted.  

 

Also, AirAsia leasing aircraft to its joint venture partner “raises the risk of an overstated book in a down-trending second-hand value environment,” the report read. 

 

Among the full-service carriers, the bank said both Cathay Pacific and SIA are “well placed” and but the book of Thai Airways is “overstated from old unmarketable jets.”

 

“SpiceJet and Tigerair face the biggest challenges,” HSBC noted, but did not elaborate. – Siegfrid Alegado/VS, GMA News