AAX: Airline Group Poised for Growth on Strategic Restructuring and Favorable Market Conditions

HLIB Research has initiated coverage on AirAsia X (AAX), soon to be known as AirAsia Aviation Group (AAG), with a “BUY” rating and a target price of RM3.35. The investment bank believes the airline group is strategically positioned for significant growth following the completion of its restructuring exercise, anticipating robust earnings and a strengthening balance sheet in the coming fiscal years.

Strategic Rebirth and Expansion

The newly revitalized group has emerged as one of ASEAN’s largest low-cost airline operators, commanding a fleet of approximately 250 aircraft, with ambitions to expand to over 300 by 2030. AAX’s strategy focuses on enhancing its network across short- and medium-haul routes throughout Asia, Australia, and the Middle East, including plans for a new hub in Bahrain to facilitate connections to Europe and Africa. A substantial order book of 377 next-generation A321 aircraft is set to drive capacity expansion and improve cost efficiencies per seat and kilometer, aligning with the group’s strategic growth plans.

Favorable Market Tailwinds

The airline group is set to benefit from several positive market dynamics. Post-pandemic air travel demand remains strong, with key airports like Malaysia Airports Holdings Berhad and Changi Airport reporting robust passenger growth in 2025. This sustained demand is expected to maintain resilient yields across the sector. Additionally, AAX is poised to gain from the “Visit Malaysia 2026” campaign, which is anticipated to stimulate significant inbound tourism. On the cost front, easing jet fuel prices, which form 30-40% of AAX’s operating expenses, are expected to provide a substantial boost to the bottom line, with forecasts indicating a decline to USD80-85 per barrel in 2026. A strengthening Malaysian Ringgit against the US Dollar is also favorable, given that 60-70% of the group’s normalized operating costs are USD denominated.

Financial Outlook and Future Returns

While acknowledging a relatively weak balance sheet at the start of FY26 due to assumed debt and lease liabilities post-acquisition, management’s immediate focus is on debt restructuring to lower interest costs. HLIB Research forecasts AAX to achieve RM1.5 billion in profits for FY26f and FY27f, expecting strong cash flow generation to materially improve the balance sheet over the next two to three years. The group also intends to introduce a dividend payout policy as early as 2029, with estimated payouts of RM300-375 million, implying a potential dividend yield of 5.3-6.6%.

Valuation and Recommendation

HLIB Research initiates its “BUY” call on AAX with a target price of RM3.35, based on 8x P/E tagged to FY26 fully diluted EPS. The firm highlights AAX’s current material undervaluation compared to its peers, whose average valuation stands at 15.5x P/E for FY26. This valuation reflects the positive impact of strong air travel demand, stable yields, declining jet fuel prices, and a strengthening local currency against the USD, positioning AAX for a significant re-rating.