This article first appeared in The Edge Financial Daily, on December 4, 2015.

KUALA LUMPUR: Signs of a slowing economy notwithstanding, Malaysia Airports Holdings Bhd (MAHB), operator of the country’s 39 airports, expects the return of several international airlines to the Kuala Lumpur International Airport (KLIA) and the government’s initiatives to promote the travel industry to be key growth catalysts next year.

MAHB managing director Datuk Badlisham Ghazali is expecting several catalysts next year, including the return of several international airlines to KLIA and the government’s initiatives to promote the travel industry.

Already, the return of British Airways in May and All Nippon Airways in September have provided the added dynamism required by the aviation industry in Malaysia, said Badlisham, with Air China also returning to KLIA in October after a three-year hiatus.

“We look forward to providing an even greater level of connectivity for passengers with the re-entry of these airlines and the introduction of new carriers, as this demonstrates that they recognise the strong growth opportunities that exist in the Malaysian market,” he said in an email to The Edge Financial Daily.

Although national carrier Malaysia Airlines Bhd (MAB) is consolidating routes and frequencies to turn around its operations, Badlisham believes that British Airways, Lufthansa and Turkish Airways have managed to fill the gap by upping their flight frequencies.

“Demand for air travel is still there,” he said, adding that British Airways’ average load factor had been steady at 88% since its return to KLIA in May, even though MAS had maintained its double daily flights to London and daily flight to Paris.

Badlisham also sees several government initiatives aimed at promoting higher tourist arrivals in the country to augur well for the industry next year. The initiatives include online visa application for certain countries by mid-2016, and the allocation of RM1.2 billion to the tourism and culture ministry to spur tourist arrivals next year.

Regardless of MAHB’s optimism about the coming year, the aviation industry will still have to face headwinds in the form of overcapacity and foreign-exchange (forex) volatility, particularly among budget airlines like AirAsia Bhd, according to Shukor Yusof, an analyst at aviation research firm Endau Analytics.

Shukor also noted that the impending US interest rate hike could impact the revenues of those focused on the Asia-Pacific.

“Overall, lower oil prices don't necessarily equate to a better operating environment, given the instability in forex markets and too many airlines chasing the same pie,” he said, though he expects oil prices to stay relatively low, perhaps even lower than the current levels.

Geopolitical risks, like the Paris terror attacks in November, will cause a short-term impact on the aviation industry, with more delays in air travel and longer time spent at airports.

“However, the airline industry is resilient. This isn't as bad as the 9/11 (Sept 11) attacks,” Shukor told The Edge Financial Daily in an email.

For TA Securities Holdings Bhd’s senior aviation analyst Tam Kang Meng, 2016 is about how the current low jet fuel prices can save the local airline industry’s profit against the backdrop of a weaker ringgit, which tends to dampen travel sentiment among outbound travellers.

“For airports, the weak international passenger movement suggests that foreign tourists are not inspired by the ‘cheap’ ringgit. As such, we expect 2016 passenger movement to grow moderately at 4.3% [compared with 2015’s forecast 2.5%],” he said in an email response.

TA Securities expects jet fuel prices to drop further to US$65 (RM274.30) per barrel, while the ringgit could average at 4.30 against the greenback in 2016.

Tam agreed that the Paris terror attacks in November would have a short three- to six-month impact on the aviation industry. Moreover, airlines and airport operators will have to tighten security at every checkpoint, which involves some, albeit minimal, expenses.

Meanwhile, speculation about AirAsia’s “privatisation” may continue into 2016, though analysts like Shukor opined that the plan is unlikely to be realised, “as there is no appetite for such a development”.

However, Shukor said AirAsia would have to continue to find other ways to recapitalise and restructure to improve its cash flow and valuation.

Echoing Shukor’s sentiments, Tam said AirAsia is in dire need of equity funding to expand its fleet size.

“However, if this [privatisation] is really a plan in the pipeline, we believe the owner will consider listing the company outside Malaysia. But the offer price must be attractive enough for shareholders to accept the offer,” Tam said.

Overall, Shukor is of the view that AirAsia and MAHB shares are unlikely to sparkle in the first half of 2016, and will more likely stagnate given the lack of drivers.

Although Tam recognised that AirAsia’s (fundamental: 0.2; valuation: 0.6) current valuation is cheap with strong earnings visibility, and MAB is expected to trim its capacity further — with shortfalls to be filled by AirAsia — he said the fear of foreign funds exiting may resurface if the ringgit weakens further against the US dollar.

Year to date (YTD), the stock has almost halved from RM2.72 to its closing price of RM1.37 yesterday, valuing it at RM3.84 billion.

“Although MAB’s restructuring is positive for the industry yield as the need to engage in head-on competition is reduced, we believe the market has already priced in this impact,” Tam added.

As for MAHB (fundamental: 0.8; valuation: 1.4), Tam expects its passenger movement to grow only moderately at 4.3%, and maintained his “sell” call on the stock.

MAHB closed unchanged at RM5.43 yesterday, with a market capitalisation of RM9.37 billion. YTD, the stock has slipped 12.6%.

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