KUALA LUMPUR: A prolonged impact of Covid-19, particularly on international travel, will erode airlines' and the aviation sector's profits and margins.
Hong Leong Investment Bank (HLIB) Research said the aviation sector has already been severely affected by Covid-19, as countries implemented strict social distancing measures, lockdowns and closed borders, resulting in a significant restrain on travel plans.
Based on track records, governments will only allow for the gradual opening of domestic travels when the pandemic has become under control.
"On the other hand, the opening of international borders policy is heavily dependent on governments' confidence on each other's Covid-19 measures, only after respective countries' domestic cases have become under control.
"Thus far, we have not seen successful instances of border opening between countries within Asia-Pacific," it said.
The firm noted that regionally, there are still many countries recording high numbers of new cases of Covid-19, despite the acceleration of vaccination programs and increasing concerns of the more deadly and contagious new virus variants.
Hence, HLIB does not anticipate a smooth recovery to international air travel in the near term.
"With the lower international travel mix, airport operators will lose out, as international travels command higher spending power and provide higher margins.
"Similarly, most airlines have been relocating their capacities into domestic segments and hence stiff competitions with limited flight deployment by the respective airlines due to low asset utilisation," it said.
Judging from the current developments, HLIB expects domestic travel within ASEAN countries will remain suppressed until the end of 2021.
The bank-backed research firm also expects domestic travel to gradually recover by the middle of 2022 with international borders opening up simultaneously and to only potentially enjoy meaningful recovery towards the end of 2022 or mid-2023.
"We maintain an 'Underweight' rating on the aviation sector with 'Sell' recommendations on AirAsia Group Bhd and Malaysia Airports Holdings Bhd (MAHB).
"While we are positive on AirAsia's progress in the development of AirAsia Digital and the potential listing of the unit in the United States (US) stock-exchange, we reckon its aviation segment is still in a dire situation.
"MAHB is expected to remain in the red in the near term, as the hopeful recovery of air travel (especially in Malaysia) remains a concern. Nevertheless, management has secured enough liquidity until 2021-2022," it added.