AAX battles fuel gusts, MAG hedges the storm

AIRASIA X Bhd’s (AAX) return to profitability is facing a fresh stress test as elevated jet fuel prices threaten to erode margins, just as the airline completes the final phase of its post-pandemic recovery.

The long-haul low-cost carrier has restored most of its fleet, rebuilt its balance sheet, and returned to profitability.

Unlike some peers, however, it entered the latest fuel shock without meaningful hedging protection, leaving earnings exposed to spot fuel prices at a time when jet fuel has more than doubled since the Iran war began.

That vulnerability has become increasingly visible as airlines worldwide scramble to manage one of the sharpest fuel shocks in recent years, driven not only by crude price spikes but also by supply disruptions across refining and transport routes.

For AAX group chief executive officer Bo Lingam, the timing could hardly be worse.

“We were working on this and preparing for hedging, but this happened before we could execute. It is just bad timing,” he told the media recently, referring to fuel hedge plans discussed earlier this year before geopolitical tensions escalated.

Without hedging, AAX has little choice but to pass part of the cost to passengers. The airline has already raised fares by 30% to 40% while increasing fuel surcharges to protect margins.

Analysts say that move can only partly absorb the pressure because fuel costs have risen faster than yields, and not every seat is sold at current higher prices.

A large portion of forward bookings would have been locked in before the latest fuel spike, meaning AAX is still flying passengers whose tickets were sold under an earlier cost structure, creating a lag between fare adjustment and earnings protection.

“While the operating environment remains dynamic, fuel price volatility continues to be the primary risk we are actively managing,” Bo tells StarBiz 7.

“We remain in close engagement with our suppliers, have strong visibility on supply ­stability, and do not anticipate any disruption that would require forced capacity reductions.”

Industry estimates suggest fuel typically accounts for 35% to 45% of total operating costs for long-haul carriers.

In extreme periods, that can rise above 50%, meaning even aggressive fare increases may not fully neutralise the earnings impact if fuel remains elevated for months.

An analyst says AAX could face material earnings pressure if current prices persist, noting that the airline’s earlier earnings assumptions were based on jet fuel levels far below today’s market.

He estimates that every US$1 increase in jet fuel prices has a meaningful direct impact on earnings, making current fuel levels difficult to absorb through pricing alone.

The challenge is especially acute for low-cost carriers because their customer base remains highly price sensitive.

Modalis Infrastructure Partners head of airport IR and industry research Khair Mirza tells StarBiz 7 that prolonged fuel inflation affects airlines not only through higher operating costs but also weaker travel demand.

“All airlines may be affected by a prolonged high fuel cost environment, not only from higher fuel costs but possibly just as much from reduced demand,” he explains.

He adds that softer demand could emerge through higher fares if airlines impose fuel surcharges, as well as from reduced consumer spending power as inflation spreads more broadly.

That puts AirAsia X in a delicate position: raise fares too aggressively and demand may soften, especially in leisure travel.

Bo maintains that pricing remains disciplined rather than reactive.

“Our profitability is driven by a combination of pricing discipline, network optimisation, and rigorous cost and cash flow management.

“While fares have been adjusted to reflect higher global energy costs, our yields continue to be supported by strong demand-supply dynamics across our core Asean and medium-haul markets,” he says.

Still, analysts note that fare hikes alone cannot fully protect margins if fuel prices remain elevated beyond the near term.

The contrast with Malaysia Aviation Group (MAG) is increasingly clear.

Malaysia Airlines’ parent has adopted a quarterly hedging strategy, covering 36% of fuel needs in the first quarter (1Q), 50% in 2Q, 40% in 3Q and 25% in 4Q.

This provides MAG with a financial cushion against immediate volatility, even though fuel now accounts for roughly half of its operating costs.

MAG president and group chief executive officer Captain Nasaruddin A Bakar said hedging remains central to managing uncertainty, allowing the airline to manage volatility effectively while still benefitting from potential price movements.

MAG has also secured supply through long-term contracts and operational adjustments, including carrying additional fuel from stations where supply remains available.

AAX, by contrast, is relying more heavily on market pricing, ancillary revenue, and network optimisation.

The airline says its cost base today is structurally stronger than before.

“Our earnings quality already reflects the structural ­improvements from our restructured cost base, as demonstrated in our 4Q25 and FY25 (financial year 2025) results,” Bo says.

“More importantly, our core profitability continues to be underpinned by strong cost discipline and industry-leading unit cost performance.”

Analysts generally remain constructive on AAX’s medium-term recovery, citing stronger balance sheet discipline and improved aircraft utilisation, but note that fuel remains the largest swing factor in earnings this year.

One analyst sees demand fundamentals remaining intact, particularly for medium-haul travel, but says near-term profitability now depends heavily on whether fuel normalises before the stronger travel season.

Khair says ringgit strength offers some relief because fuel and lease obligations are largely denominated in US dollar.

“In general, the ringgit has appreciated against the US dollar compared to 12 months ago. This should provide some relief to airlines operating in Malaysia.”

However, he emphasises that this relief is secondary to fuel costs. China’s traffic recovery may help support volumes, though not enough to offset broad weakness if geopolitical uncertainty drags on.

“China’s rebound will help, though it alone may not be able to change the overall sum result,” Khair notes.

For now, AAX’s fare hikes may buy time, but they do not eliminate the risk.

If fuel prices retreat meaningfully, the airline’s low-cost structure and nearly fully reactivated fleet could quickly restore earnings momentum.

If prices stay elevated, profitability may once again depend less on passenger growth and more on how long AAX can absorb a fuel bill it never locked in.