- AirAsia announced that it has agreed to move into KLIA2 by 9 May, as instructed by the government. This follows the government’s decision to enlist the expertise of the International Civil Aviation Organisation (ICAO) to further evaluate KLIA2 and to determine the long-term safety of the new airport.

- Positively, passenger service charges (which are passed on to passengers), as well as landing, parking and other airport charges (which are typically borne by AA) are also expected to remain the same as the current LCCT for the foreseeable future, based on negotiations between AA and MAHB.

- KLIA2 will provide better connectivity given a dedicated rail line form the city directly to the airport. This, and the comfort of a much larger and updated airport might suggest room for yield improvement, if not, traffic improvement, in particular, via new business traffic.

- More importantly, KLIA2 addresses congestion issues at the LCCT. The current LCCT was built for passenger capacity of 15mil pax/annum vs. the 21mil pax AA carried last year (which may include pax from various other hubs in Malaysia). KLIA2 in comparison would have 45mil pax/annum capacity.

- Secondly, it also addresses operational constraints, given AA’s growing aircraft count. The LCCT was built to accommodate 33-36 aircraft parking bays, compared to the 72 aircraft AA had in its Malaysian operations as of end 2013.

- Airport development aside, in the near-term, the negative impact on tourist volume from the MH370 incident could further entice price competition to win pax traffic, on top of the already weak pricing environment prior to the incident. MAS’ strategy to improve utilisation of its assets means there is further capacity growth that needs to be filled up (FY13 ASK: +17%, FY14F ASK: +10%). AA in comparison, is expecting circa 4% ASK growth. In the case of a prolonged price war, the small capacity growth limits AA’s ability to react and win over pax share, in our opinion.

- Maintain HOLD on AA at unchanged fair value of RM2.50/share. On top of the abovementioned risk, the strengthening USD is another key risk as AA does not hedge operational forex exposure; some 70% of AA’s cost is denominated in USD, while the majority of revenues are in non-USD currencies. 

Source: AmeSecurities