- AirAsia Bhd (AA) has secured an air operator’s permit in India. Under its initial plans, AA will have a 49% stake in a JV with Tata Sons Ltd (Tata) and Mr Arun Bhatia (AB) of Telestra Tradeplace Pvt Ltd.

- On first thought, we believe that India is simply a huge potential in the longer term. Besides the fact that it has one of the largest populations in the world (1.2bil), overall air travel penetration is still low at 5% (Indonesia as a comparison entails a penetration of 22%). However, India’s income per capita is still very low (USD1,527) in relative to other emerging countries, e.g. China (USD5,445), Thailand (USD4,972), and Indonesia (USD3,495).

- While the huge population and under-penetrated air travel market are attractive propositions, any venture into India comes with huge risks. First, the high cost structure for domestic airlines arises from:- (1) high tax structure for jet fuel - local airlines effectively pay up to 60% higher jet fuel cost than other airlines; (2) high airport charges – same charges for FSCs and LCCs; and (3) dearth of experienced commercial pilots which forced local airlines to employ foreign pilots, who are paid in foreign currency.

- Second, intense competition has constrained yields. The LCC model started to dominate India in a big way from 2003. The success of the first LCC, Air Deccan, has spurred the entry of other LCCs like SpiceJet, Indigo and Go Air and subsequently, low fare offerings from Jet Airways and Kingfisher. Out of India’s c.60mil annual passenger traffic, 66% are carried by existing Indian LCCs. Opportunities, however, exist for international routes which entail only a 17% LCC penetration rate. We suspect uncompetitive jet fuel cost structure and a lack of LCC infrastructure make it difficult for Indian LCCs to compete on the international front – AA may have an advantage here as it has linked up key ASEAN destinations to India via AA, TAA and IAA.

- While India would be a promising market in the longer term, we are cautious on this development given the initial losses that comes with it. Recall that it took IAA c.3 years to start breaking even in Indonesia (a similar high population, low income and highly competitive market, but without India’s high cost structure), and 3-4 years to gain steady state profitability.

- Maintain HOLD at an unchanged fair value of RM2.50/share. 

Source: AmeSecurities