- Death toll passed the 1,000 mark: The Ebola outbreak has worsened with the World Health Organisation (WHO) recently reporting that death toll from the outbreak has reached 1,013. The current Ebola outbreak initially affected three West African nations namely Sierra Leone, Liberia, Guinea, but has now spread to Nigeria with confirmed 10 cases and 2 deaths. While Ebola is not new, this is the worst outbreak in history.

-  Looking into the past outbreaks: Two key disease outbreaks in the past were the SARS outbreak in 2003 and the swine flu outbreak in 2009. The swine flu outbreak was first detected in Mexico, initially causing 103 facilities in Mexico and infected 47 people in the United States, 6 in Canada, 2 in Scotland and 1 in Spain. This occurred during the financial crisis when global air traffic was already experiencing a slowdown. Another outbreak was the bird flu (SARS) in 2003, which originated from the Asian region. Based on past trends, the impact on the aviation industry (once it reaches a pandemic stage) is negative and immediate.

-  How did past outbreaks affect Malaysian airlines?: SARS outbreak was formally announced in late February 2003 and took four months to contain before WHO formally announced SARS as epidemic in late June 2003. As a result of SARS, MAS registered four consecutive months of passenger traffic decline. The sharpest dip was seen in May 2003 (effectively 3rd month after SARS was officially announced) when MAS registered a 39% YoY drop in pax traffic and 23% drop in RPK (See Chart 2). MAS’ valuation de-rated by almost 45% YoY to as low as 1.4x PBV during the period (vs. average historical PBV of 1.7x). Airasia was not operating any Chinese routes in 2003, while the 2009 swine flu impacted mainly transpacific flights, which Airasia does not operate.

-  Ebola impact is pretty contained at this point: So far, reported cases of Ebola are limited to four countries in West Africa. No travel restrictions or frontier closures have been recommended by WHO at this juncture. Furthermore, we have seen little impact on regional airlines’ share price when news of the outbreak first surfaced in March 2014, given that Ebola is not widespread at this point and is not as contagious as the prior swine flu and SARS outbreaks (which are airborne viruses) vs. Ebola, which is transferred via contact of bodily liquids.

-  No impact on our stock calls: We still recommend investors to take up Khazanah’s privatisation offer (FV of RM0.27/share). Out of the two listed airlines under our coverage, MAS has bigger exposure to international capacity via its long-haul operations. However, MAS only had 0.2% revenue exposure to the African and South American region in FY12, and no exposure at all in FY13. The European and Middle Eastern region form the largest chunk of MAS’ revenue (24% of total). Experts interviewed by the press indicate that the risk of Ebola virus spreading into Europe, although not entirely impossible, is very low.

-  AirAsia remains a HOLD (FV: RM2.50/share): AirAsia’s routes are limited by a 4-hour flight range, which means the majority of its routes are contained within the ASEAN region from key hubs in Kuala Lumpur, Jakarta/Bali and Bangkok. We see little risk of a direct impact from the Ebola outbreak given the abovementioned reason, unless feeder traffic from long-haul airlines is affected. This too, seems to pose little risk at the moment. MAS’ restructuring will have a bearing on Airasia as it will likely determine prospects of yield recovery and Airasia’s appetite for expansion for its key Malaysian operation.

Source: AmeSecurities