Yesterday, SPAD announced an increase in rates for express buses by an average of 22% while taxi rates were also increased. According to SPAD, this is to reflect the gradual increase in operating cost over the years and the fact that the last time these rates were reviewed was in 2009.

On first thoughts, the increase in land transportation rate (particularly express buses) which is a competing mode of travel, is a potentially positive catalyst for airlines as the significant rate increase could encourage migration to air travel.

The increase in express bus rate narrows the price differential between the two modes of transport quite substantially, and in fact, depending on actual date of travel and destination, air fares can be even cheaper or comparable (see Exhibit 1) based on our comparison with flights a week from now. The fact that air travel significantly shortens travel time relative to land transport further underpins the potential substitution.

There are over 260 express bus operators in Malaysia. One of the largest operator is Konsortium Transnasional, which carries circa 6mil passengers/annum for its express operations, almost 30% of Airasia’s total pax carried (including international traffic) in FY14. Airasia derives around half of its revenue from the domestic market and we think is a potential beneficiary of a substitution of land travel.

Separately, Tan Sri Tony Fernandes is indicating of a possible revisit of Indonesia Airasia’s and Airasia Philippines’ IPO. While this arguably needs to be analysed in more detail, the move is generally positive for the associates to unlock value, recapitalise and reduce reliance on financial support from Airasia Bhd, besides possibly helping reduce amounts owing to the parent company which had increased to circa RM2bil in the recent 4Q14.

Other than the IPOs, perhaps a serious look at the perpetual Sukuk program that Airasia proposed (amounting to RM1bil) in Oct 2014, could also help bump up Airasia’s equity and improve the current balance sheet standing (2.5x net gearing), on top of the potential sale of up to four aircraft (group-wide) planned in FY15F.

Maintain BUY at an unchanged fair value of RM3.30/share.

Source: AmeSecurities Research - 20 Mar 2015