Highlights/ Comments

Malaysia airlines and airports have reported strong passenger growth in 1Q13, as MAS and AirAsia increased capacity and fought for market share.

For the remaining quarters, we expect further capacity expansion in the market as MAS, AirAsia, AirAsia X and Malindo takes delivery of aircrafts.

All the airlines are pursuing similar strategy of active load and passive yield. Airlines are offering competitive ticket prices in order to induce more air travels and improve their load factors (lower cost/unit). Further yield compression is imminent, as airlines increase capacity and ensure high load factors (at the expense of yield) to grab/defend market share.

The lower jet fuel price at US$115/bbl since April 2013 from US$135/bbl in 1Q13 will improve airlines’ operational margin, as jet fuel cost typically stands at 40% (FSC) to 60% (LCC) of the airline operational cost (exdepreciation, aircraft lease and interest expense).

However, we believe that airlines are likely to offer further yield cuts (as jet fuel price dropped) in order to grab larger pie of the market. Hence, the lower yield will diminish the advantage of lower jet fuel price.

Airport operator MAHB is the main beneficiary of the current aviation trend. MAHB has the monopoly of Malaysia airports (except Senai), in strategic position to gain from the increasing capacity of the airlines and cheap ticket prices to induce air travelling.  MAHB is considerably conducive from pricing competition among the airlines and fluctuating jet fuel prices.

The delay in KLIA2 commencement will not impair air travelling and expansion plan by airlines, while MAHB has clarified that KLIA2 cost is still within RM4bn budget. A 10% cost overrun (RM400m) is relatively immaterial to our DCFE valuation.

Risks 

World crisis (i.e. war, tourism and epidemic outbreak), delay in KLIA2 completion, high jet fuel price and the development of high speed train between Singapore and Pulau Pinang.

Forecasts 

Unchanged.

Rating

NEUTRAL


Positives –

• Strong growth in passenger movements. 
• Liberalization of ASEAN open sky policy. 

Negatives – 

• High jet fuel cost. 
• Yield pressure due to overwhelming capacity growth.

Valuation 

MAHB: Maintained Buy with unchanged TP: RM6.80 based on FY14 DCFE. 

AirAsia: Maintained Hold with unchanged TP: RM3.08 based on FY14 SOP. 

MAS: Maintained Sell with unchanged TP: RM0.28 based on 6.8x adjusted FY14 EV/EBITDAR.

Source: Hong Leong Investment Bank Research - 7 Jun 2013