Highlights

According to AirAsia Group CEO Tony Fernandes, the group is determined to hit back on the severe fare competition posed by MAS and Malindo (NADI and Lion Air).

Both MAS and AirAsia have been reporting depressing yield trend for the first 9 months of 2013, after MAS recapitalized and implemented load active-yield passive strategy, and the commencement of Malindo in Malaysia.

Given the stiff competitive environment, AirAsia will maintain its low fare strategy in defending its market share. Cost cutting measures (through automation and increased efficiency) are in place to reduce overall cost by 7.5% (estimated RM294m).

Comments

As highlighted in our 2014 Aviation Outlook report (dated 10 Jan 2014), airlines’ yield environment is expected to remain depress in 2014, mainly due to:

1. Dampened domestic demand for air travel due to increasing cost of living and negative sentiments, as government continued subsidies cut and GST implementation in 2015.

2. Continued strong capacity growth of domestic airlines.

3. Airlines’ strategy to capture market share, through load active-yield passive strategy (offer low ticket prices to increase load factor).

VMY 2014 may boost tourist arrivals, but domestic airlines are unlikely to fully benefit from VMY 2014, as tourists prefer to travel with their own country-based airlines.

The airlines are still facing high jet fuel cost (40% of MAS’s and 60% of AirAsia’s operational cost) and depreciation of RM/US$, which will affect their margins in 2014.

Airport operator MAHB, will be the main beneficiary of VMY 2014 (increase foreign demand for air travel) and the continued low yield environment (induce domestic demand for air travel), which will boost airport traffics (both aircraft and passenger movements). Furthermore, MAHB are shielded from the high jet fuel cost and depreciation of RM/US$.

Risks

World crisis (ie. 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 pressures due to overwhelming capacity growth.

Valuation

• MAHB: Maintained Buy with unchanged TP: RM9.75.
• AirAsia: Maintained Hold with unchanged TP: RM2.45.
• MAS: Maintained Sell with unchanged TP: RM0.27.

Source: Hong Leong Investment Bank Research - 13 Jan 2014