Highlights

KLIA2 is on track to commence operation on May 2, replacing LCCT (to close on May 9), despite various parties’ concerns and skeptical on the new airport’s safety issue.

Four major LCCs: Malindo Air, Cebu Pacific, Tiger Airways and Mandala Air have confirmed their transfer move to KLIA2 by May 2, while AirAsia Group (including AirAsia X) insisted to stay in LCCT, not until all the issues raised by the group being addressed. Among the issues are the depressions (as well as cracks) on the taxiway/apron and runway and the potential higher passenger charges in KLIA2.

Comments

We believe that MAHB will push through the operation commencement of KLIA2 on May 2 (in-line with government’s aspiration), despite the possible short-comings of KLIA2. MAHB is likely to continue rectify the disputed short-comings after the official launch of KLIA2.

However, we do not expect AirAsia Group to stay long in LCCT, given the group will be disadvantaged against other LCCs, which operate from KLIA2. Afterall, KLIA2 promised better and more offerings (product and service), facilities and conveniences to air travellers.

Should AirAsia Group insist on staying in LCCT for a long period, other LCCs may take advantage of the situation and add capacity aggressively (new routes and additional frequencies into existing routes) in KLIA2 (direct competition with AirAsia Group). Furthermore, other LCCs may attempt to hog on the preferred time slot in KLIA2 (first mover advantage), before AirAsia Group moved into KLIA2.

On the other hand, we do not expect significant impact on MAHB, should AirAsia Group stays in LCCT. MAHB may extend the contract period for retailers in LCCT (depending on AirAsia Group transfer), while retailers in KLIA2 remained on schedule for opening in May 2, i.e. MAHB will earn nonaeronautical revenue (rentals, royalties, retails, advertising and car parks) from both KLIA2 and LCCT (passengers will still spend regardless of the terminal).

However, MAHB may grant rental discounts to the retailers in KLIA2, given the potentially lower traffic-flow.

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 at this juncture.

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: RM10.55.

AirAsia: Maintained Hold with unchanged TP: RM2.22.

MAS: Maintained Sell with unchanged TP: RM0.20.

Source: Hong Leong Investment Bank Research - 10 Apr 2014