Highlights

• 8 low cost carriers (LCCs) across Asia-Pacific region are forming an alliance called Value Alliance, in order to strengthen their networks.

• The LCCs include: 1) Scoot Airways (Singapore); 2) Tiger Airways (Singapore); 3) Vanilla Air (Japan); 4) Tiger Airways Australia (Australia); 5) Nok Airlines (Thailand); 6) NokScoot Airlines (Thailand); 7) Cebu Pacific Air (Philippines); and 8) Jeju Air (South Korea).

• Similar to the full service carrier alliances (i.e. Star, Oneworld and Skyteam), Value Alliance looks to extend their connectivity and increase sales while cutting expenses. The alliance will offer a website allowing passengers to book tickets and ancillary services across airlines within the alliance, which offer flights to more than 160 destinations with 174 aircrafts.

Comment

• We are not overly concern on the potential impact from the alliance on Malaysia aviation sector, as we doubt the effective implementation and integration of the network and process of each of the members, as well as the differences of regulatory framework of the member countries.

• AirAsia: Impact would be relatively limited to Philippines AirAsia from the existing major LCC Cebu in Philippines, while the threat on Thailand AirAsia from Nok Airlines and NokScoot would be immaterial for their loss making position. For Malaysia, Indonesia and India, we do not expect material impact. On the other hand, the Singapore aviation market is already very competitive; we do not expect material changes in the market. Overall, we expect AirAsia to remain competitive with lowest cost structure and stronger integration of wide network.

• MAHB: Impact on the connecting (including transfer) flight passenger MAHB as a regional hub would be relatively limited as MAHB does not charge tariff on these segments.

Risks

• World crisis (ie. war, tourism and epidemic outbreak), shutdwon of KLIA2, surge in jet fuel price and development of high speed train between Singapore and Pulau Pinang.

Forecasts

• Unchanged.

Rating

• Overweight

Positives

• 1) Government initiatives to boost tourist arrivals; 2) Liberalization of ASEAN open sky policy; 3) Implementation of ASEAN Economic Community; and 4) Low jet fuel cost.

Negatives

• 1) Air incidents; and 2) Weakened RM.

Valuation

• Maintained BUY on AirAsia with unchanged target price of RM2.60 based on SOP.
• Maintained BUY on MAHB with unchanged target price of RM7.50 based on SOP.

Source: Hong Leong Investment Bank Research - 17 May 2016