We do not see a near-term threat on  the setting up of Fly Mojo,  a new airline  that  will  operate  out  of  two  hubs  –  Senai  Airport  and  Kota Kinabalu Airport. We retain our OVERWEIGHT stance on the sector with AirAsia as our Top Pick. While Kota Kinabalu makes rational sense as a hub with feeder traffic from smaller Tier 2 and 3 cities, we doubt making Senai a hub will work in the near term on lack of sizeable feeder traffic. 

A  new  airline  start-up  enters.  Yesterday,  at  the  13th  Langkawi International  Maritime  and  Aerospace  exhibition,  an  unknown  start-up airline – Fly Mojo – signed a letter of intent with Bombardier (BBD/B CN, NR) for the purchase of 20 CS100 aircraft (with an option of another 20). At list price, these aircraft, which have a 100-seat capacity configuration, will have a combined value of USD1.47bn.  The airline will be operating as a full service carrier. Operations are expected to commence as early as October. There  are no details on the shareholder background of Fly Mojo,  but  our  Google  search  results  reveal  that  its  managing  director, Datuk  Janardhanan  Gopala  Krishnan  was  previously  chief  operating officer  of  Subang  SkyPark  SB.  There  is  still  little  knowledge  on  the airline’s future growth plans.  

Hubs  at  Senai  and  Kota  Kinabalu.  Fly  Mojo  is  said  to  hub  at  Kota Kinabalu  Airport  (Sabah)  and  Senai  Airport  (Johor).  While  the  former makes rational sense as a hub with feeder traffic from smaller Tier 2 and 3 cities, we doubt that making Senai as a hub will work in the near term due to lack of sizeable feeder traffic – of which, if any, will be competing against Singapore Changi Airport. Furthermore, with the  high-speed rail connectivity  between  Kuala  Lumpur-Johor  Bahru-Singapore  likely  to materialise,  this  could  pose  another  challenge  towards making  Senai  a sizeable  hub  for  air  carriers.  As  Fly  Mojo  operates  in  the  full  service segment, we do not see this as a near-term threat for AirAsia (AIRA MK, BUY,  TP:  MYR3.45).  On  a  positive  note,  we  see  airport  operators  like Malaysia  Airports  (MAHB  MK,  BUY,  TP:  MYR7.35)  benefiting  from  the entry  of  a  new  player.  Note  that  Senai  Airport  is  owned  by  MMC  Corp (MMC MK, NR).  

Maintain  OVERWEIGHT. We  continue  to  maintain  our  OVERWEIGHT stance on the aviation sector. AirAsia remains our Top Pick on its strong earnings  growth  outlook  ahead,  in  view  of  margins  expansion  seen thanks to the sharp drop in jet fuel price. Note that our in-house jet fuel forecast  of  USD86/barrel  (bbl)  is  significantly  higher  than  the International Air Transport Association’s (IATA)  forecast  for an  average of USD71/bbl for 2015. 

Source: RHB