4 January 2013
The aviation sector in the year 2013, may not be a dazzler but it promises to be entertaining, with the entry of Malindo Airways and an expected price war in the low cost segment, as the country’s major airport operator sits back and enjoy the show.
Kenanga Research in its note said it believes that Malindo will start its marketing and promotions during this period (Q1) for its May 2013 take-off and this may attract AirAsia‘s customers in a knee-jerk reaction.
Despite reports of a possible March 2013 launch, it is unlikely that the airline will be operational by then as it is understood that it is yet to receive its Aircraft Operator Certificate (AOC) from the local aviation authorities.
"As a result, we expect a price war and competition to start, which could jeopardise AirAsia’s earnings in the short term. On a longer term view, however, we still believe that AirAsia will be able to withstand the competition. In any case, Malaysia Airports Holdings Bhd (MAHB) will be the clear winner above the likely intense competition between AirAsia and Malindo as the fight will result in better airline and passenger traffic. This bodes well for its (MAHB) klia2 prospect as it will increase the utilisation rate here at a faster pace," the research house said.
Add on the effects of the entry of 32 new aircraft into the local aviation market, and a Maybank Investment Bank (IB) Bhd analyst thinks you have a sure fire recipe for a price war.
"The way I see it, there’s not going to be a huge spike in flying passengers this year, so these aircraft are likely to cater to existing passengers which are unlikely to fly more unless fares are competitive enough for them to do so," he told SunBiz via telephone recently.
The analyst said the last record number of aircaft delivery seen, was in 2007 when some 12 aircraft came into service.
AirAsia Bhd will take delivery of 10 aircraft, MAS 15, AirAsia X 7, Malindo 10 and Firefly three this year. MAS’ deliveries will only see a net addition of two aircraft as it retires its older aircraft.
According to the analyst, the price war should be limited to the low cost market as MAS is unlikely to want to join the fray and start dumping its fares too. He said full service carriers typically look to limit capacity rather than cut fares.
He said, MAS is relatively protected from the affects of a price war as he opines that people who choose to fly with it are not so price sensitive.
This year will also see it benefit from its much-awaited entry into the oneworld alliance.
While analysts are split on whether Malindo Airways will be able to do damage to low cost stalwart AirAsia with only 10 planes to start with as opposed to the 60-odd planes Airasia is operating out of Malaysia , AirAsia is not without its own issues.
The next two months also will be crucial for AirAsia as it needs to make sure that come March 2013, the Department of Civil Aviation finds it fit enough to accord it with a two-year renewal of its AOC, which gives it the right to fly in Malaysia.
A further extension by the aviation authority will only serve to make investors more jittery on its stock. AirAsia’s shares fell to a low of RM2.53 on Dec 21, 2012 before starting on an uptrend again. It rose 4 % to close at RM2.89 yesterday.
The Maybank IB analyst for example, is certain that 10 aircraft could very well "make a bit of damage" to AirAsia’s profitable operations, just by very simply flying the right routes, such as to Pekan Baru, Medan and Cambodia.
Analysts favourite stock pick for the aviation sector has decidedly been MAHB, considering the benefits it is likely to reap with the entry of Malindo Airways, an ensuing price war, more aircraft and the opening of klia2.
As OSK Research Sdn Bhd analyst Ahmad Maghfur Usman wrote in his report last week, klia2, capable of handling up to 45m passengers, is expected to reach 50% capacity in its first year of operations.
"Come FY14, MAHB’s revenue is projected to expand 38% from the RM2.151bn the company expects to register in 2012. A significant portion of the total revenue will be derived from higher rental to be collected from klia2 as it will offer more than four times the retail space at the existing LCCT. Although the company’s operation costs are expected to surge by 32%, we expect the incremental flow to earnings before tax interest depreciation and amortisation (ebitda) to be immense, with ebitda ballooning by 46% from RM840m in 2012 to RM1.23bn in FY14," he said.
On corporate movements in the industry, the recent entry of former Pos Malaysia Bhd CEO Datuk Syed Faisal Albar into the board of MAHB has revived talks that he may be replacing Tan Sri Bashir Ahmad as managing director of the airport operator this year. Bashir’s one year contract ends in June this year.
AirAsia X which is expected to be listed on the local stock exchange by Q1 of this year, will also see its CEO Azran Osman Rani three year contract end this July.