AIRASIA - Competition coming sooner

By AmResearch
2 November 2012


HOLD

Price: RM3.05

Fair Value: RM2.80

• It was reported in a local daily this morning that Malindo is bringing forward its launch date to mid-March 2013 from earlier indication of May 2013. This follows the group’s (PT lIon Air) decision to delay the launch of Batik Air from March to end-2013 as the group intends to focus on positioning Malindo as a regional player.

• The move is made possible as aircraft meant for Batik Air will now be allocated to Malindo. Malindo will take the first two B737-900ER in March followed by two each in April and May. Malindo intends to build up aircraft capacity by 12 per annum.  

• Malindo’s strength lies in Lion Air’s (parent company) robust connectivity intra-Indonesia, where it is this feeder traffic that it intends to leverage on for international flights out of KL operated by Malindo. It is noted (by Lion Grup chief executive, Rusdi Kirana) that Indonesians tend to prefer to fly international routes via KL, Singapore or Bangkok hubs. 

• More importantly, contrary to earlier general expectations of Malindo operating predominantly KL-Indonesia routes, Malindo’s first two aircraft will be utilised for the lucrative KL-East Malaysia routes. Lion Air already operates flights out of Indonesia to KL.  

• Meanwhile, the immediate international route (using the next 2 aircraft to be delivered in April 2013) will be India. First stop will be Trichy, and New Delhi will be added at a later stage. In May, Malindo will fly to China and is looking at cities such as Canton, Shenzhen and Hong Kong. 

• While it is yet to be seen how effectively Malindo can compete on a cost basis with AA –  as news reports has it that Malindo will have a two-seat class configuration – Malindo has the advantage of having a strong network in one of the largest markets in ASEAN to feed it with the required traffic. We suspect this flow of traffic (that prefers international connectivity out of KL) has in the past benefitted AirAsia, and that Lion Air intends to plug this leak in potential revenue via Malindo. Notably, arrivals from South East Asia account for 45% of KLIA traffic and 35% of this comprise of arrivals from Indonesian cities (based on 2010 statistics).

• We maintain our HOLD call on AA with an unchanged fair value of RM2.80/share given increasing earnings risk and peaking yield cycle from the entry of new competition, particularly with the initial impact coming from the KL-East Malaysia routes, which is the most profitable route for domestic carriers.

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