Dragged into the trench
AirAsia was not spared from the aggressive pricing set by MAS and Malindo this year, and has had to lower its fares in order to fill up its planes. AirAsia is nonetheless a well-run airline with a unit cost far below the rest, allowing it to weather the storm best.
We lower our 2013-15 forecasts on expected weaker yields. While the near-term outlook for AirAsia will be challenging due to MAS‟s continued heavy discounting, valuations are now reflective of the risks. We maintain our Outperform call, and roll over our target price basis from 11X CY14 P/E to CY15 (sector average). If MAS reverses its aggressive pricing strategy in late-2014, a major re-rating catalyst would emerge.
Not spared from irrational competition
As MAS and Malindo embark on an expansion spree and discount fares in order to fill up their planes, AirAsia has had to follow suit. As an LCC, AirAsia is not an obvious price setter in the market place, but a price follower despite its capacity being larger than MAS's. This is because it always has to price lower than MAS given its status as a discount airline with stripped-down services and product offerings. This is also consistent with AirAsia's philosophy of being „load active, yield passive‟.
Thai the only bright spot
The outlook for AirAsia‟s associates in the Philippines and Indonesia also look challenging, with the exception of perhaps, Thai AirAsia. TAA is likely to continue its secular growth path, with continued tourist inflows and eight aircraft deliveries per year in 2013 and 2014. However, headwinds could appear for TAA, if Lion Air and VietJet Air proceed to start their LCC operations in the coming year. The Indian JV, scheduled for 1Q14 start, may take a long time to breakeven given the weak rupee and high operating costs.
Best to weather the storm
AirAsia‟s share price has fallen sharply since it reported a 25% decline in 2Q13 core net earnings for its Malaysia business on the evening of 21 August. Despite very real near-term headwinds, AirAsia is the airline that will hold up the best, as its unit cost is substantially lower than its competitors' and its short-haul flight network is the most dense – ideal for commuting and transiting passengers alike. When the price war comes to an end and the dust settles, AirAsia is the airline that will come out strongest.
Publish date: 26/09/13