More of 2013 in 2014?
We recently met with AirAsia and MAS to discuss the operating and competitive environment in Malaysia. We found out that MAS was determined to stay relevant as its competitors expanded, suggesting that the weak yield environment of 2013 could extend into 2014.
As such, we reduce EPS estimates and target prices for AirAsia and AAX. AirAsia remains an Outperform while we downgrade AAX to a Neutral from Outperform as it is very sensitive to yield pressure. We stay Underperform on MAS. Our top pick MAHB remains an Outperform as a pure volume play, with forecasts and target price raised. We retain our Overweight sector call.
Yields deteriorated in 2Q13
Last quarter‟s decline in yields in the Malaysian aviation space was caused by Malindo‟s entry and MAS‟s strong price and capacity response. In fact, all three carriers are now following the „load active, yield passive‟ strategy, with negative results. MAS has given up the goal of high yields in order to push up aircraft utilisation and defend its market share and AirAsia has had to reduce its fares to compete. New entrant Malindo is still offering low fares to market itself.
The race to the bottom
MAS‟s August operating statistics give little cause for comfort. Its domestic and international RPK demand rose an eye-popping 41-44% yoy and loads surged to a record 83-86%. This means that yields will continue to fall in 2H13 and 2014 across the industry unless MAS changes its strategy.
We recommend staying away from troubled MAS. AAX is well managed but its bottomline is very sensitive to small changes in yield and exchange rates assumptions, which are both not in its favour. AirAsia will also be affected, although it has the strength to weather the storm.
Pump up the volume
MAHB is the most obvious winner from the ongoing capacity and price war. For 7M13, passenger traffic rose 15.5% yoy, which is a dramatic rise from the modest 5.0% yoy increase during 2012. We believe that full-year 2013 passenger traffic at KLIA will expand by an even larger 17.5% yoy. The key risk for MAHB lies in its ability to complete and open KLIA2 by 2 May 2014. As a precautionary measure, we have pushed back our expected opening date for KLIA2 to 1 January 2015, although the hit to earnings is more than offset by the strong passenger volume growth.
Publish date: 26/09/13