Unrelenting yield pressure
The level of competition in the marketplace remains fierce, resulting in a disappointing 3Q13. We expect yield pressure to remain a prevalent feature in 2014 as MAS and Malindo continue to be overly ambitious with their capacity expansion.
Under our new rating structure, our Neutral call changes to Hold. Our target price remains based on 11x CY15 P/E, the sector average. Yield pressure will persist in 2014 as MAS is intent on defending its market share, leading to pedestrian group earnings growth in FY14-15 as Malaysia earnings fall, only to be offset by better associate earnings. Still, AirAsia remains the best in the field, given its low cost structure. Switch to MAHB.
AirAsia's 3Q13 core earnings fell 12% yoy to RM146m, largely due to the 22% yoy plunge in Malaysia earnings. Base yields fell 12.2% as competition hit hard while AirAsia's substantial US$ cost base rose after the ringgit weakened by 3.8%. The base yield decline in 3Q13 had accelerated from the 10.6% fall for 2Q13. The weakness in Malaysia was augmented by the collapse in Indonesia's bottomline as yields fell due to competition and the rupiah depreciated. But Japan's losses have stopped and Thailand's profits grew healthily during 3Q13. The net effect was that the better yoy overall associate performance helped temper but not completely overcome the pressure on Malaysia.
What to expect for 2014
AirAsia may suffer fare deflation for at least the next two years as the current heavy competition could prevent it from passing through to passengers the 9% rise in landing charges from Jan 2014 onwards, the impending 9-11% rise in airport passenger service charges in Feb and the 6% GST from Apr 2015 onwards.
Stay on the sidelines. AirAsia's two founders have recently moved their base from Jakarta back to Kuala Lumpur, admitting in an interview that they have been "complacent" and "taken their eye off the ball". Urgent intervention is clearly needed to reverse its shrinking profits. We expect core earnings to continue to contract in 2014 as yield pressures remain unrelenting, providing AirAsia with little headroom to pass the higher airport charges to consumers.
Publish date: 10/12/13