The Great Malaysian Fare is Ending
Value has emerged. The Malaysian aviation sector has had a turbulent 2013 due to price war and overcapacity that decimated yields and profitability. The industry is gradually improving and we are more optimistic on the balanced capacity planning and deployment in 2014. We forecast sector earnings growth of 312% YoY in 2014, primarily driven by narrowing losses at MAS. Excluding MAS, the industry‟s earnings will grow by 4.9% YoY. With values having emerged, this underpins our Overweight stance on the sector. Our top BUY pick is AirAsia X, followed by AirAsia. We maintain our HOLD call on MAHB as we think all the good news has been priced in. MAS is now a HOLD as its share price has closed in to our target price since our SELL call.
2013 was a battle for market share. In 10M13, passenger traffic growth was 17.3% YoY, which was the highest over the past two decades. MAS achieved a record passenger load factor of 80.8% in this period whereas other airlines managed to retain high load factors as well. The market was stimulated by low yields, which fell on average by 8.0% in 2013, making it the third worse yield destruction since 2001. Malindo‟s entry on 22 Mar had triggered this fare war, of which MAS and AirAsia reacted fiercely. Everyone was practitioners of the load active and yield passive strategy with devastating results.
Traffic growth will moderate to normal levels in 2014. We forecast passenger traffic growth in 2014 to be lower than 2013‟s 18% YoY growth. This is based on the net fleet addition plans by the respective airlines as shown in the table below. There will be a net addition of 10 aircrafts in 2014, 33% lower than the 15 aircrafts received in 2013. Based on this, we forecast passenger traffic growth of 9-10% in 2014, which the market should absorb comfortably because it is close to Malaysia‟s long-term growth rate of 8%. The yield outlook should gradually improve as the supply-demand is in balance and airlines no longer need to engage in an all-out fare war.
Visit Malaysia Year 2014, another growth driver. 2014 is the fourth installment of the Visit Malaysia Year (VMY) campaign, the last being in 2007. VMY has generally been effective in boosting tourist arrivals with its various promotional activities held all year round on an international scale. VMY 2007 campaign saw a 19.5% YoY spike in tourist arrivals and tourist receipt spiked by 27% YoY.
KLIA2 will be a game changer. The KLIA2 promises a quantum leap improvement over the existing LCCT, drawing strong traffic and boosting loads. It will help airlines to reduce costs thanks to its high levels of automation. KLIA2 provides the platform to be the premier LCC hub of the region, and we expect large number of airlines to launch their maiden services into Kuala Lumpur.
Risks. The main downside risk for the airline sector in 2014 is fuel prices, the largest cost item, comprising 40%-45% of total costs. Furthermore, there are fears about potential delays in the launch of KLIA2, currently scheduled for 2 May 2014. If a delay is to materialize, traffic growth might be a setback, as KLIA is already operating at 20% above its design capacity and landing slots are scarce. Our current forecasts impute a traffic growth of 10% in 2014; this may have to be revised down.
Overweight on airlines. We believe that yields have adjusted to a new level of equilibrium after Malindo Air's entry into the market. The domestic yields will be lower than the levels achieved pre-2012 going forward, but it should be above of the levels achieved in 2013. The situation should get progressively better because every airline‟s management has acknowledged that this price war is not sustainable and they need to reverse the yield decline trend.
AirAsia X will deliver the strongest earnings growth among the lot, due to the maturity of existing routes and economies of scale benefits. We forecast AirAsia‟s profit to rise by 14.9% YoY in 2014 driven from the stronger performance of its associates and JVs. We expect MAS to incur losses in 2014, but it is expected to perform better with a 76% reduction in losses.
KLIA2 uncertainty mars Airport. 2014 is supposed to be an exciting year for MAHB due to the launch of KLIA2 on 2 May, higher airport tariffs and the positive impact of VMY4. However, the uncertainty on the start date of KLIA2 once again perturbs investors‟ mind. KLIA2 is the single most important earnings driver in 2014 and a delay will put a new financial burden on MAHB; it has to service its debt obligations of MYR15m per month, and bear additional staff costs of MYR3-4m for the hired workforce in anticipation of the 2 May 2014 launch date.
BUY, selectively. AirAsia X is poised for strong profit growth and is our top BUY for the sector. AirAsia‟s share price has been over punished and its valuation is in deep value territory compared to its peers. MAHB‟s share price has had a good surge and its valuation is fully valued compared to regional peers. MAS is now a HOLD. Yet, it still needs to do a lot of soul searching to cut costs and boost revenues, we think it will only be profitable in 2015, at best.
Publish date: 23/12/13