Airlines - The Great Malaysian Fare War is Ending
Value has emerged. The airlines sub-sector has underperformed the KLCI in 2013 with an average decline of 15.8% versus a 10.5% increase in the KLCI, due to depressed earnings and deteriorating competitive environment. The industry is gradually improving and we are optimistic on the more balanced capacity deployment plans in 2014. We forecast earnings recovery to MYR652.7m in 2014, versus a loss of MYR361.1m in 2013. This underpins our Overweight stance. Our top pick is AirAsia X, followed by AirAsia. We have upgraded MAS to a HOLD (from SELL); since our downgrade in 19 Nov 2013, the share price has been down 10.1% and it is now close to our target price.
2013 was a battle for market share. In 10M13, passenger traffic growth in Malaysia was 17.3% YoY, which was the highest rate in the past two decades. MAS achieved a record load factor of 80.8% for the period whereas other airlines managed to retain high load factors as well. The market was stimulated by lower yields, which fell on average of 7.6% YoY in 9M13. We expect 4Q13 earnings will be negative on a YoY basis, but the quantum should be less than 3Q13.
Common sense will kick in 2014. We forecast a net aircraft addition of 10 in 2014, much less than the 15 aircraft received in 2013. Furthermore, 79% of the aircraft to be delivered in 2014 consists of narrow body versus 70% in 2013. This means that the capacity growth rate in 2014 will be much lower than 2013. We impute a growth of 9%- 10% in 2014, which should be absorbed by the market comfortably. The outlook on yield should gradually improve as the supply-demand is in balance and airlines no longer need to engage in an all-out fare war.
KLIA2 will be a game changer. The KLIA2 terminal is scheduled to be ready for operations on 2 May 2014, but there are doubts surfacing whether there will be further delays. This new terminal will bring a much needed new level of comfort against the current LCCT, and will help to boost efficiency and reduce cost. We expect the KLIA2 popularity factor to draw in strong traffic, boost loads and help to reverse the yield decline trend. Furthermore, 2014 is a Visit Malaysia Year and the campaign has historically been a crowd puller.
BUY, selectively. AirAsia X is poised for strong earnings growth and is our top BUY for the sector. AirAsia’s share price has been over punished (2013: -19.7%) and its valuation is in deep value territory compared to its peers. MAS is a HOLD; we feel MAS needs to do a lot of soul searching to cut cost and boost revenues; we think it will only be profitable in 2015, at best.
Publish date: 02/01/14