Saturday, 17 December 2011

AirAsia to MAS: Your Loss is my Gain

Received the following research report from a friend:

Your loss is my gain
Winds of change are swirling in the Malaysian aviation industry. AirAsia yesterday announced frequency additions on routes left behind by MAS/Firefly. In the process, AirAsia’s market share will increase at the expense of the national carrier, and yields are likely to improve. We maintain our Outperform rating and target CY13 multiple of 7x. AirAsia is likely to see strong earnings growth in 2012 because the competitive environment in Malaysia has become more benign. Its venture into Japan and Philippines will drive growth as well. 

What Happened
AirAsia announced yesterday that it will, from February 2012, increase frequencies from Kuala Lumpur to Kota Kinabalu (KK) and Sandakan, as well as from KK to Hong Kong, partially taking over capacity that has been or will be abandoned by MAS and Firefly. It also announced expected long-haul route cuts to Rome, Johannesburg, Cape Town, Buenos Aires, Dubai, Damman and Karachi, and its pullout from short-haul routes like the daily Langkawi-Penang-Singapore flights and KL-Surabaya. MAS’s route cuts will take effect in January 2012.

What We Think
The developments are in the direction of our expectations. The announcements of frequency additions by AirAsia and route removals by MAS are some of the CCF’s most tangible benefits to AirAsia. AirAsia will continue to garner more market share next year as it fills part of the void left behind by the capacity reductions. Its yields will also improve following the removal of Firefly as an LCC competitor and MAS’s selective pullout of routes to East Malaysia. Apart from that, MAS is likely to stop plying international routes from its KK hub, which are currently not profitable. This is an excellent opportunity for AirAsia to expand further. Given its much lower cost base, it is likely to be able to earn profits from these routes. 

What You Should Do
This is definitely the time to load up on AirAsia. We have a high conviction Outperform call on this stock, which is one of our top picks for Malaysia in 2012. We think this airline will do very well next year despite the  high jet fuel price. The listing of its Thai and Indonesia associate next year will further catalyse the stock.

MAS/Firefly route cuts provide opportunities to AirAsia
AirAsia said during its 3Q11 results conference call last month that it was adding two leased A320s to its Malaysia fleet in 4Q on top of the three new aircraft deliveries that Malaysia will be allocated this year. The reason for this move has now been made very clear. AirAsia is using the opportunity provided by the withdrawal of MAS and Firefly from several domestic and regional routes to expand its schedule and network capacity. In other words, AirAsia is expanding on the back of opportunities left behind by MAS and Firefly, by at least partially restoring the capacity removed by the two latter airlines and taking the rest of the benefits from potentially higher ticket prices/yields since net capacity on the relevant routes will still be reduced as the capacity withdrawals exceed capacity additions by a large margin.

Firefly has stopped its domestic LCC business; AirAsia takes advantage by expanding frequencies to KK and Sandakan
In mid-November 2011, Firefly stopped selling tickets on the 189-seater B737-800 planes on routes between KL and KK, Kuching, Sandakan and Sibu. Not coincidentally, AirAsia yesterday announced that it will from 6 February 2012 increase its KL-KK flights from 13 to 14 times/day and step up its KL-Sandakan flights from two to three times/day. This shows that AirAsia is taking over some of the capacity abandoned by Firefly. Additional frequencies by AirAsia to Kuching and Sibu cannot be ruled out.

AirAsia planning increase in KK-HK frequencies in anticipation of MAS withdrawal
MAS has not announced definite cuts to its international routes from the KK hub but earlier indicated that these are on the chopping board. In anticipation of the MAS move, AirAsia will from 21 February 2012 increase its KK-Hong Kong flights from seven times/week (once daily) to 10 times/week, a net increase of 24 one-way flights/month. MAS is currently flying 56 times/month on the KK-HK route. Hence, if MAS abandons the KK-HK route altogether, there will be a net 15% reduction of capacity (Dragonair also serves the route).

From KK, AirAsia also flies to Taipei and Shenzhen, and may benefit from reduced competition to Taipei if MAS pulls out. AirAsia does not currently fly from KK to Seoul, Perth, Tokyo or Osaka. However, if MAS cancels its flights from KK to the latter four destinations, it may open up new route opportunities for AirAsia.

MAS may withdraw from KL-Tawau/Sibu, potentially leaving AirAsia as the monopoly operator on the routes 
We believe that MAS is also likely to announce in the near future reductions to its West Malaysia to East Malaysia crossings. While we do not expect MAS to reduce frequencies on truck routes like KL-KK/Kuching, it could cut less profitable routes like KL-Tawau/Sibu. The airline currently flies 11 times/week on KL-Tawau while AirAsia flies 21 times/week. On KL-Sibu, it flies 14 times/week while AirAsia flies 35 times/week. Hence, AirAsia dominates the capacity on these two routes and the domination could turn into a monopoly if MAS axes these routes. We believe MAS will retain KL-Miri/Labuan/Bintulu as there is likely to be more business traffic on these routes and average ticket pricing should be higher.

To me this sounds like really bad news, [1] from a corporate governance point of view (Tony Fernandes being the CEO of AirAsia, director of AirAsiaX and director of MAS, a clear conflict of interest), [2] for the minority investors of MAS (it seems from the above report that MAS gets the short end of the stick), and [3] for the consumers (on many routes, a duopoly is turned into a monopoly).

The writer of the report advises to load up on AirAsia shares. I will not give investment advice to the readers of my blog, but would like to point out that there are many (serious) corporate governance and accounting issues regarding AirAsia:

The readers should make their own decision.


  1. What did you expect, Mr. Wind, that CIMB would say otherwise? They initiated the whole deal, you know the connections, and sure, they will advise to prop it up.

    Your last remark is spot on. It could not happen in any other civilized country.
    The endgame is not played yet. There is more to come.


  2. Thanks for your comment, yes, lets wait and see what will happen.

  3. Dear M.A. Wind,

    Thanks for sharing. Such a biased coverage on the whole matter. It's so blatantly obvious.

  4. They do all these things, but there are minority investors involved. If all companies were private companies, they could do what they want, taking into consideration certain regulations (in Western countries they seem to be much sharper against cartels etc, you hardly hear about this in this side of the world).