No Big Worry For Capital A With New Airline

When Batik Air Malaysia commenced operations in 2013, CAPITALA’ AirAsia Malaysia passenger traffic grew 11% YoY but its average fares fell 10% YoY, but there's no big worry for Capital A today

No Big Worry For Capital A With New Airline

With the entry of MYAirline, investors are reasonable to fear that fares will fall. After all, that was what occurred in 2013 with the entry of Malindo but analysts say there should not be any big worry for Capital A in this scenario.

"That said, industry capacity growth this time around will be a lot more moderate than that experienced in 2013, relieving negative pressure on fares.

"Thus, we maintain our earnings estimates, BUY call and MYR0.84 SOP-TP for CAPITALA, premised on average fare/stage length assumption of MYR0.18-MYR0.19 going forward (2Q22: MYR0.21)," says Maybank.

When Malindo (now Batik Air Malaysia) commenced operations in 2013, CAPITALA’ AirAsia Malaysia (MAA) passenger traffic still grew 11% YoY but its average fares fell 10% YoY to MYR166 (Fig. 1).

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Capital A and MyAirline

In fact, MAA average fares did not recover to above MYR170 until recently in 2Q22 due to fierce competition. With the entry of MYAirline, it is reasonable for investors to fear that history will repeat itself.

"That said, we posit that its entry should not result in MAA fares falling by much," analysts say.

MAA average fares fell in 2013 not just due to the 11 aircraft that Malindo took delivery of that year.

The other Malaysian airlines, including MAA, took delivery of many aircraft that year (MAA: 8, AirAsia X: 7, Malaysia Airlines: 7, MASWings: 3, Firefly: 2) (Fig. 2). Going forward, no Malaysian airline other than Batik Air Malaysia (+1 Boeing B737 MAXs) have plans to increase their fleet size.

"MAA itself plans to transfer 10-11 aircraft to Indonesia AirAsia to capitalise on high fares there. Thus, we believe that MYAirline’s 4 aircraft can be easily absorbed by the industry."

Price Wars

Malaysia Airlines Group CEO, Izham Ismail stated that 1 of his main KPIs is linked to how much equity funding he draws down from Khazanah Nasional. MYAirline itself does not plan to undercut its peers by a lot, which we believe is because its shareholders do not have very deep pockets.

Batik Air Malaysia has not publicly stated its pricing strategy but we suspect that it cannot undercut its peers by much as the average monthly lease rate for new Boeing B737 MAXs is rising again (Fig. 3).