THE BUZZ
Qantas announced to the Australian Exchange last week that
it was terminating its possible
partnership with MAS to setup a premium airline as the two were not able to reach mutually
agreeable commercial terms. Qantas' CEO, Alan Joyce, said Asia remained a
priority for the Qantas Group and it will continue to explore opportunities in the
region, including joint ventures and alliances. Separately, the union workforce
of MAS has bypassed management to meet
the Prime Minister a couple of weeks ago, urging him to review the share swap deal between the main
shareholders of MAS and AirAsia. It is understood that the Prime Minister is
seriously looking into the matter. A key official in AirAsia says that it is
prepared to part ways should it become a problem for the Prime Minister,
although its CEO, Tan Sri Tony Fernandes, has denied any plans to scrap the
collaboration. Officials at Khazanah and the Prime Minister’s Department aredetermined
to ensure that the collaboration remains on course.
OUR TAKE
Another blow for MAS.
Sponsorship at risk? The announcement came as a surprise to us as we had
assumed that negotiations on
setting up a regional premium
carrier between MAS and Qantas would eventually be concluded despite the delays
in finalizing the partnership. With Qantas ending talks for a potential
collaboration, a key concern is whether Qantas could pull out of its
sponsorship of MAS in joining the oneworld alliance as this would be deemed a
competitive threat since Qantas no longer sees Malaysia as a potential hub for
its Asian premium airline. But with Qantas reaching a dead end for now (as it
has ran out of options on partnerships), we reckon Qantas will continue to be the
sponsor of MAS as the former will still ultimately benefit from
the traffic feed generated. With no partnerships at hand, MAS faces tough
headwinds in its expansion plan to setup a short-haul regional premium carrier
as this would mean that it would have to rely on its own balance
sheet to for fleet acquisition.
Why the deal didn't
go through. Although the reason of the termination was never disclosed, we
reckon it could be largely due to
the amount of assets that MAS is required to inject into the
partnership. Qantas has indicated that it would want to spend as little as
possible on new jets, which probably put off MAS which
has its own set of problems in acquiring new aircrafts too.
Qantas faces dead
end. With Singapore Airlines already
having an established partnership with Virgin, it remains to be seen
which airline can be Qantas’ new partner for its Asian premium carrier. A
possible partner could be Thai Airways, which is now concentrating on
strengthening its presence in Asia, and given that it also has plans to establish
a regional carrier of its own called Thai Smile. However, we think the chances for
this to happen are still slim, noting that there is a difference in the target
market as Thai Smile Air intends to serve the market gap that exists between
the low cost carrier and the full service segments. We also don't think
Indonesia's national flagship carrier, Garuda Indonesia could be a potential
partner of Qantas as geographically serving the lucrative Chinese market would
still not be feasible for flights exceeding 6 hours on the former's upcoming
delivery of A320s. Furthermore, Garuda is still the dominating carrier in terms
of international destinations (other than ASEAN per se), and what the Indonesian
carrier needs is wider access to Europe and North America after being slapped with numerous bans back in 2007–2009. With no
viable options at hand for Qantas
to revive its International Business, it appears to be at a dead end for now.
Share swap to be
reversed? While the cries of the union workforce of MAS over the need to
protect jobs are felt by the Prime Minister, we have reiterated that the key
low hanging fruit for MAS to pick lies in trimming its excessive workforce (MAS
has some 20,000 employees vs AirAsia's 9,000 and SIA's 21,000). Furthermore, with
routes between AirAsia and MAS already rationalized as well as key employees
from AirAsia being deployed to MAS, we
think the unraveling of the share swap deal inked last year would not bode well
for the Malaysian corporate scene. Aside from scrapping the share swap deal,
rumours are abound that the union is requesting MAS (in an
attempt to protect jobs) to abort
its plans to start a new premium short-haul carrier (and instead focus on
Firefly) as well as abort its panned
entry into the oneworld alliance. We think any reversal of the share swap is
highly unlikely but we do not discount this possibility entirely.
Malaysia Airports'
potential volume feeder fizzles out. With MAS and Qantas both
ending partnership talks,
Malaysia Airports will lose the
opportunity to tap into higher feeder
traffic arising from being a key operating hub for Qantas' Asia-based
premium carrier. Nonetheless, this will have no impact to our BUY call on the
company as we are fairly optimistic on
the airport operator’s ability to
expand its retail revenue significantly once the KLIA2 is fully
operational over the medium to long term. In addition, the completion of the
recent private placement exercise that
raised some RM616mm which was taken up by both local and foreign investors
could instill confidence in the
longer-term prospects of KLIA2. Previously,
there were concerns from some quarters over the possibility of a
lukewarm response to the private placement since the higher capex allocation
for KLIA2 was announced.
SIA potentially
sustaining its premium market share. With Qantas reaching a dead end in
establishing anAsia-based regional premium carrier, this would bode well for
SIA in retaining its market share in the premium segment which has been
declining over the recent years due to the intensifying competition from other regional
full service carriers.
Maintain OVERWEIGHT.
With SIA (FV: SGD12.47), AirAsia (FV: RM4.57), Malaysia Airports (FV: RM7.53) and
Tiger (FV: SGD0.87) in our list of BUYs, we maintain our OVERWEIGHT
recommendation on the aviation sector. Given concerns over their weakening balance sheets amid
intensifying competition, we maintain our sell calls for MAS (FV: RM0.90) and
THAI (FV: THB21.13). Our OVERWEIGHT call
is largely centred on the activities of passengers downtrading to low cost
carriers, hence benefiting the likes of AirAsia and Tiger as well as Malaysia
Airports as it stands to take advantage of the potential higher revenue arising
from travellers spending more money
in airports. While SIA will continue to face headwinds from the intensifying
competition, we think that its valuation is appealing as we continue to believe
its share price has bottomed out and
considering the fact that its balance sheet remains solid with a high net cash level to weather any
downturn. With our overall sector call driven by the low cost segment, we
continue to have AirAsia as our TOP BUY in the aviation sector.
Source: OSK188
No comments:
Post a Comment