Airlines - The Need For Speed

Malaysia  and  Singapore  have  agreed  to  the  setting  up  of  a  HSR  (High  Speed  Rail)connecting  Kuala  Lumpur  and  Singapore.  We  foresee  that  impact  on  the  alreadycompetitive LCC (Low Cost Carrier) segment would be manageable as HSR fares are not likely to beat the already low LCC fares. Likely negative impact will be on the full service carriers due to pricing. We maintain our OVERWEIGHT call on the Malaysian aviation  sector  as  we  think  completion  of  the  HSR  by  2020  is  too  far  ahead  to  be priced  in.  We  have  buys  on  both  AirAsia  (FV:  RM3.39)  and  Malaysia  Aiports  (FV: RM7.32) whilst MAS remains a SELL (FV: RM0.52).  

Strengthening  bilateral  ties.  Yesterday,  in  a  Singapore-Malaysia Leaders’ Retreat,  the Prime  Ministers  of  Malaysia  and  Singapore  agreed  to  build  a  HSR  Link  between  Kuala Lumpur  and  Singapore  targeted  for  completion  by  2020.  Malaysian  premier  Datuk  Seri Najib  Razak  said  the  project  would  be  a “huge game changer”,  cutting  travelling  time between the two cities to merely 90 minutes.  

Details  of  the  high  speed  train  project.  There are no further details on the said project, including whether the rail would just be a point-to-point connection between Singapore and Kuala  Lumpur  or  would  run  across  and  stop  at  other  train  stations  on  the  way.  But  as Datuk  Seri  Najib  has  stated  that  travelling  on  the  HSR  would  only  take  90  minutes,  we reckon that the high speed train could likely be a direct service with no other stops.

HSR more predictable. Compared to HSR, flying is still the faster way to travel in terms of pure speed but many factors will need to be taken into account in estimating the total travel time, such as commute time to the station/airport, check in/out, rail/flight time and number of  stops  made  throughout  the  journey.  Given  the  certain  unpredictability  in  air  travel,  as flights  are  subjected  to  weather  conditions  and  airport  congestion,  HSR  services  offer better reliability and consistency.

Travel time cut. The track will span a distance of approximately 350km connecting Kuala Lumpur and Singapore. By applying an average speed of 350km/h, which is the designed track speed of China’s recently completed tracks,  and  assuming  a  direct  point-to-point service, we estimate that the door-to-door time travel on the HSR (including check in/out) could  take  only  190  minutes.  This  is  75-90  minutes  less  than  when  travelling  by  air  (see Figure 1 overleaf).

What fares would it fetch? Fares for the HSR would depend on several factors, such as per  capita  income  of  the  respective  nation,  speed,  time  saved  compared  to  flying, frequencies and airfares. We foresee two different price levels due to the wide per capita income  gap  between  the  two  nations.  As  the  HSR  service  is  likely  to  offer  more convenience for passengers due to its reliability and the travel time saved, we reckon that HSR  fares  could  likely  be  pricier  than  the  fares  charged  by  LCCs.  Due  to  the  number  of airlines serving the KL-Singapore sector, LCC fares could be as low as RM60 one-way (all in). Average airfare for LCCs departing from KL is approximately RM100-RM120 one-way vs RM300-RM400 for full-service flights. As such, we foresee that the HSR will negatively impact yields permanently for full-service carriers such as MAS, SIA and Silk Air. However, we note that in China’s case, the HSR fares offered are roughly at a 20%-30% discount to airfares. This is largely due to the higher frequency and population base it accommodates. Furthermore,  the  travel  time  saved  by  travelling  on  China’s HSR  is  not  much  due  to  the number  of  stops  it  makes.  In  contrast,  French  bullet  train  fares  are  relatively  pricier  than LCC fares and comparable to airfares of full-service carriers.

Singapore  accounts  the  biggest  chunk  of  passenger  volume.  We  anticipate  airlines with exposure to the Singapore (Changi) – Kuala Lumpur (LCCT/KLIA) route to be subject to downside risks in passenger volume due to the diversion of air travel to HSR. Note that flights  to  Singapore  account  for  the  biggest  chunk  of  Kuala  Lumpur’s international air passenger  volume,  followed  by  Jakarta,  Bangkok  and  Hong  Kong.  Based  on  Malaysia Airports Holdings (MAHB)’s  2011  annual  report,  a  total  of  2.944m  passengers  were handled on the Singapore (Changi) – Kuala Lumpur (LCCT/KLIA) route, which has seen a CAGR of 11.9% yearly over the past five years. Assuming a 12% y-o-y growth rate for last year, this route represents 8.2% of total passengers handled in KLIA and LCCT combined and 4.9% of total passengers handled by Malaysia Airports.  In terms of number of flights, we estimate that this would account for approximately 5%-5.5% of total aircraft movements handled by MAHB’s airports in Malaysia. According to weekly flight schedule as per Figure 3, passengers carried by both MAS and AirAsia account for approximately 6 – 7% of total passengers handled for the full year.  

Full-service  carriers  likely  to  take  a  hit.  As  we  are  seven  years  away  from  the completion  of  the  HSR,  it  is  tricky  to  gauge  the  impact  accurately.  We  estimate  that  the downside  risk  to  passenger  volume  would  be  fairly  manageable  for  LCCs  given  that  its fares could still be much more attractive. Even if the LCCs do see some passenger traffic diversions to HSR, we reckon that the decline could likely be short term. However, as HSR fares could be more attractive compared to the airfares of full-service airlines, we foresee that  the  latter  could  be  hit  most,  with  a  permanent  drop  in  yields.  In  terms  of  total  net passengers for airport operator MAHB, we estimate that the short-term drop in passenger traffic  could  only  account  for  3%-5%  of  total  passengers  handled  and  the  impact  will  be short term. The improved economic ties between the two countries would boost per capita income and the propensity to spend, thus we foresee the decline in air passenger volume on the KL-Singapore route to be offset by higher volume for other routes.

Too far ahead to be priced in. We think the 2020 completion of the HSR is too far ahead to be priced in to the Malaysian aviation stocks  under our coverage. Case in point is how well  the  share  prices  of  Thailand’s Airports  of  Thailand  (BUY,  FV:  THB137),  Asia Aviation  (BUY,  FV:  THB7.35) andThai  Airways  (BUY,  FV:  THB35.40) have performed despite its government’s announcements of a massive high speed rail network that would link  to  China.  As  such,  we  continue  to  maintain  our OVERWEIGHT  call  on  the  aviation sector with BUYs for AirAsia  (BUY,  FV:  RM3.39) and MAHB  (BUY,  FV:  RM7.23) as we see value emerging after the stocks were bashed down last year. However, MAS remains a SELL (FV: RM0.52) due to its massive earnings dilution post rights issue.

Source: OSK