The Visit Malaysia Year 2014 as well as other tourism boosting initiatives by the government are expected to boost the overall aviation industry in Malaysia, particularly for airport operator Malaysia Airport Holdings Bhd (MAHB) due to the expected influx of foreign tourist arrivals.
The airlines sector, however, is likely to see challenging times ahead of stiff competitions from new airline entrant; Malindo Airways Sdn Bhd (Malindo Air), according to RHB Research Sdn Bhd (RHB Research) analysts Ahmad Maghfur Usman and Jerry Lee.
Visit Malaysia Year 2014 has been actively promoted since the start of this year and a 2014 calendar filled with year-long events that will focus on four main themes which are heritage and culture, adventure and nature, luxury and wellness, and island and beaches.
According to the Ministry of Tourism, the tourism campaign is expected to raise the number of tourists coming to Malaysia to 28 million from 2012’s 25.03 million.
Additionally, Visit Malaysia 2014 is expected to generate a positive spillover effect on traveller arrivals to neighbouring countries such as Singapore, Indonesia and Thailand.
“The expected influx of foreign tourist arrivals will result in increased use of the group’s 39 airports nationwide,” the analysts outlined, noting that MAHB stands to benefit in such an environment via its capacity expansion.
Furthermore, airports are set to see increased usage with airlines setting competitive rates to meet the expected increment of air travel demand. Nevertheless, Maghfur and Lee cautioned that the airlines sector could see stiffer competition with the potential influx of air travelers in Malaysia.
“The arrival of Malindo Air into the market, however, has increased competition among the airlines and, hence, we still believe that tough times remain for the carriers under our coverage (AirAsia Bhd and Malaysian Airline System Bhd) – although we think AirAsia has done fairly well in cushioning the downside impact of the heightening competition on its yields.
“Additionally, Malindo Air’s apparent shift in direction – to focus on expanding to regional routes – will ease the pressure off AirAsia, but may impact MAS instead, as there will probably be some overlapping routes between them.
“We believe that Malindo Air’s shift in focus will likely cause the airline to underperform its earnings targets,” they explained.
Meanwhile, the depreciation of some countries’ local currencies due to the regional exodus of funds – on concerns that the US Federal Reserve (US Fed) was tapering off its bond buying programme (though this was ultimately delayed to a later date) – is expected to boost the revenues of the airlines under the research firm’s coverage.
“However, despite jet fuel costs normalising, it remains at a high level, and this may more than offset the topline growth in carriers’ revenues.
“Long haul airlines like AirAsia X and MAS will likely see higher yields and passenger demand from non-regional travellers, whose stronger currencies mean they experience cheaper airfares and vacation costs,” they said.
The risk of a further depreciation in the ringgit will erode profits, as jet fuel, aircraft maintenance fees and leases are typically paid in US dollar.
This, they explained, may offset the overall impact of the higher revenue churn. Additionally, debt will also be affected by any weakening in the local currencies, as the funding for some aircraft purchases are mostly carried out in US dollar terms.
“We are of the view that the carriers most sensitive to currency risks are those with a low earnings base, such as MAS and AirAsia X,” the analysts opined.
While the airline carriers’ prospects under RHB Research’s coverage have been envisaged as challenging, MAHB saw its earnings growth coming in line (excluding its distorted costs impact) as the group benefited from intensifying competition and capacity expansion among the airlines flying to and from its airports.
“This led to declining fares, which in turn stimulated demand for air travel – a scenario that has benefited MAHB,” the research firm remarked.