Tuesday, August 9, 2011

MAS-AIRASIA MERGE 2011- Analysts say MAS stands to benefit more than AirAsia

PETALING JAYA: Although it remains to be seen if a proposed share swap among key shareholders of Malaysia Airlines (MAS) and AirAsiacan save the former from its troubles in the long term, MAS stands to benefit the most from the transaction.
Under the highly anticipated deal to be announced today, AirAsia groupchief executive officer Tan Sri Tony Fernandes and his Tune Air partner and AirAsia deputy CEO Datuk Kamarudin Meranun are expected to swap a portion of their AirAsia shares for 20% of Khazanah Nasional Bhd's stake in MAS.
Analysts said MAS would gain the most from this deal on an individual stock basis, as MAS was coming off from a very low base and given the negative investor sentiment as the airline is expected to post full-year operational losses this year.
Standard & Poor's equities research analyst Shukor Yusof attributed the gain to AirAsia's market position, expertise and slick management.
“We think this is certainly the hope of Khazanah (in entering such a deal). However, the cost differentials for Khazanah and Tune Air suggest that the former will need to pay a premium for AirAsia's stake based on its last closing share price, while Tune Air will find the purchase of MAS stock relatively cheap.
“It seems like a sizeable gain for Tune Air's main shareholders but not necessarily for its minority shareholders,” he added.
Meanwhile, a foreign aviation analyst said his concern was for AirAsia as an individual stock, as he felt the tie-up could result in a dilution of the strong AirAsia brand.
“After all, AirAsia has spent years distancing itself from MAS and the way MAS operates. So a shareholding swap will see AirAsia's top management buying into the full-service carrier space,” he said.
The analyst added that the impact for regional airlines once the deal was cemented remained relatively muted, as the tie-up between MAS and AirAsia would see a streamlining of domestic routes which was not operated by regional peers.
“On an individual stock basis, we think MAS is slated to rise significantly due to scarcity value (MAS effective free float is 18%). Tune Air would never have been able to purchase MAS on the open market. AirAsia, on the other hand, is very liquid and Khazanah would not have had any problems to procure it in the open market,” Maybank Investment Bank (IB) said in a report yesterday.
AmResearch Sdn Bhd the consistent discord between both airlines needed to be resolved if a National Aviation Policy was to be put in place.
The share swap is seen as a prelude to the ironing out of issues related to such a policy, including route rationalisation which could see AirAsia monopolises most domestic and short-haul routes, a committed traffic to feed into MAS' long-haul network and AirAsia using MAS' maintenance, repair, operations (MRO) facilities.
With Asean Free Skies scheduled for 2015, most regional airlines were now aggressively growing and starting up their own low-cost carriers (LCCs), which were turning out to be effective vehicles to garner regional traffic to feed into legacy, premium airlines' long-haul routes, added AmResearch.
“Strengthening and co-ordinating the two local airlines are necessary to stave off incoming competition, particularly considering that KL International Airport is stuck between Singapore as a major business hub and Thailand as a major tourism hub,” it said.
Maybank IB said it was a stark reality that Firefly's jet operations would be discontinued, as Firefly was encroaching into AirAsia's market and severely depressing yields on the East-West Malaysia services.
“Firefly's turbo-prop operations might be amalgamated into MAS branding and operate as a regional link airline similar to Silk Air and Singapore Airlines,” it added.
The report said that roughly 70% of the combined capacity of MAS Group (MAS, Firefly and MasWings) and AirAsia Group (Malaysia, Thailand, Indonesia and AirAsia X) were deployed on overlapping routes.
“Often, these flights are duplicates (as they depart at the same time) which severely undermines yields, load factor and ultimately profitability. Unfortunately, these irrational practices are a permanent feature due to both airlines' adamant quest for domination,” it said.
Analysts believe that leakages can be done away with if both groups share data and make decisions objectively, helping to stop irrational capacity deployment, overcapacity on selected domestic routes and predatory pricing.
While this tie-up could be viewed as a cartel, business overlap between both groups can be reduced, allowing them to prosper financially together as MAS focuses on premium travel and AirAsia focuses on the low-cost market.
Shukor said in a report that the MAS-AirAsia alliance could lead to a politically correct “1Malaysia Airlines”, allowing both carriers to focus on the premium and budget sectors, respectively.
He added that Fernandes was unlikely to sign the deal unless he and AirAsia stood to benefit from it.
“If he does get himself into the deal, Fernandas, for all his successes at AirAsia, may find MAS a bumbling beast best left to fend for itself.”
Shukor added that while there were no direct comparison of such a deal in the region, the closest would be the “cross-shareholding between Cathay Pacific and Air China Cathay owns about 19% of Air China and Air China owns 30% of Cathay”.
“This tie-up was driven by business (creating a force in Chinese aviation as well as developing Hong Kong and Beijing as hubs) and political needs. I see some similarity with the proposed MAS and AirAsia swap,” he said.
Maybank IB said a tie-up involving operations would provide synergies of up to RM1bil annually in the form of yield, network, growth, fleet, staff, MRO and cargo, but the full synergy could take time to materialise.
Although the synergy and benefits appear substantial, it is also highly dependent on whether both companies can work together. After all, MAS and AirAsia have been at loggerheads from the time AirAsia took flight almost a decade ago.
Analysts said with Tune Air buying into MAS, it was the fastest way for AirAsia to put a stop to Firefly eroding the former's market share in the LCC space while its partnership with Khazanah would help AirAsia X secure international route rights, which had hampered its growth and was pivotal ahead of AirAsia X's plan to list next year.
Meanwhile, Khazanah's presence in AirAsia as a shareholder will give it exposure to a leading Asean LCC.
“Khazanah clearly understands the benefit of air travel to the country's economy. It is crucial that it has exposure to a winning airline rather than one airline versus the other a situation that has prevailed in the past decade.
“Too much money and resources have been wasted over the past decade. By teaming up with AirAsia, Khazanah can extract great value for its investment and to the country's benefit,” said Maybank IB.

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