Aviation Sector

New financial incentives for airlines in the pipeline
The Business Times highlighted, quoting sources, that
Malaysia Airports (MAHB) will announce its new financial
incentives for airlines this week. According to sources, this
was made known by MAHB’s managing director Tan Sri
Bashir Ahmad at a Board of Airline Representatives (BARMalaysia)
meeting on Friday.
Among the incentives to be given include waiver on landing
charges for new foreign and existing airlines that add new
destinations or flight frequencies for a number of years
(after which discounts will be given), new parking charges
after the first three hours of free parking, and new
incentives for airlines that bring in additional passenger
traffic. It is understood that MAHB had earlier proposed to
provide rebates on passenger service charges for airlines that
achieved certain passenger growth y-o-y.
MAHB had previously provides incentives for foreign airlines
to encourage the airlines to operate to Malaysia. Waiver of
aeronautical charges was also granted to AirAsia between
2002 and 2007.
The development is conceptually positive for MAHB as it
could help to stimulate demand for air travel amid the
economic slowdown and the H1N1 pandemic. This could
translate into higher passenger movements in airports and
hence, benefit MAHB. We believe that MAHB would likely
be compensated for the reduction in charges as per the new
financial restructuring agreement. However, we have yet to
impute the impact of the new incentives in our forecasts
pending more details and confirmation from the
management.
Meanwhile, AirAsia could benefit from the incentives given
the Group’s strong number of passengers as travellers
increasingly shifted to cheaper and short-haul flights. MAS,
on the other hand, may not be able to benefit strongly given
its weak passenger numbers as well as its relatively small
domestic business contribution. Note that MAS’ domestic
route revenue accounted for 9% of its total revenue in
FY08.
Maintain Cautious on sector and our Fully Valued calls for
MAS and AirAsia with price targets of RM1.80 (based on
1.4x CY10F BV) and RM1.25 (based on 8x CY10F EPS)
respectively. We maintain our Buy call for Malaysia Airports
with SOP-derived target price of RM4.50. We continue to
like MAHB for its resilient earnings, thanks to the support
from its non-aeronautical business. We also believe MAHB’s recent restructuring enhances long-term earnings visibility
and improves ROE.

Hwang-dbs 17/8/2009