Airasia

In view of the Government’s reluctance to support MAS further and in the aftermath of the MH370 jet disappearance, the possibility of a capacity cutback to mitigate immediate-term cash burn “may be imminent” and was a move which “can only be positive for AirAsia”.

Additionally, this could cause industry yields to stabilise or even increase on a year-on-year (y-o-y) basis during the second half of 2014. If this happens, it could be a powerful trigger to AirAsia’s share price.

There is the potential for a significant yield and earnings upgrade if MAS cuts back on its capacity deployment.

Should the Government decide to pump more money into MAS in 2015 AirAsia’s yields would remain at the current (May 2014) low levels. However, yields in Malaysia were already so low that both airlines had said fares were unlikely to go lower sequentially from where they ended in late 2013 (although fares will likely still be lower y-o-y in first quarter 2014 vs first quarter 2013, as the fare deflation started in earnest only from the second quarter 2013).

Furthermore, AirAsia’s current (14 May 2014) share price is already below its asset liquidation value, and that is not even counting the value of its brand and its sustainable competitive advantage. So, there is significant downside from protection for investors from 14 May 2014 onwards.

A potential negative development that could hurt AirAsia’s yields was the possibility of a hike in KLIA2’s tariffs after May 2015. However, if MAS rationalises its capacity deployment, pricing power might return to the airlines and increase their average yields, allowing AirAsia to pass through the higher passenger service charges.