Malindo's fares unlikely to stay low

Malindo's fares unlikely to stay low

Malindo Air, which will commence operation on March 22, 2013, is unlikely to maintain its low fares in the long term given the high cost structure of its model, said RHB Research.
Malindo Air is positioning itself as a hybrid model, offering full service carriers' amenities for low-cost carrier (LCC) type fares.
Currently Malindo Air is promoting a one-way all-in promotional air fare as low as RM38 to Kuching from Kuala Lumpur and RM68 to Kota Kinabalu from Kuala Lumpur, much cheaper than the RM79 and RM89 LCC AirAsia is offering, respectively.
"With Malindo Air competing in the local aviation landscape by offering full service at low-cost pricing, this reminds us how Firefly's jet operations turned out, which were loss-making despite churning high loads," it said in a note to clients yesterday.
Comparing Malindo Air with Firefly's jet operations before it was shut down, RHB Research said Firefly's unit cost base could have been relatively lower than Malindo Air's due to the fact that in-flight meals were still charged at Firefly and Malindo Air has an additional in-flight entertainment cost to incorporate in its cost structure.
"We see Malindo operating at a high cost base at its initial start-up and it's only a matter of time that it will stop offering such low fares on the longer term," said the research firm.
RHB Research also expects both Malaysia Airlines (MAS) and AirAsia to take a hit from the start of Malindo Air's flights to Kota Kinabalu and Kuching.
Kota Kinabalu and Kuching account for 15% and 6% of AirAsia and MAS available seat per kilometre (ASK) respectively. "While MAS and AirAsia are potential losers from Malindo Air's entry, we see this as an opportunity for Malaysia Airports Holdings Bhd (MAHB) to expand its revenue base further," RHB Research said, reiterating an "overweight" call on the aviation sector with AirAsia as its top buy.
"Although the emergence of Malindo may put yields at risk, 2013 is shaping to be better year for both AirAsia and MAS. We expect the former to see its earnings grow by 6.9% on the back of higher contributions from its associates, and the latter possibly returning to the black with a small profit," it added.
Meanwhile, RHB Research said MAHB's 43% estimated earnings drop in 2013 largely due to a change in accounting entry, should not be a major concern.
"We expect MAHB's operational cash flow to further improve (in 2013), driven by a stronger 11% passenger traffic growth, coupled with higher passenger spending per passenger," it said.