Potential price cap on airfare a minor irritant to airlines, says CIMB Research

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KUALA LUMPUR (July 19): The move to impose price caps on airfares is likely to be a minor irritant to the airlines and is unlikely to have any major commercial implications, said CIMB Research.

Yesterday, Transport Minister Anthony Loke said during a parliamentary sitting that the aviation regulator Malaysian Aviation Commission (Mavcom) was studying measures to control domestic airfares.

Mavcom initiated a study several months ago to address public complaints over the high price of domestic airfares during festive seasons. The report will be presented to the Ministry of Transport later this month.

"We are short on details at this point, but there was talk that price caps may be introduced, which is generally negative for airlines. This report examines the issues involved, and to what extent it will hurt airlines, if any.

"Even if price caps are introduced, we believe that the impact on airlines will be limited as the price caps are likely to be set quite high. We maintain Neutral on the sector," CIMB said in a note yesterday.

CIMB opined that setting of price caps is a complicated affair, as it involves setting the price cap route-by-route, taking into account flight distance.

Of considerations needed to be taken, Mavcom will need to decide how to treat the different ways airlines price their tickets, i.e. bundled vs. unbundled fares, as well as to work out how to factor in changes in airline costs into the price cap.

Mavcom will also need to balance the public's desire for reasonable fares with the ideal of free market forces, said CIMB.

"We believe that the price caps are likely to be set quite high, because 1) a low price cap will hurt Malaysia Airlines Bhd (MAS) and Malindo Airways Sdn Bhd (Malindo) more, as their airfares are typically higher than AirAsia Group Bhd (AirAsia), and 2) it is not in the interests of Mavcom to drive MAS and Malindo out of business, since that would leave AirAsia as the de-facto monopoly which will have repercussions for the level of competition and consumer choice in the airline space," it said.