This article first appeared in The Edge Financial Daily, on December 7, 2015.

Malaysia Airports Holdings Bhd
(Dec 4, RM5.62)
Maintain hold with a higher target price of RM5.73: Malaysia Airlines Bhd (MAB) announced recently that it had entered into a new code-sharing partnership with Emirates, upgrading from their previous interline relationship. 

MAB will add its codes on Emirates to a total of 91 cities, including 38 in Europe, 38 in the Middle East and Africa, and 15 in the Americas. In return, Emirates will add its codes on MAB flights to domestic routes in Malaysia, Southeast Asia and selected cities across the Asia-Pacific region.

After January 2016, London will be MAB’s only route in Europe, with all the rest cut off due to “monumental losses”. Although MAB can use its One World Alliance links, nothing comes close to beating Emirates’ capacity deployment to Europe, making Emirates an excellent partner in MAB’s new strategy to serve Europe via a stopover in Dubai. 

Without its own long-haul network, Emirates will be the key to feed MAB’s domestic and short-haul international network. MAB can ride on the Emirates brand and distribution network to sell its tickets, which should generate a higher passenger volume for MAB and make it less likely for MAB to further cut its short-haul B737 network. 

The benefits are less obvious for Emirates, since it already serves key cities in Southeast Asia like Bangkok, Singapore and Jakarta with multiple daily flights. There will be incremental benefits for Malaysia Airports Holdings Bhd (MAHB).

We expect Emirates to deliver a net increase in passenger volume to the Kuala Lumpur International Airport and MAB, as a result of Emirates becoming a new distribution channel for MAB’s seat capacity. If the partnership takes off, we expect Emirates to potentially up-gauge one of the four daily flights to Kuala Lumpur from a B777-300ER to an A380 flight. 

Nevertheless, we expect the benefits to be small at the beginning, and take some time to build up momentum. MAB’s new secondary bases could also be positive for MAHB. Separately, MAB announced last Thursday that it plans to relocate 18 B737-800s to seven secondary cities in Malaysia to “improve connectivity and service quality of the domestic network”. 

We think that this move may result in increased aircraft utilisation of the fleet based in secondary cities, and the planes can also be used to operate new routes from one secondary city to another secondary city, bypassing the very competitive Kuala Lumpur hub. This could benefit MAHB. — CIMB Research, Dec 4