No signs of slowdown in aviation sector

This article first appeared in The Edge Financial Daily, on October 14, 2019.
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Aviation sector
Maintain positive:
September traffic data for Malaysia Airports Holdings Bhd’s (MAHB) Malaysian operations reached 8.4 million passengers, translating into a 7.6% year-on-year (y-o-y) growth and extended gains for the 11th uninterrupted month.

This brings the nine-month 2019 (9MFY19) passenger traffic numbers for Malaysian operations to 78 million, representing a 5.9% y-o-y growth and constitutes 76.1% of our full-year passenger growth estimate of 102.5 million for 2019. The bulk of the increase in passenger traffic during 9MFY19 came from other airports (excluding Kuala Lumpur International Airport [KLIA] Main Terminal and klia2) which contributed more than 60% of traffic expansion.

We continue to opine that growth in non-KLIA airports was supported by MAHB’s hub-and-spoke model which aims to bring global traffic to smaller airports and vice versa.

For example, Britain’s TUI Airways and Kazakhstan’s Sunday Airlines have been operating from the Langkawi International Airport since late last year. As for the Istanbul Sabiha Gokcen International Airport, total passenger traffic in 9MFY19 grew 2.9% y-o-y, bringing the total cumulative 9MFY19 passenger traffic for MAHB to 104.6 million passengers.

Domestic traffic at Malaysian airports recorded a staggering growth of 10% y-o-y in 9MFY19 to hit 38.6 million passengers. Following the Aidilfitri holidays in June, travel demand in the third quarter of 2019 (3QFY19) remained strong, with a series of three long weekends in September and the Aidiladha and National Day holidays in August. The haze which occurred in the middle of September appeared to have no impact on travel sentiment.

Looking ahead, the consolidation of domestic traffic is expected to continue at least until 1QFY20 as airlines shift capacity from the international to domestic sector.

Meanwhile, international traffic at Malaysian airports grew at a measured pace of 2.2% y-o-y to hit 39.4 million passengers in 9MFY19. The international passenger traffic of 13.4 million recorded in 3Q19 was also the highest ever recorded on a quarterly basis.

Besides the series of long weekends, the 3.3% y-o-y growth in international traffic during 3QFY19 partially came from the haj movements in August. It also proved that the haze in September did not adversely impact travel demand. We believe that North Asia (China, Taiwan and South Korea) likewise supported international traffic in September due to the Mid-Autumn Festival.

Although growth in the domestic sector outpaced the international sector for 9MFY19, international passenger movements continued to retain slightly more than 50% of the passenger mix.

The latest international route additions include Malaysia Airlines’ flights from Kuala Lumpur to Pekanbaru and Solo in Indonesia which commenced in the middle of September, while Indonesian carrier Citilink started flight services from Pekanbaru to Kuala Lumpur in late September.

Going forward, we expect international traffic for Malaysian operations to be supported by incoming additions of frequencies routes and also airlines. For instance, Turkmenistan Airlines will begin operating flights between Kuala Lumpur and Ashgabat from December, while Uzbekistan Airways will be introducing a third flight beginning from the middle of December under its Tashkent-Kuala Lumpur services which replaced the triangle routing with Jakarta.

Passenger traffic growth at klia2 in 9MFY19 of 4.2% y-o-y outpaced the 2.2% y-o-y growth seen in KLIA Main Terminal, mainly driven by a 6.9% growth in domestic traffic during the same period.

On the international front, passenger traffic for Asean countries at klia2 grew by 5.4% y-o-y and 6.6% y-o-y in 9MFY19 and 3QFY19 respectively.

Hence, we opine that AirAsia Group Bhd will continue to record commendable operational statistics for 3QFY19. Although the growth of international passengers beyond Asean for klia2 declined by 0.6% in 9MFY19, we believe that this would change as routes operated by AirAsia X Bhd (AAX), especially from Kuala Lumpur to Fukuoka, which started in 1QFY19, are expected to mature as the 2020 Tokyo Olympics gets closer.

We view AAX’s new service from Kuala Lumpur to Narita, Tokyo beginning in late November, on top of its existing flights to Haneda, Tokyo, will further strengthen AAX’s position as one of the largest airlines in Japan’s emerging medium-/long-haul market.

Recall the international departure levy that came into effect on Sept 1, which is only applicable to tickets purchased on or after the implementation date; its effects may have yet to be felt. Nonetheless, we continue to believe that the impact of the departure levy will be negated by robust travel demand heading into Visit Malaysia Year 2020.

In comparison with other countries such as Hong Kong, Bangkok and Australia, Malaysia still has the lowest departure levy for economy class passengers (for both Asean and non-Asean destinations) and premium class passengers (for Asean destinations). — MIDF Research, Oct 11