Winners and losers in Malaysia and Japan

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By TESTCustomwebLP TESTCustomwebLP August 8, 2014 13:31

Winners and losers in Malaysia and Japan

As Skymark continues to cut routes, one wonders if the airline can survive much longer, but as mentioned previously, at least management are trying to cut back to the profitable routes alone to save the business and re-build, something that Kingfisher Airlines never bothered to do until it was far too late. We mentioned that Skymark’s business plan was rather much like that of Kingfisher in 2012.  I still hope to be proved wrong. But as we watch Skymark reduce in size to save itself, we must consider the benefits to this contraction that AirAsia Japan will be able to exploit. Rapidly filling the routes left unserved by a low cost is essential for AirAsia Japan and it seems that the timing of this new start-up is fortuitous indeed.

However, if you refer back to our report last week on the plans of Malaysia’s state investment firm Khazanah Nasional for Malaysia Airlines System (MAS) then you will recall that the plan is to perform a JAL-style overhaul of the airline and then launch an IPO for the same in a few years. Today there is confirmation that the plan is going ahead with Khazanah, which currently owns 69.4% of the airline, offering to pay 0.27 ringgit per share for the remaining stock, a 12.5% premium to the closing price yesterday.

Trading of Malaysia Airlines shares has been suspended as a result ahead of the announcement.

So, where does AirAsia come into all this? To answer that, we must consider the extreme damage inflicted upon ANA when state supported JAL was allowed to carry on business in competition with them while enjoying a myriad of tax breaks and price concessions. We must therefore ask: Will the same happen in Malaysia as part of the plan to save, re-brand and relaunch MAS?

Khazanah contacts remain confident that some form of the same JAL-style plan will happen in Malaysia over the next few months and years in order to save the flag carrier and turn it into a low-cost operation like JAL. This means AirAsia may well suffer damage as a result of having to compete with the same, albeit indirectly on the main, unlike the full competition between ANA and JAL. That said, some 60% of AirAsia flights are on domestic routes and that will give rise to concerns that perhaps AirAsia will not be competing on a level playing field against MAS in the near future and as a result growth will stall. This also comes at a time when Jet Airways is attacking AirAsia India routes using 737s on the all-important Bangalore-Goa segment. It is well worth keeping a close eye on AirAsia Group figures in the future for Malaysian routes, but as mentioned it might well be that AirAsia Japan gets off to such a good start that profitable growth remains a sure thing at the group.

Meanwhile, do you recall Boeing being rather dismissive regarding questions posed about Russian titanium supply back in March? Well it turns out we were right in our assessment at the time, Boeing has indeed been stockpiling as much titanium as it can from VSMPO-Avisma, as has United Technologies it turns out.

Given that production has not increased by a huge amount at VSMPO-Avisma, one can only assume that this buying up of the metal is at the expense of other customers, which should in turn increase titanium prices. As you would expect, titanium prices started rising in March 2014 and have again risen sharply since EU and US sanctions last week. One wonders if the other OEMs have enough of the stuff too? If they have all stockpiled, the next question is where are the storage facilities? Look out for increased production costs running through the books of the OEMs as they stockpile, ship and store raw materials at great cost.

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By TESTCustomwebLP TESTCustomwebLP August 8, 2014 13:31