Asia-Pacific Airlines - The great Asian LCC land grab::Macquarie Research,

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Asia-Pacific Airlines
The great Asian LCC land grab
Asia is seen as the next gold mine for low cost carriers (LCCs), representing a
high growth profile and a low penetration rate for budget carriers. We highlight
the growth prospects across the region and the carriers best equipped to benefit
from this opportunity.
Asian LCC market set for strong medium term growth
We see strong growth opportunities for Asian LCCs over the next five years,
driven by improving personal wealth and a more liberal regulatory environment.
In particular we highlight the opportunities in the Japanese market, which will see
the launch of three low cost carriers in 2012 and likely see LCC penetration
levels rise from the current 9% to ~25% by 2016.
China represents the biggest upside in terms of market size and demand
dynamics, however we believe upside to this market will be limited to
international connectivity of Chinese ports in Southeast Asia rather than the
domestic Chinese market which remains heavily regulated and limited to
domestic and mainly Government owned airlines. Elsewhere we also see
opportunities within ASEAN for international flights between the major cities
which are currently dominated by full cost carriers.
Improving regulatory framework conducive to pan-Asian
carriers
In the same way that a Single Aviation Market in Europe paved the way for
substantial growth from the likes of easyJet and Ryanair, we expect the
implementation of Open Skies in the ASEAN region from 2015 to facilitate the
development of pan-Asian LCCs. We are already seeing Asian LCCs like
AirAsia, Jetstar and Tiger spread their wings through the development of
minority stakes in affiliated airlines. This allows these carriers to fully capitalise
on fifth freedom traffic rights from 2015 and ultimately cross-border M&A, we
suspect from 2020, paving the way for a couple of profitable pan-Asian carriers
benefiting from their first-mover advantage.
AirAsia and Jetstar best placed to profit from growth
opportunities
We view AirAsia (AIRA.MK, O/P, MR4.77 P/T) as the best way for investors to
play the Asian LCC growth story, with a recent pull back in the company’s share
price providing an ideal entry point. We also see significant upside in QAN‟s
(QAN.AU, N, $1.65 P/T) share price should it be able to successfully deploy its
Australian Jetstar operating model into Singapore and Japan – on valuation
metrics QAN is significantly cheaper than AirAsia however is less of a pure play
given its existing union issues within Australia and the likely 3-5 year turnaround
required in its loss-making mainline international operations.
At the other end of the spectrum we rate Skymark (9204.JP, U/P, ¥850) an
Underperform given its vulnerability to the incoming domestic LCC competition
within Japan combined with an unconvincing long haul strategy, whilst we
believe ANA (9202.JP, N, ¥250 P/T) is fairly valued but needs to demonstrate its
use of a dual LCC model in the Japan market will prove more effective than a
single airline.