08 January 2010
KUCHING: Cross-border alliance between both low cost carriers (LCCs), AirAsia Bhd (AirAsia) and Jetstar Airways Pty Ltd (Jetstar) could negotiate better terms on passenger and cargo handling services at airports that they both fly to which are over a dozen locations across Asia.
Maybank Investment Bank (Maybank) in its research report cited that a five per cent reduction in such charges would lower AirAsia’s total costs by less than one per cent.
Similarly, pooling inventories can generate savings, although this is also limited given the less than five years old aircraft both carriers used.
Jetstar chief executive Bruce Buchanan was quoted by various media as saying that savings for each of two airlines would be “hundreds of millions of dollars”. However, given that AirAsia’s aircraft order stretches into 2014, any savings from the joint procurement for future aircraft purchases will be realised only later in the future.
Maybank however left its 2010-2011 forecast for AirAsia unchanged at this point pending future developments.
As announced on Bursa Malaysia recently, both parties are still in discussions to investigate the desirability and feasibility of forming a possible collaboration to find innovative ways to reduce costs, pool expertise and drive efficiency to ultimately bring about cheaper fares for both carriers.
The discussions are still at a preliminary stage and yet to enter into any binding agreements.
According to OSK Research Sdn Bhd (OSK Research) in its research report, the cost savings are already phenomenal in the airlines’ daily operations, the potential cost-cutting collaboration is definitely welcome as any positive cost reduction may alter their bottomlines.
Further, OSK Research was unable to determine the actual quantum of cost savings that AirAsia may enjoy due to the lack of details but suspected that part of the cost reduction may eventually be passed on to passengers in order to enhance competitiveness of the Low Cost Carriers (LCC).
Apart from that, it may take a while for both airlines to come to an agreement on their respective shares of the potential savings derived from this initiative.
Meanwhile, both carriers have dismissed concerns of potential job cuts on both sides, thanks to the aggressive growth of the LCCs in keeping their employees’ head growing, added OSK Research.
Also the cooperative arrangements for the provision of passengers and ground handling arrangements in Australia and within Asia at overlapping airports would generate a cost savings curve at approximately RM2 million per annum based on every ringgit saving from each passengers.
The non-equity alliance between both parties would not generate any impact on financials at the moment as both airlines still have many undelivered aircrafts. OSK Research said the earliest implication may be five years from now.
The point of sharing aircraft parts plus pooling and joint procurement with focus on engineering or maintenance supplies will be a good move as well. It may potentially improve bargaining power as both carriers operate similar range of narrow body aircrafts made by Airbus.
On the other hand, the potential staff cost saving moves on reduction in ground handling workforce will be difficult to quantify the changes at this moment.
The research house also remained mindful of the fact that high crude oil prices may squeeze AirAsia’s margins, especially given that price changes may persist in the short to medium term.
Nevertheless, 2010-11 prospects appear challenging without deferred tax credits that contributed RM80 million in first quarter last year and higher fuel costs that have more than doubled year-on-year in first quarter on this year year-to-date basis leaving the RM1.35 target price unchanged based on 7.5 times this year per earnings ratio, Maybank pointed out.
OSK Research, however, remained mindful of the fact that the budget carrier might go weaker than expected in the last third quarter results. It recommended a 12 months target price of RM1.13. The fair value was derived from 10 times FY10 earnings per share.