Asia's Budget Carriers Prepare For Price War

Includes: EWM, IDX
by: Peter Pham

While the airline industry struggles in the West, the air travel industry in Southeast Asia is booming. Small, regional carriers are proliferating and providing consumers a myriad of options for travel over the relatively tranquil waters of the Gulf of Thailand and the South China Sea.

Asia's leading low-cost carrier, Malaysia's AirAsia, continues to post growing revenues (+14.4%) and profits (+3.6%) each quarter. These results are the result of higher passenger volume offsetting higher fuel cost and increasing taxes. AirAsia has an ambitious expansion plan which includes potentially spending $9 billion on nearly 100 Airbus jets. AirAsia currently has 112 A320's and will have more than 375 jets by 2026. The continent's air-travel industry is expected to grow by 6.4% annually by 2030 and currently 25% of this market is dominated by budget carriers.

Indonesia's Lion Air is planning to launch a budget carrier, called Malindo Airways, in Malaysia by May. Lion Air's decision comes right after AirAsia announced it was moving its headquarters to Jakarta. The competition is expected to be severe as Lion Air's President Director Rusdi Kirana has said that the ticket prices could be lower than AirAsia's. Malindo, which will be owned by Lion Air (49%) and Malaysia's National Aerospace & Defense Industries - NADI - (51%), will initially start with 12 jets which will gradually reach 100 within the next ten years.

The strength of these two Asian giants is evident from the sheer size of aircraft orders they have placed. AirAsia is already one of the biggest buyers of the narrow body fuel efficient jets, while Lion Air is Boeing's (NYSE:BA) major customer. Earlier this year, Lion Air placed a $22.4 billion order for 230 Boeing 737 jets in what is by far the biggest order in Boeing's history by a single customer. On the other hand, Airbus's biggest order had come just a few months before from AirAsia for 200 Airbus A320 Neos with a total price tag of at $18 billion.

Both airliners seem more than willing to sacrifice net profit margins for the sake of market share. A new price war is going to start from the second quarter of 2013. The Indonesian air travel market has been growing faster than Malaysia's, which is why AirAsia is moving its operations there.

Besides these two carriers, there are at least two other airliners in this region with significant operations; Singapore Airlines (OTCPK:SINGY) and Australia's Qantas Airways (OTCPK:QUBSF). The latter has been expanding its budget carrier Jetstar in Singapore, Vietnam, Japan and Hong Kong, while the former is revamping its SilkAir fleet with 54 new Boeing 737s. However, Singapore Airlines is a small player in the low-cost airline industry and its subsidiary Scoot is just about six months old. Scoot currently has four aircrafts and in the coming years, 20 new Boeing 787 Dreamliners will be included in its fleet but is still effectively a pilot project for SingAir whose core business of luxury intercontinental business travel is collapsing in the face of a cloud-computing connected world and $100+ barrels of Brent Crude (NYSEARCA:BNO) oil.

It looks like Malindo Airways has a real opportunity to challenge AirAsia in the market it helped create and dominates. The former is looking to compete not only on price but on services as well by offering entertainment and free meals coupled with the inherently low ticket prices.

We like both the iShares MSCI Malaysia ETF (NYSEARCA:EWM) and Market Vectors Indonesia ETF (NYSEARCA:IDX) to capture the growth trends in this region. Both AirAsia and Lion Air have significant exposure within these ETFs and this industry is a strong leading indicator of direction changes in the regional economy which so far seems immune to the chaos in the U.S. and Europe.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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