AirAsia Berhad

AirAsia Berhad
Recommendation: BUY (unchanged)
Fair value: RM1.96
Share price: RM1.39

Secures landing rights in Paris
AirAsia was reported to have been granted landing rights to Paris, France - according to a newswire report yesterday. The news came following Prime Minister, Datuk Seri Najib Razak's four-day visit to France this week.

Actual details of the landing rights have yet to be worked out with no further details forthcoming at this juncture. So far, indications are for AirAsia to be given rights to land at Paris Orly Airport, located south of Paris (See map).

This will be AirAsia's second port of call in France following an earlier grant of rights for it to land in Nice, announced a few months ago. Based on routes operated by airlines to Nice and Orly, we reckon bulk of feeder traffic at these airports would originate from within Europe and certain Middle eastern countries.

Prior to Charles de Gaulle Airport being operational, Paris Orly was the main airport for France. Even with a shift of most international traffic to Charles de Gaulle, Orly remains the busiest French airport for domestic traffic and second busiest French airport overall in terms of passenger boardings. Other airlines that operate via Paris Orly include Air France, Alitalia and EasyJet. Nice meanwhile, is the third most important airport in France.

No firm timeline has been given by AirAsia X on the launch of its routes to France. AirAsia X is currently operating three A330s - these do not attain the flight range to reach Europe. While ultralong haul routes such as United States, New Zealand and Europe are in the plans, these are expected to be served by longer range A350s, scheduled for delivery only in 2016. We understand however, that AirAsia currently has leased two A340s (almost similar range to the A350).

While there is no direct impact on AirAsia as a result of this development (long-haul routes are operated by AirAsia X, 10% owned by AirAsia), feeder traffic brought by AirAsia X into Malaysia or any other part of ASEAN will increase potential traffic for AirAsia, which already has a comprehensive regional route network. About 80% of AirAsia X's traffic use AirAsia's flights for connecting flights and vice versa for regional traffic bound for Europe.

We reiterate our BUY rating on AirAsia and maintain our fair value of RM1.96/share - based on 9x FY10F earnings. AirAsia is one of the least expensive budget airline stocks globally, trading at just 6.5x FY10F earnings - a deep 53% discount to historical average of 14x and 47% discount to peers' average of 13x. This is despite Air Asia generating premium ROE of 19% versus industry's 11%.