By Lee Wei Lian
KUALA LUMPUR, Sept 14 ― The lack of clarity surrounding the financials and safety record of its backers have led analysts to suspect Malindo’s ability to challenge AirAsia’s supremacy in the budget airline skies.
Analysts say the new joint venture airline could face years of losses as it tries to take market share away from both AirAsia and Malaysia Airlines, putting the financial robustness of its two investors ― Malaysia’s National Aerospace and Defence Industries Sdn Bhd (NADI) and Indonesia’s PT Lion Grup, which operates Lion Air ― under the microscope.
CIMB noted that there is a lack of clarity about the financial position of NADI, since it has not filed its financial statements to the Companies Commission of Malaysia (CCM) since 2007, as is required.
“If NADI cannot inject sufficient capital to cover the losses for the first few years, we are unclear if Malindo will be able to execute its expansion plans,” said CIMB.
Documents obtained from the CCM show that for the year 2007, NADI reported revenue of RM307.3 million and after-tax profit of RM90.5 million.
It also had RM684 million in current assets and RM496 million in current liabilities in 2007.
CIMB added that Berjaya Air would have been a far more potent partner for Lion Air in Malaysia, as it has a vast and profitable business empire as well as the ability to raise finance. The two firms could not, however, agree on terms.
CIMB also said that Lion Air did not offer any public financial disclosure, but from its discussion with sources, it suspects that Lion would have high liabilities due to its massive aircraft orderbook and because its core domestic Indonesian business may also not be very profitable.
“We wonder aloud if Lion will have the appetite and resources to finance what could be a brutal price war with AirAsia,” said CIMB.
While analysts generally agreed that Malindo could threaten AirAsia, some noted that safety issues may prevent the new airline from even taking off at all.
An MIDF analyst told The Sun newspaper that the new low-cost carrier could face difficulties in securing an air operators certificate (AOC) from the Malaysian government due to its association with Lion Air, which is on the list of airlines banned in the European Union since 2007 due to safety concerns.
According to the daily, Lion Air has also been denied membership in the International Air Transport Association (IATA).
A search on IATA’s website confirms that Lion Air is not a member.
“The rules are quite stringent in Malaysia and there is a perception that Lion Air is not as safe as other airlines. However, it may be easier for them to secure the licence (AOC) with Malaysia’s National Aerospace & Defence Industries Sdn Bhd (Nadi) as its major shareholder,” the analyst was quoted as saying by The Sun.
A Maybank Investment Bank analyst told The Sun, however, that Malindo will not be expected to face problems in securing an AOC in Malaysia as Lion Air already flies to Malaysia and its safety track record has also improved.
Amresearch said in a report that a competitive yield environment is inevitable and Malindo is expected to embark on aggressive price discounting to generate volumes.
“The key question is the financial capacity of Lion Air and NADI, which will support the initial phase of market share acquisition,” said Amresearch. “In order to protect its turf, we believe AirAsia will react by discounting fares.”
OSK said in its reports that with only 12 operational aircraft in the start-up phase next year, Malindo is not expected to be an immediate threat to AirAsia and MAS, but that could change as the new airline grows.
The research house noted that Malindo also has an added advantage in its cost structure, as its new generation Boeing B737-900s have a comparably higher seating capacity of 220 seats versus the 180 seats on AirAsia’s Airbus planes.
Another advantage is that maintenance, repair and overhaul (MRO) services will be done by NADI’s subsidiary Airod.
It noted, however, that AirAsia’s yields will not suffer too much as Malindo’s aggressive promotions may give rise to operating losses and would only be short-lived, probably for two quarters.
“Eventually, Malindo would come to its senses and see the need to start showing a positive bottom line,” said OSK.
It also maintained a “Buy” call on AirAsia shares following the sharp selldown immediately following the announcement of Malindo.
AirAsia fell 17 sen to RM3.02 on Wednesday the day after announcement. The shares traded up by 14 sen at mid-day today at RM3.09.
Malindo is a 51:49 joint venture between NADI and Lion Grup.
According to the OSK Report, NADI is 78 per cent owned by PJS Industries Sdn Bhd, while DZJJ Sdn Bhd holds a 10 per cent stake and the Ministry of Finance owns a 6 per cent stake which includes one golden share.
It said that NADI’s principal business activities are mostly related to the maintenance and provision of services for the Royal Malaysian Air Force’s fleet.
The report also noted that the NADI is controlled and managed by PJS Industries and its management also comprises former air force generals.
Lion Air started in June 2000 and is Indonesia’s largest private airline and biggest carrier by passenger volume.
It postponed a US$1 billion (RM3.09 billion) IPO earlier this year due to turmoil in financial markets.