SIA / SATS: Australia's Qantas Airways is setting up two new airlines in Asia, in a bold move to try and salvage its loss-making int’l business. It highlights that Spore could be the Asia-Pacific hub for its new premium carrier. The other is intended to be a Japanese budget carrier, operated jointly with Japan Airlines and Mitsubishi Corp. Qantas plans to acquire up to 110 Airbus A-320s, worth >US$9.4b (S$11.3b) at list prices.
The premium airline would likely be launched next year with an initial fleet of 11, though it would not be majority owned by Qantas. Qantas has an existing relationship with AirAsia, which this week agreed to swap shares with Malaysian Airline System as part of a partnership deal to revive MAS as a premium carrier.
The Qantas-AirAsia-MAS combination will compete directly with SIA in the premium airline space. Meanwhile, the premium airlines themselves have been losing market share to the rapidly expanding budget carriers. With the operating environment expected to remain challenging, sentiment in SIA may remain weak. Stock now trades at 0.94x P/B, but may revisit trough valuations of 0.65x P/B if its earnings growth turns negative.
Meanwhile, Qantas and its subsidiary, Jetstar together control 11% of the seat capacity at Changi, and this could rise to 15% if the new premium carrier is launched in Spore next year. This market share could be further boosted when Jetstar starts its planned pan-Asian long-haul base at Changi. Higher traffic at Changi may help offset the rising competition and increasing margin pressures expected to be faced by SATS. Street ratings are mixed, with wide TP range btwn $2.15-3.30.
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