themalaysianreserve.com

Air Asia Bhd shares took a beating yesterday with its market capitalisation reduced by a whopping RM475 million.

The low-budget carrier’s share price continued its free fall, plunging 5.33% following news of competition from new entrant Malindo Air. The news weighs negatively on investors sentiment.

This is excluding a drop in market capitalisation of RM277.97 million on Tuesday when its shares fell 10 sen to RM3.19 when the news was first announced. The last two trading days would have seen AirAsia’s market capitalisation reduced by RM723 million or 7.9%.

AirAsia shares closed RM3.02 and was the second most active counter with 42.7 million shares traded yesterday.

Dealers and analysts contacted said trading in AirAsia shares is likely to remain depressed with a downward bias in the near-term as the market perceives Malindo Air as a threat to AirAsia.

According to an aviation analyst at MIDF Research Sdn Bhd, Malindo Air, a 49:51 joint venture (JV) between Indonesia’s PT Lion Mentari and Malaysia’s National Aerospace and Defence Industries (Nadi), will “definitely have an impact” but not one as earth-shattering as anticipated.

“Malindo has not yet revealed their operating model, so it is too early to say. They will only begin operations in May next year,” he told The Malaysian Reserve yesterday.

“Malindo operates in a different segment. They have placed themselves as a low-cost carrier but with premiums.

So far they are the only carrier in the segment. This means the market will only get bigger and there will be more choice,” said the analyst.

Malindo also needs time to acquaint itself with Malaysian consumers and habits and build a reputation before it can compete. Consumers also need to become familiar with the branding and concept, he said.

AirAsia chief executive Tan Sri Tony Fernandes, in a statement to the media on Tuesday, said neither Malindo Air nor its parent companies posed a threat to Air-Asia’s network in the region.

AirAsia recently announced the opening of its Asean headquarters in Jakarta, Indonesia. It bought into Batavia Air in order to gain a foothold in the saturated Indonesian market, which already has eight carriers.

Lion Air has a 45% share of the Indonesian market, and setting up its regional offices in Malaysia was a logical expansion choice, said the analyst.

It’s decision to provide Nadi with the majority shareholding could facilitate the process of obtaining an air operator’s certificate, he said.

“There is also growing demand for Nadi’s maintenance, repair and overhaul services, so Lion Air will most likely want to have a share in that too,” said the analyst.

The entry of Malindo Air may spark a price war if its initial market strategy would be to price its services below AirAsia but this could see AirAsia also resorting to price cuts.

The initial news from the Malindo Air announcement suggests that it will be a premium low-cost carrier providing meals and entertainment with a limited number of business class seats.