- AirAsia announced that it has formed a partnership with several Japanese partners to set up AA Japan (AAJ). AirAsia will have 49% share in the JV (on a capital basis) but 33% voting ownership (as Japanese regulations limits foreign control in local airlines at this level).

- This is AA’s second attempt at the Japanese market with new partners comprising Octave Japan Infrastructure Fund (19% economic ownership/28.2% voting ownership), Rakuten Inc (18%/18%), Noevir Holdings (9%/13.4%) and Alpen Co Ltd (5%/7.4%). Rakuten is involved in internet services (e-commerce, travel), financial services, telco and professional sports.

- Operations are targeted to start during summer (July-August) 2015 as it will likely take a year to secure an AOC. Initial capital injection is expected at RM32mil (AA’s share RM16mil), but further injection will come gradually. AA will utilise internal funding for its portion.

- AAJ is expected to start off with two aircraft initially, based on our check with management. However, we expect initial losses at least in the 1st year, if past experience is of any guidance. Back in FY12, AAJ (under previous JV with ANA) recorded a net loss of RM97mil, out of which RM40mil came in 4Q12 (the partnership lasted for <2 years, decision to pull out in 2Q13). Nonetheless, the amount of losses that AA equity accounts for will be capped by the amount of its investment.

- That said, Japan seems to entail huge potential with still very low LCC penetration (domestic: 20%, international 4.4%, with most LCC being domestic-centric). AAJ’s strategy is likely to involve gaining share from Shinkansen (Japanese bullet train), which carries 350mil/annum traffic (compared to Japan domestic 85-90mil/annum air traffic).

- There are currently seven LCCs – four incumbents are Skymark, Solarseed, Starflyer and Air-DO while three new LCCs are Jetstar Japan, Peach Air and Vanilla Air (previously AAJ). Skymark controls the largest domestic share (6.6%) followed by Air-Do (2.9%) and Solarseed (2.3%). Out of the three new LCCs, Jetstar Japan is largest (2%) followed by Peach (1.4%) (See chart 1). AA has not finalised decisions on its hub yet, but Narita, Haneda and Osaka are already bases for existing LCCs (See Table 2).

- We are positive on the potential of the Japanese aviation market given the low penetration in the LCC space (South East Asia LCC penetration: 56%-57%) and much higher GDP/capita in relative to other markets AA is in. Potentially higher yields however, could be partly offset by higher operating cost in Japan. Maintain HOLD (FV: RM2.50/share). No change to projections yet pending further details on the venture, which will be launched 3Q15. 

Source: AmeSecurities