The aviation industry in Malaysia took a big shock as they will be expected to pay up to ten times more in fees charged by the Department of Civil Aviation (DCA) Malaysia.  According to DCA, the increase in fees is inevitable after 42 years of stagnation.   
 
Many anxious travelers are concerned that the hike in fees will see a knock on impact on the price of air tickets.  Hear what Macquarie Equities Research (MER) has to say about it...

Event

• Malaysia Airports released its March 2016 and 1Q16 operating statistics.
• Separately, MER learned from AirAsia that the fees to the Department of Civil Aviation (DCA) could increase by RM70-80mn in FY16E post the recent announcement of a fee hike.

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Impact

• March 2016 operating statistics - klia2 pax growth saves the day
  • Malaysia Airport's (MAHB) Malaysian business reported a 0.8% decline in passengers in Mar 2016. While KLIA Main Terminal saw a decline of 8.8%, klia2 pax increased 10.5% YoY in March 2016. This reflects positively for AirAsia, the main tenant of klia2. Malindo Air operated out of klia2 until 15 March 2016.
  • Aircraft movement in Malaysia declined 4.5%, faster than passenger decline, suggesting load factors for airlines have improved on the back of capacity rationalisation seen in the market.
  • Istanbul Sabiha Gokcen (ISG) continues its double-digit growth, with an increase of 15.7%.

• 1Q16 operating statistics - tracking ahead of MER’s estimates
  • A 3.4% pax growth was reported for MAHB's Malaysian business in 1Q16. Last twelve months' pax growth of 1.7% is tracking slightly ahead of MER’s 1% passenger forecast.
  • ISG pax growth for the 1Q16 was 19.6% YoY, driven by a 23.6% domestic pax growth. International pax grew 12.1%.

• Minimal impact to AirAsia due to DCA fee hike, in MER’s view
  • A higher DCA fee of RM70-80mn in FY16E could reduce AirAsia's profits by 8-9% if not passed through to passengers. However, MER believes AirAsia is likely to pass it through to passengers as the additional cost of RM70-80mn translates to a passenger levy of RM2.75-RM3.15 per departing and arriving passengers, i.e. ~2% of FY15A average fare.
  • Separately, Malaysia Airports also believes that the DCA fee hike is "not likely to affect the demand for travel".

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Action and recommendation

• AirAsia remains MER’s top pick in the sector. Malaysia Airports' operating statistics released on Monday supports MER’s trade down thesis. Also, improving load factor for the airlines is a positive signal of a more rational market, in MER’s view.

Source: Macquarie Research - 15 Apr 2016