By S. Ashwiinie
The joint-venture (JV) low-cost airline venture between Malaysia’s AirAsia, the Tata group and a third investor, Telestra Tradeplace, in India worries some analysts given the current difficult environment in India.
Analysts say that there are too many budget airlines in India which are not doing well. Operating costs are higher because fuels costs and handling charges are higher while competition is stiff and purchasing power is low.
An aviation analyst from HLIB Research said AirAsia is expected to face losses for the first three years. He added that the airline Kingfisher was doing pretty well when it started but now is facing bankruptcy.
A research report from UOB said that the JV is marginally positive because it will provide additional lease and management fees.
Aviation analyst, Angeline Chin from Alliance Research in her report said, “Despite near-term hiccups, we remain positive on the fundamentals and growth prospects of AirAsia. Various growth opportunities lie ahead for AirAsia, including but not limited to more ancillary income streams, and the opening of the new low-cost terminal KLIA 2, which will accelerate AirAsia’s passenger growth.
“Nonetheless, many airlines have often aggressively priced tickets below their breakeven rates in order to gain market share. Thus, AirAsia will have to overcome the challenging operating environment in India. Note that 5 out of 6 major airlines in India were still loss making”, she added
AirAsia meantime is confident that it can replicate its unprecedented success across Malaysia, Thailand and Indonesia through other joint ventures. It said in a statement that its success in flying people affordably through better operational performance will benefit the Indian customer.
On Twitter, Tony Fernandes said, “Welcome to the airline business, dump the private jet in India. AirAsia India is the way”.
AirAsia closed yesterday at RM2.65. The Alliance research report called AirAsia a “buy” with a target price of RM3.40 based on a target 2013 price earnings ratio (price per share divided by forecast earnings per share) of 12 times.
“We advocate long term investors to accumulate AirAsia, in view of its attractive valuations at present”.
AirAsia has applied for approval to invest 49 percent in the JV and is planning to launch it in the 4th quarter of 2013.
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