Why AirAsia's Chinese Budget Airline Venture Is Bad News for China's Airline Stocks


AirAsia' s (5099.MY) move to enter China's low-cost airline market could be bad news for some of the mainland's legacy carriers.

Last month, Kuala Lumpur-based AirAsia signed a memorandum of understanding with China Everbright Group and Henan province's government to set up a new no-frills airline in the eastern metropolis of Zhengzhou.

On the face of it the move could be a stroke of genius. Penetration of low cost carriers in China and North Asia generally is low, at just 10% of market share, data from research firm Crucial Perspective shows. In South Asia and South East Asia penetration is much higher at 50%. Henan province also looks like a good call. It's by no means the richest part of China, but it's one of the Middle Kingdom's biggest provinces by population. It's also strategically located, meaning the new airline can cover pretty much everywhere in China within three hours using smaller, narrow-body aircraft.

Crucial Perspective says the new carrier could snatch traffic from China's big, established airlines. For example, China Southern Airlines (1055.HK) and its associated subsidiaries currently have a 40% market share at Zhengzhou Airport. Hainan Airlines (600221.CN) has 28% and China Eastern Airlines (670.HK) has 10%.

Investors shouldn't rush out and buy shares in AirAsia just yet, however. Crucial Perspective thinks Air Asia's shareholding in the new airline will be capped at 25%. The basis for that is the recent cargo joint venture between the Henan Provincial Government and Luxembourg's Cargolux. The latter's stake in the venture was capped at 25%.

AirAsia's stock has soared 40% in 2017, versus 10% for the Malaysian index.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Stocks


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