Airlines may need to contend with low fares, uneven loads as Langkawi travel bubble takes off tomorrow — CGS-CIMB

Photo by Mohd Suhaimi Mohamed Yusuf/The Edge

Photo by Mohd Suhaimi Mohamed Yusuf/The Edge

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KUALA LUMPUR (Sept 15): The impact from the Langkawi travel bubble, which starts tomorrow (Sept 16), is expected to bode well for airlines, though CGS-CIMB Research has cautioned that the degree of the positive impact is “more murky at the start”.

CGS-CIMB analyst Raymond Yap said this is because airfares are likely to be very low and perhaps loss-making, as airlines compete for passengers. 

He expects that for the first few months, many passengers on AirAsia Bhd's flights may be flying for "free" by using their credits from flights cancelled in the past one-and-a-half years.

"In addition, if the load factors are low, some flights could be loss-making. This is especially the case for return flights; for instance, on the first day of the Langkawi travel bubble on Sept 16, AirAsia’s outbound flights from klia2 to Langkawi are seeing high pax load factors and decent fares, but return flights from Langkawi to klia2 are still rather empty and the lowest RM17.30 fare bucket is still available for booking at the time of writing.

"The jury is out on whether AirAsia can maintain high load factors once it restores capacity more aggressively from October onwards, since we suspect that there remains hesitancy among many Malaysians to travel until the Covid-19 situation stabilises. If demand does not pan out as expected, AirAsia could consolidate flights," he said in a sector note today.

To recap, the Malaysian domestic travel bubble to Langkawi is open only to vaccinated adults above 18 years old, but unvaccinated travellers below 18 can also travel to Langkawi, as long as they are accompanied by vaccinated travellers.

Yap expects air travel to be the key means of getting to Langkawi, as road journeys must be booked with travel agents because self-driving is not allowed.

According to the analyst, AirAsia is starting out with three daily flights from klia2, and already has more than 80% load factor on next week’s outgoing flights, due to initially-limited capacity, pent-up travel demand, and lack of alternative domestic holiday options for Malaysians. AirAsia will deploy seven times daily flights KL-Langkawi from Sept 23, nine times daily from Oct 1, and 10 to 11 times daily flights from Oct 31 until the end of 2021. 

Other airlines like Malaysia Airlines Bhd, Malaysia Aviation Group's subsidiary Firefly, and Malindo Airways Sdn Bhd are also reinstating capacities.

As such, Yap viewed that the restoration of airline capacity and air travel to Langkawi is positive for Malaysia Airports Holdings Bhd (MAHB), because of the increased passenger traffic.

"Airlines are likely to keep their airfares quite low, as we think that seat capacity is being restored faster than the recovery in demand. Low airfares coupled with the ongoing hotel promotions in Langkawi will help boost demand, and perhaps convince ‘on-the-fence’ travellers to pack and go," he said.

According to Yap, the cheapest one-way all-in ticket price at the moment is from AirAsia which is at RM17.30 with the breakdown comprising RM5 AirAsia fare, RM11 passenger service charge by MAHB, RM1 fee by the Malaysian Aviation Commission and 30 sen service tax. Yap however noted that on these flights MAHB actually earns more than AirAsia.

He also noted that the risk of new Langkawi infection clusters could pause the experiment.

“The key risk to the Langkawi travel bubble is that with daily Covid-19 cases in Malaysia [is] still quite high (although trending lower lately), and with travellers to Langkawi not required to be tested for Covid-19, inevitably some infected people will make their way to Langkawi and cause outbreaks on the island, and newly-infected holidaymakers could then inadvertently carry back the virus to their home states.

"The risk is accentuated by the presence of non-vaccinated travellers to Langkawi below the age of 18. Even among vaccinated travellers, breakthrough infections are possible given the more infectious Delta strain. If the outbreaks are serious, the Langkawi travel bubble experiment could be paused temporarily," he said.

The research firm reiterated its "overweight" call on the local aviation sector, with MAHB ("add" call and target price of RM6.96) as its top pick, while AirAsia remained at a "reduce" call with a target price of 23 sen.

At the closing of this morning's trading session, shares of MAHB were 1.19% or eight sen higher at RM6.78 while AirAsia was 0.54% or half a sen higher at 92.5 sen.

Joyce Goh