Wednesday, March 30, 2011

AirAsia Joint Venture Into Online Travel Agency

March 30, 2011
Price Target: RM3.50
Share price: RM2.65

# AirAsia entered into a joint venture agreement with Expedia for the purpose of establishing an OTA (Online Travel Agency). Each party is expected to hold equal stake (50%) in the new Joint Venture (JV).

# AirAsia expected to invest US$10m cash into the JV.

# Expedia will contribute its current and future Expedia branded OTA storefronts in Asia region, as well as the company’s technology platform and make available its global hotel inventory at cost for all JV points of sale.

# AirAsia will inject its AirAsiaGo and GoRooms business, and provide exclusive access to Expedia to its flight inventory. The JV and Expedia shall earn a commission on prebooked, flight related ancillary sales on the OTA storefronts.

Financial impact
Earnings accretive. At this juncture, it is hard to gage the financial impact of the JV.

Pros / Cons
Positive on the JV:
1. Allow AirAsia opportunity to further penetrate into other regional markets outside ASEAN by taping into Expedia extensive coverage.

2. Achieve cost synergies and economies of scale with a wider market reach.

3. Able to ride on the growing cost-conscious and internet savvy population.

4. Tap into Expedia’s technology platform and in-house expertise for better inventory and marketing management.

5. Add dimension into the already strong ancillary income.

World crisis (ie. War, terrorism and epidemic outbreak), delay in KLIA2 completion, surge in jet fuel price and development of high speed train between Singapore and Pulau Pinang.

BUY <- ->

- Beneficiary of strong regional air travel demand growth.
- Largest and lowest cost LCC in Southeast Asia with strong brand name.
- Re-rating catalysts via IPO exercises of Airasia X, Thai Airasia and Indonesia Airasia.
- Strong ancillary income to mitigate higher fuel cost.

- Surging jet fuel cost.
- Potential pricing war between Airasia and Firefly.

Target Price maintained at RM3.50 based on Sum-of-Parts, to better reflect AirAsia’s valuation post IPO exercises of associates and investment.

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