Asia's Low-Cost Carriers A Comprehensive Study of Regulation, Competition and Growth Potential 21-05-13!18!30

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Equity Research l Asia Pacific I Airlines l
22 May 2013
Asias low-cost carriers

A comprehensive study of regulation, competition and growth potential
Asias LCC country book: The Asia-Pacific LCC market could ultimately be 10x larger than Europes. We build a
unique and comprehensive low-cost carrier (LCC) country book for 10 Asia-Pacific markets. We analyse the following: market potential, capacity and traffic growth, regulatory and infrastructure conditions, and competitive environment, and profile the airlines based in each market.
Multi-layered scorecard analyses: We first rank the countries on their LCC-friendly characteristics. This then informs
our company scorecard, which assesses LCCs based on their geographic and competitive advantages, and strategic and operational positioning. Our framework indicates Thailand and the Philippines are Asias most hospitable bases for LCCs, AirAsia is the best positioned pan-Asian LCC, and Asia Aviation and Lion Air represent the strongest singlecountry businesses.
Buy AirAsia and Cebu Air: Contrary to market perception, we believe AirAsia will survive the competition and maintain
decent profitability, just as Europes Ryanair did last decade. Cebu Air is well positioned for strong earnings growth following a period of rationalisation and consolidation in the Philippines aviat ion sector that should drive higher yields.
Mkt cap AirAsia Cebu Air Tiger Airways Ticker AIRA MK CEB PM TGR SP Rec OP OP IL (USD mn) 2,988 1,177 431 Ccy MYR PHP SGD Price 3.25 80.00 0.66 PT 4.40 97.00 0.66 Up/ dn (%) +35 +21 0 EV/EBITDA* 2013E 7.5x 8.8x 6.4x 2014E 7.8x 7.5x 5.9x PBR* 2013E 1.4x 2.0x 1.3x 2014E 1.3x 1.7x 1.2x PE* 2013E 8.2x 13.0x 95.3x 2014E 8.1x 11.1x 27.1x
Above data as of 20 May 2013. *FY14E and FY15E ratios (years ending March) for Tiger Airways. Source: Companies, Bloomberg, Standard Chartered Research estimates
Claire Teng, CFA

Claire.Teng@sc.com +852 3983 8525
Michael Parry
Michael.Parry@sc.com +852 3983 8712
Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2013 http://research.standardchartered.com
22 May 2013
Contents
Executive summary Valuation summary Scorecard: The most hospitable bases for LCCs Scorecard: The best-positioned Asia LCCs The country book Australia Hong Kong India Indonesia Japan Korea Malaysia The Philippines Singapore Thailand Appendix: Freedoms of the Air Companies AirAsia Cebu Air Tiger Airways Holdings Disclosures appendix 25 29 33 37 41 45 50 54 58 61 65 3 7 8 17
67 90 109 129
SCout is Standard Chartereds premium research product that offers Strategic, Collaborative, Original ideas on Universal and Thematic opportunities
Equity Research 2
22 May 2013
Executive summary
In this SCout report, we introduce a proprietary scorecard for 10 Asia-Pacific countries and conclude that Thailand and the Philippines are Asias most hospitable bases for LCCs. Based on this country analysis, we take our analysis down to the company level for the 10 largest LCCs in Asia (by ASK). Based on a similar scorecard framework, we highlight Asia Aviation (Thai AirAsia, AAV TB, NR), Lion Air (not listed) and AirAsia (AIRA MK, OP) as the best-positioned LCCs in Asia.
Our LCC country book

LCCs have been present in Asia for over 10 years and have made significant progress. LCC LCC penetration in penetration in the region, measured by the percentage of total seats served, reached 24% in Asia Pacific reached 24% 2012 from virtually zero a decade ago, and we expect penetration to reach 30% by 2015. in 2012 from 2.4% in However, we believe the market growth potential for the Asian LCC industry remains significant, 2003; we expect it to as flight penetration rates are still low in Asia compared to the US and Europe given the relatively reach 30% by 2015 poorer populations in many countries. We believe the LCC market in Asia Pacific could ultimately be more than 10 times larger than that in Europe today. However, the LCC industry is changing. More countries in Asia are opening their markets to LCCs and more LCCs are being established and entering new markets. This implies more investment opportunities in either single country or pan-Asia carriers, but also makes the sector more complex and dynamic. In this report we therefore build a LCC country book for 10 Asia-Pacific markets. The country book includes our assessment/analysis of market potential, capacity and traffic growth, regulatory and infrastructure conditions, competition structure and profiles of the airlines based in each market. Following our country book analysis, we use a scorecard to rank the countries on their LCCfriendly characteristics. This then informs our company scorecard, which ranks LCCs based on their geographic and competitive advantages, and strategic and operational positioning. We finally highlight the LCCs we believe are best positioned.
We identify the countries most hospitable to LCC operations, and the best- positioned LCCs
The most hospitable bases for LCCs

Based on our scorecard analysis, we believe Thailand and the Philippines offer the highest growth potential for the LCC industry. Fig 1: LCC country scorecard
Country Australia Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Thailand Population 1 1 5 5 4 2 2 4 1 3 Disposable income 3 4 3a 5 1 3 4 5 4 5 LCC penetration 1 3 5 5 5 5 2 4 1 4 International market potential 1 2 4 3 2 1 2 5 1 5 Flag-carrier strength 1 1 3b 3d 4 2 3 4 2 3 Regulation 5 3 1 2 3 3 4 3 5 4 Airport constraints 5 2 3 2 3 4 5e 2 3 4 Structural cost base 2 1 3c 4 2 2 4f 5 1 5f Total 19 17 27 29 24 22 26 32 18 33
a. We subtract 2 from Indias cost base due to punitive government charges and taxes. b. We subtract 2 from Indias disposable income because its current GDP per capita of USD 1,571 might be too low a base to exper ience a rapid rise in air travel affordability. c. We subtract 2 from Indias flag carrier strength to reflect regular government subsidies and a bailout guarantee. d. We add 1 as Garudas effective execution of its new strategy has improved its competitiveness. e. We add 3 to Malaysias airport score due to the imminent opening of KLIA2. f. We add 1 to Malaysia and Thailands cost base due to low charges and their favourable tax regimes for LCCs. Source: Standard Chartered Research
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22 May 2013
Thailand and the Philippines offer the greatest growth potential for LCCs
Our scorecard framework uses eight criteria to evaluate the potential for LCCs in 10 markets: (1) population; (2) disposable income; (3) LCC penetration; (4) international market access; (5) strength of the flag carrier; (6) regulatory protection; (7) airport constraints, and (8) structural cost base. In each category, one is the lowest score and five the highest. We rank the markets by a simple aggregate. The market potential in Thailand and the Philippines is enormous given their low flight penetration rates and the potential rise in disposable income. Both are open to LCCs from a regulatory perspective, and the incumbent flag carriers have left the LCC market to LCCs. Although Indonesia arguably enjoys even greater market potential with its larger population and strong economy, the flag carrier (Garuda Indonesia) is strong and well protected, and has better access to limited flight rights and airport slots. We believe a profitable home market with high growth potential is important for the ultimate success of any Asian LCC. Since domestic routes in most countries are protected from foreign carriers, LCCs can build economies of scale and establish strong cash-generating businesses in their home markets before entering the more competitive international skies. Our country scorecard analysis therefore provides a solid foundation for our company scorecard analysis.
The best-positioned LCCs

We apply a similar scorecard framework to the 10 largest Asia LCCs (excluding players in China, Japan and India). We use 10 criteria to determine which of the eight Asia-Pacific LCCs are bestpositioned for future growth. We believe Asia Aviation (an associate of AirAsia, also known as Thai AirAsia) and Lion Air are the best positioned Asian LCCs. AirAsia remains the bestpositioned pan-Asian LCC, in our view. Fig 2: Scorecard: The key Asia-Pacific LCCs
Company Home market Domestic growth potential International growth potential Domestic competitive environment International competitive environment Threat of new entrants Economies of scale & cost performance Infrastructure support Regulatory support Balance sheet strength Management and strategy Single-market total Secondary market Growth potential Competition structure Economies of scale & cost performance Diversified total Lion Air ID 5 3 4 2 5 5 5 5 3 2 39 MY 3 1 1 44 AirAsia MY 3 4 4 4 2 4 5 4 2 5 37 TH 5 5 2 49 Jetstar AU 2 2 5 4 2 4 5 3 3 4 34 JP 3 1 2 40 Asia Indonesia Cebu Air Aviation* AirAsia Citilink PH TH ID ID 4 5 4 5 3 3 3 3 3 4 37 NA 37 5 5 4 5 3 2 5 4 5 4 42 NA 42 5 3 1 3 5 2 1 1 1 3 25 NA 25 5 3 2 3 5 2 4 5 4 4 37 NA 37 Nok Air TH 5 5 3 2 3 1 5 3 1 3 31 NA 31 PAL Tiger Express Airways PH SG 4 5 3 3 3 2 3 3 2 2 30 NA 30 NA 3 NA 2 3 2 4 3 3 2 22 AU 2 1 1 26
*Also known as Thai AirAsia. Source: Companies, Standard Chartered Research estimates
Asia Aviation: Asia Aviation is the holding company of Thai AirAsia (TAA), AirAsias 45% -
owned Thai affiliate. We believe Thailand offers significant growth potential for both domestic and international air travel, and think Thai AirAsia is well positioned to capitalise on this latent market. The ample availability of airport slots and its low-cost operations should allow the company to continue to gain market share.
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Lion Air: Despite competitive disadvantages to Garuda in the international market, Lion Air
(Lion) remains well positioned in its domestic market due to the successful implementation of its low-cost business and favourable regulatory support. We think strong funding sources should allow the carrier to develop its pan-Asian ambitions in the next three to five years.
AirAsia: Its successful strategy and brand image have enabled AirAsia to significantly expand
market share and penetrate six markets in Asia through cross-border JVs since 2006 (see diagram below). While we believe the group will eventually be the dominant LCC in Asia, in much the same way Ryanair currently dominates the LCC market in Europe, the threat to its cash cow home market is our key short-term concern. Fig 3: AirAsias cross-border JVs
AirAsia Berhad (MAA)
Thai AirAsia (TAA) 45% owned
Indonesia AirAsia (IAA) 48.9% owned
AirAsia Philippines (AAP) 39.9% owned
AirAsia Japan (AAJ) 49% owned
AirAsia India (AAI) 49% owned
Source: Company, Standard Chartered Research
Stock recommendations
AirAsia (Outperform, PT MYR 4.40) is our preferred long-term pick Competition misunderstood: We believe the market is failing to take into account the lessons of the European LCC market over the past decade and has over-estimated the negative impact of increasing competition in the Asian LCC space, particularly from Malindo Air, which is not a true LCC and cannot compete with AirAsia on pricing on a sustained basis, in our view.
Positive long-term prospects: Our country and company scorecards suggest AirAsia is the
best positioned pan-Asia LCC. We believe the size of AirAsias fleet is likely to e xceed Ryanairs in Europe in the long run, given that (1) Asias LCC market potential is significantly larger than Europes given its larger population and area; (2) competition in Asia is milder than in Europe; and (3) regulatory constraints create higher entry barriers for LCCs seeking to be pan-Asian players.
Valuation: We derive our price target of MYR 4.40 using a sum-of-the-parts methodology by
ascribing a target EV/EBITDA multiple of 8.2x for AirAsias Malaysia business (MAA), and 10.8x for both Thai AirAsia (TAA, 45% owned by AirAsia and 55% owned by Asia Aviation (AAV TB, NR)) and for Indonesia AirAsia (IAA). Our price target implies 2.0x 2013E PBR, in line with its historical trading average. Cebu Air (Outperform, PT PHP 97.00) Domestic conditions more benign: The Filipino LCC market recently experienced a longoverdue period of consolidation, with Philippine Airlines (PAL) and PAL Express undertaking a route rationalisation programme, and Zest Airways merging with Philippines AirAsia. We believe Cebu Pacific Air (Cebu Air), which has the greatest domestic market share, will benefit from the yield recovery in this previously overcrowded market.
Overseas potential: Cebu Air will target the enormous number of overseas Filipino workers
(OFWs) by serving international routes with its new long-haul, high-density A330s. Cebu Air is targeting cities with the highest number of OFWs served by the lowest number of budget seats, thus achieving the greatest likelihood of stimulating new demand with low fares to fuel future growth.
Valuation: We base our new price target of PHP 97.00 on 9.3x 2013-14E EV/EBITDA. The
multiple is in line with its historical average forward EV/EBITDA. We think the stock will re-rate in 2013 after de-rating in 2011-12.
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Tiger Airways (In-Line, PT SGD 0.66)

Fig 4: Tiger Airways cross-border JVs
Tiger Airways Holdings
Tiger Singapore 100% owned
Tiger Australia 40% owned
SEAir (Tiger Philippines) 40% owned
Mandala Airlines (Tiger Indonesia) 33% owned
Singapore the lone positive earnings generator: Despite Singapore being a highly
competitive market without barriers to entry, we expect Tiger Singapores yields to remain stable, with better alignment between supply and demand as regional carriers focus their expansion on less mature markets. We expect the partnership with Scoot to boost feeder traffic and raise load factors, and forecast a FY14-16 EBITDA CAGR of 12% for Tiger Singapore.
Australias catch-22: We are concerned about: (1) whether the mature Australian market
can absorb the planned capacity expansions of both Qantas-subsidiary Jetstar and Tiger Australia without severe yield compression; and (2) whether Tiger Australia can lower unit costs to effectively compete with incumbents. Despite the likely synergies between Virgin Australia and Tiger, we believe Tiger Australia will remain a loss-making affiliate in FY14-16.
Valuation: We base our new price target of SGD 0.66 on 7.23x FY14E EV/EBITDA. The
multiple is based on a 50% discount to Tigers historical average forward EV/EBITDA of 14.45x (excluding FY11-12 when earnings were distorted by Tiger Australias grounding by regulators due to safety concerns). We do not consider valuation attractive at 1.3x FY14E PBR versus ROE of 1.7%.
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Valuation summary
Fig 5: Valuation comparables
Share Rating Code Airlines Air China China Southern China Eastern Cathay Singapore Air Thai Airways Korean Air Asiana China Airlines EVA Air Malaysia Airlines Garuda Japan Airlines ANA Holdings Skymark Airlines Jet Airways SpiceJet Qantas Airways Virgin Australia Asia Aviation (Thai AirAsia) AirAsia Cebu Air Tiger Airways Sector average Airports Airports of Thailand Malaysia Airports (MAHB) Sydney Airport Auckland Int'l Airports Beijing Capital Int'l Airport Hainan Meilan Airport Shanghai Int'l Airport Shenzhen Airport Xiamen Airport Sector average Above data as of 20 May 2013. Source: Bloomberg, Standard Chartered Research estimates IL NR NR NR OP NR NR NR NR AOT TB MAHB MK SYD AU AIA NZ 694 HK 357 HK 600004 CH 600009 CH 000089 CH 600897 CH THB 167.00 THB 134.00 MYR 6.19 AUD 3.74 NZD 3.13 HKD 5.31 HKD 7.53 CNY 6.98 CNY 13.28 CNY 3.93 CNY 13.62 NR NR NR HKD 6.70 NR NR NR NR NR 2.8 1.7 3.9 1.7 1.1 1.4 1.0 1.5 0.9 1.5 1.7 2.6 1.6 4.5 1.7 1.1 1.3 1.0 1.4 0.8 1.3 1.7 2.3 1.5 5.2 1.7 0.9 1.2 0.9 1.3 NA 1.1 1.8 22.5 20.9 41.6 27.7 16.0 10.7 8.9 13.3 12.2 9.7 18.3 16.4 19.1 37.1 24.8 12.8 10.2 8.0 11.6 12.7 9.0 16.2 17.6 16.6 31.5 23.2 10.3 8.9 7.1 10.3 NA 7.6 14.8 15.3 11.8 14.7 16.3 7.9 9.6 3.4 8.1 NA NA 10.9 12.1 9.7 14.1 15.3 6.6 9.0 3.0 6.2 NA NA 9.5 11.7 8.6 13.4 14.5 5.4 8.2 3.5 4.8 NA NA 13% 8% 9% 6% 9% 29% 13% 12% 7% 19% 16% 8% 12% 7% 11% 28% 13% 13% 7% 17% 14% 9% 16% 7% 12% 30% 14% 13% NA 17% 55% 64% 343% 45% 88% -1% -25% -26% NA -15% 59% OP OP IL IL UP NR NR NR NR NR NR NR NR NR NR NR NR NR NR NR OP OP IL 753 HK 1055 HK 670 HK 293 HK SIA SP THAI TB 003490 KS 020560 KS 2610 TT 2618 TT MAS MK GIAA IJ 9201 JP 9202 JP 9204 JP JETIN IN SJET IN QAN AU VAH AU AAV TB AIRA MK CEB PM TGR SP HKD 6.99 HKD 4.02 HKD 2.92 HKD 7.80 HKD 5.00 HKD 3.50 1.3 0.9 1.0 0.9 1.0 0.9 1.0 1.1 1.1 1.3 1.5 1.3 1.4 1.0 NA 4.7 NA 0.6 1.0 1.4 1.4 2.0 1.3 1.3 1.1 0.7 0.8 0.8 0.9 0.9 0.9 1.0 1.0 1.2 1.4 1.2 1.1 0.9 NA 3.1 NA 0.6 0.9 1.4 1.3 1.7 1.2 1.1 0.9 0.6 0.7 0.7 0.9 0.8 0.9 0.9 1.0 1.2 1.1 1.0 0.9 NA NA NA 0.6 0.8 1.3 1.1 1.6 1.1 1.0 9.6 10.9 9.8 17.2 16.9 12.0 36.6 18.2 11.3 16.1 10.4 5.8 16.9 NA 18.0 NA 41.5 23.3 20.4 8.2 13.0 95.3 17.2 6.7 6.2 6.2 7.4 33.1 9.5 10.1 8.3 8.5 12.7 17.6 10.8 5.8 14.7 NA 11.6 NA 10.3 11.3 15.5 8.1 11.1 27.1 12.0 6.6 5.4 5.7 5.7 19.8 8.0 7.3 7.1 16.0 13.6 8.4 8.6 6.4 11.8 NA NA NA 7.2 7.8 12.3 6.9 9.6 16.2 9.5 7.9 8.6 7.5 9.9 4.9 7.0 8.3 8.8 9.1 6.8 10.3 4.3 2.6 4.9 NA NA NA 4.1 6.2 8.5 7.5 8.8 6.4 7.1 6.7 6.7 6.1 7.0 5.3 6.2 7.5 7.5 7.2 6.2 6.9 3.8 2.3 4.6 NA NA NA 3.2 4.6 6.5 7.8 7.5 5.9 6.0 6.0 6.2 5.6 5.4 5.1 5.3 7.1 6.6 5.7 6.2 5.4 3.7 2.3 4.5 NA NA NA 2.8 3.7 4.6 7.2 6.5 5.5 5.3 14% 12% 14% 6% 6% 8% 3% 7% 7% 8% 0% 12% 26% 6% NA NA NA 2% 4% 12% 19% 16% 2% 17% 17% 19% 12% 3% 9% 10% 11% 7% 10% 6% 12% 22% 7% NA 34% NA 6% 8% 14% 17% 16% 5% 15% 15% 16% 13% 5% 11% 12% 13% 6% 9% 12% 12% 18% 8% NA NA NA 8% 11% 16% 17% 17% 7% 141% 152% 243% 65% (30%) 201% 476% 283% 161% 88% 170% 25% -44% 65% NA 1323% NA 53% 106% (23%) 116% 67% (3.4%) 173% price Price PBR (x) PER adj (x) EV/EBITDA (x) ROE Net gearing 2013E target 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E
HKD 14.60 HKD 12.00 SGD 10.85 SGD 10.50 THB 32.25 KRW 36,700 KRW 5,630 NT$11.40 NT$17.00 MYR 0.41 IDR 590.00 JPY 4,945 JPY 218 JPY 381 INR 581.15 INR 40.00 AUD 1.65 AUD 0.42 THB 6.55 MYR 3.25 SGD 0.66 NR NR NR NR NR NR NR NR NR NR NR NR NR NR NR MYR 4.40 SGD 0.66
1.3 (50.5)
PHP 80.00 PHP 97.00
9.2% 12.5% 12.1%
Guangzhou Baiyun Int'l Airport NR
8.8 12.5% 13.1% 14.7%
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Scorecard: The most hospitable bases for LCCs

We have performed a deep country analysis of 10 Asia markets to analyse the growth
potential for the LCC industry. We believe a profitable home market with strong growth potential is important for the ultimate success of any Asia-Pacific LCC.
We evaluate and score the markets on eight criteria: (1) population; (2) disposable income; (3)
LCC penetration; (4) international market access; (5) strength of the flag carrier; (6) regulatory protections; (7) airport constraints; and (8) structural cost base. We then rank the 10 countries using a scorecard framework.
We believe Thailand and the Philippines are Asias most hospitable bases for LCCs, given
their strong growth potential and the supporting regulatory and infrastructure environments. Singapore and Australia are the toughest LCC markets among the 10 countries.
Our country book includes a detailed analysis of each market.
LCC penetration in AsiaPacific reached 24% in 2012 from 2.4% in 2003; we forecast it will reach 30% by 2015
LCCs have been present in Asia for over 10 years and have made significant progress. LCC penetration in Asia Pacific (measured by the percentage of total seats served) reached 24% in 2012 from virtually zero a decade ago, and we expect the rate to reach 30% by 2015. Although LCC penetration rates for the five largest ASEAN economies (Malaysia, Indonesia, the Philippines, Thailand and Singapore) were above the global average in 2012, we believe the market potential for LCCs remains enormous in the region as annual trips per capita and flight penetration rates remain extremely low compared to the US and Europe, given the relative poverty of many Asian countries. However, driven by liberalisation of air services, a fastexpanding middle class, and its favourable geography, we believe the Asia-Pacific LCC market could ultimately be more than 10 times larger by traffic than Europes present LCC market. Fig 6: LCC penetration rates in Asia Pacific and the world
30% 25% 20% 15% 10% 5% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: CAPA, Standard Chartered Research estimates
Asia-Pacific
World 21% 22% 16% 23% 18%
26% 24% 24% 19%
19% 14% 11% 9% 4% 2% 6% 15% 17% 12%
14%
Of course the LCC industries in Asian countries are at different stages of development, implying diverse growth prospects for the various LCC players. The industrys tremendous potential in Asia has also attracted many new entrants, and we expect more and more LCCs to pursue public listings going forward. Our report has dug into the development of 10 markets in the region to find the potential winners among national LCCs and dominant pan-Asia players.
Eight criteria for 10 countries

For an LCC to succeed, a profitable, high-growth home market is key We adapted a scorecard framework and developed eight criteria with which to assess the 10 markets in Asia to discover the growth potential for the LCC industry in each. We believe a profitable home market with high growth potential is important to the ultimate success of any LCC. Since the eighth and the ninth freedoms (see appendix for explanations) are extremely rare outside the European Union, and most countries impose restrictions on foreign ownership of domestic airlines, domestic routes in LCCs home markets are generally protected from foreign competition. This allows LCCs to build economies of scale and generate cash flow in their domestic market before competing on more competitive international routes. 8
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Fig 7: Our criteria for evaluating LCC industry growth potential

Definition and score Criteria Population Disposable income 1 25mn 2.0% 2 26-50mn 2.1-3.0% 3 51-75mn 3.1-4.0% 4 76-150mn 4.1-5.0% 5 >150mn >5.0%
The larger a country's resident population, the higher the potential demand for air travel. Disposable income is indicated by GDP per capita. Higher disposable income implies greater affordability of air travel. The higher the expected growth in disposable income (per capita GDP CAGR 2012-15E), the higher its potential LCC demand growth. LCC penetration >150% 101-150% 51-100% 26-50% 25% We measure this by LCC seat capacity per capita. High LCC penetration rates possibly imply a smaller growth potential in the future. LCC penetration rates may have a lower ceiling in affluent countries or financial centres. International market potential LCCs enjoy greater growth opportunities when international short- and medium-haul routes are under-served by LCCs. We assign a score subjectively, taking into account the following four points: ur hours or less)
Strength of the flag carrier
>43%
37-43%
30-36%
23-29%
22%
A strong and reputable flag carrier (in Asia, often backed by implicit state guarantees) with a clear market segmentation strategy presents a clear threat to LCCs. We measure flag carriers by their total market share (international and domestic), including sub-brands and affiliates. Interventionist regulation; restricted ASA arrangements Liberal regulation; restricted ASA arrangements Liberal regulation; constrained ASA arrangements Liberal regulation; liberal ASA arrangements Liberal regulation; liberal ASA arrangements; no ownership restrictions
Regulation
The more liberal a countrys approach to governing its aviation sector, the better for LCCs. By regulation, we mean the extent to which the government dictates a carriers business model, in terms of fares, capacity, routes etc. Liberal ASAs are those where the third, fourth and fifth freedoms (at a minimum) are granted reciprocally and without restrictions. Airport constraints >85% 80-84% 75-79% 70-74% 70% Congested airports with limited takeoff/landing slots, particularly at hub airports, constrain the development of LCCs. We measure this by the percentage of peak-time (0700-2300) flight movements per hour as a percentage of the airports maximum hourly slot capacity. Structural cost base >USD 50,000 USD 35,001-50,000 USD 20,001-35,000 USD 10,001-20,000 USD 10,000 LCCs prefer a low operational cost environment to lower unit cost. Cost items include airport charges, labour costs, distribution costs and etc. We use GDP per person employed (constant 1990 PPP$) as a baseline and make adjustments based on our knowledge of local airport charges and taxes.
Source: Standard Chartered Research
Scorecard: Thailand and the Phillipines have the highest potential for LCCs
Fig 8: LCC market scorecard
Country Australia Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Thailand Population 1 1 5 5 4 2 2 4 1 3 Disposable income 3 4 3a 5 1 3 4 5 4 5 LCC penetration 1 3 5 5 5 5 2 4 1 4 International market potential 1 2 4 3 2 1 2 5 1 5 Flag-carrier strength 1 1 3b 3d 4 2 3 4 2 3 Regulation 5 3 1 2 3 3 4 3 5 4 Airport constraints 5 2 3 2 3 4 5e 2 3 4 Structural cost base 2 1 3c 4 2 2 4f 5 1 5f Total 19 17 27 29 24 22 26 32 18 33
a. We subtract 2 from Indias cost base due to punitive government charges and taxes. b. We subtract 2 from Indias disposable income because its current GDP per capita of USD 1,571 might be too low a base to exper ience a rapid rise in air travel affordability. c. We subtract 2 from Indias flag carrier strength to reflect regular government subsidies and a bailout guarantee. d. We add 1 as Garudas effective execution of its new strategy has improved its competitiveness. e. We add 3 to Malaysias airport score due to the imminent opening of KLIA2. f. We add 1 to Malaysia and Thailands cost base due to low charges and their favourable tax regimes for LCCs. Source: Standard Chartered Research
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Our scorecard suggests Thailand and the Philippines offer the greatest growth opportunities for LCCs, while Singapore and Australia present the most challenges. For each parameter in our scorecard, a score of 5 implies the most favourable conditions for LCCs and a score of 1 implies the least favourable conditions. We use a simple aggregate of the results to arrive at an overall score.
Country comparisons
Indonesia and Japan are huge potential LCC markets
Population: Japan and Indonesia had the largest number of air passengers in Asia in 2012,
and we attribute this largely to their large populations and the affordability of air travel. India has the highest growth potential for air travel due to its large population (1.2bn in India versus 29mn in Malaysia), as GDP per capita and affordability are improving. Singapore and Hong Kong are Lilliputian markets by comparison. Fig 10: GDP CAGR 2013-15E
Indonesia Malaysia Thailand Population Australia Hong Kong India Indonesia Japan Korea Malaysia Philippines HK 40,000 USD AU SG 60,000 80,000 Singapore Thailand 0% 2% 4% 4.5% 5.2% 6% 8% 1.3% 3.3% 5.0% 5.8% 3.2% 4.1% 6.6% 6.7%
Fig 9: Population and GDP per capita

300 ID 250 Population 200 150 100 50 0 20,000 PH TH MY KR Australia Japan Philippines Hong Kong Korea Singapore JP
*India excluded to enable readers to see the other countries more clearly. Source: IMF, Standard Chartered Research
Source: IMF, Standard Chartered Research estimates
Disposable income is highly correlated with flights per capita
Disposable income: Disposable income is highly correlated to GDP per capita and the
affordability of air travel (as indicated by round trips made per capita). We therefore see great air travel growth potential for Indonesia, the Philippines and Thailand. Indias growth poten tial is enormous, but the very low GDP per capita may imply an affordability constraint. Fig 12: Annual round trips per capita, 2012
67,723 36,667 Australia Hong Kong India Indonesia 46,736 23,113 Japan Korea Malaysia Philippines 51,162 Singapore Thailand 40,000 USD 60,000 80,000 0.00 0.48 1.00 2.00 3.00 4.00 5.00 0.19 2.37 0.03 0.20 0.39 0.70 0.85 1.89 1.94
Fig 11: GDP per capita, 2012 (USD)

Australia Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Thailand 0 5,678 20,000 10,304 2,614 1,492 3,592
Source: IMF, Standard Chartered Research
Source: IMF, country data, Standard Chartered Research
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LCC penetration: We see great upside potential for LCC penetration rates in Japan, South
Korea, and Thailand, especially for international travel. Although LCC penetration rates as a percentage of total seats appear high for India, the Philippines, Indonesia and Thailand, true penetration as a percentage of population shows how far these markets still have to grow. Asian LCC markets have plenty of room to grow, especially for international travel Fig 13: LCC penetration rates, 2012 (LCC seats/total seats)
International Australia Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Thailand 0% 10% 0% 16% 20% 30% 40% 50% 28% 78% 30% 51% 60% 70% 80% 4% 9% 20% 29% 47% 58% 0% 5% 16% 67% 41% 52% 16% 39% Domestic
Fig 14: LCC penetration rates, 2012 (LCC seats/total population)

Australia Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Thailand 0.00 0.15 0.18 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 0.06 0.24 3.81 0.01 0.05 0.05 0.17 0.03 0.20 0.11 0.14 0.73 0.51 0.29 0.58 International 1.29 Domestic
Many international routes remain underserved
International market potential: We believe the Philippines and Thailands international short -
haul routes have significant growth potential for LCCs, as a larger number of budget travellers to/from these countries are underserved. International routes from Japan, Korea, and Hong Kong are well served by existing full service carriers. However, the increasing level of LCC services is likely to stimulate demand for short-haul trips with lower ticket prices.
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Fig 15: International destinations already served*

Australia Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Thailand 0 17 97 21 23 43 95 78 32 102 80 20 40 60 10 80 100 120 7 5 9 16 6 3 5 3 Asia-Pacific destinations Middle-East destinations 6
Fig 16: International LCC penetration (% of seats)*

Australia Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Thailand 0% 10% 16.3% 20% 30% 40% 50% 28.3% 29.7% 4.4% 8.6% 47.2% 5.2% 16.0% 41.5% 16.1%
*April 2013. Source: CAPA, Standard Chartered Research
*April 2013. Source: CAPA, Standard Chartered Research
Strength of the flag carrier: Most flag carriers have developed a partly- or wholly-owned
A strong flag carrier with an LCC brand is a challenge to LCCs as it has implicit state backing
LCC subsidiary to leverage this fast-growing segment of the market. Qantas led the way in this regard, empowering Jetstar to fly head-to-head with the parent on trunk routes across Australia and placing no constraints on its growth. This has given the Qantas group a 60% stranglehold on its domestic market. At the other end of the spectrum, Air India has a history of financial and operational mismanagement. The flag carrier has failed to fully utilise ASAs for which it received preferential access, its fleet is spread across too many aircraft types and poorly matched with its routes, its low-cost subsidiary Air India Express has almost no presence (just 1% of seats) in the fast-growing domestic market, and it has persistently made losses despite receiving regulatory protection and repeated government-led bailouts and restructurings.
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Fig 17: Competitive advantages of the incumbent full-service carriers in Asia

Country
Australia
Flag carrier Comments

Qantas Dominant market share (60%) in Australia with competitive cost advantage Multi-brand portfolio strategy: Jetstar as a pan-Asian LCC and Qantas as a premium carrier Strong global code share and interline network
Hong Kong
Cathay Pacific
Strong product and brand in the premium travel segment Benefits from China feeder traffic via Dragonair subsidiary Extensive global network to Hong Kong, one of the most important air hubs in Asia Premium product has struggled to attract customers Highly subsidised by government Remains competitive by pricing below cost
India
Air India
Indonesia
Garuda
Only carrier in Indonesia with premium international capability Multi-brand portfolio strategy gives it exposure to rapidly expanding domestic LCC market via Citilink Both are well positioned in the premium international market with complete networks to the US and Europe Multi-brand portfolio strategy gives JAL (Jetstar Japan) and ANA (Peach and AirAsia Japan) exposure to growing domestic LCC market
Japan
JAL, ANA
Korea
Korea Air
Extensive network in transpacific market for Chinese to the US via Seoul Strength in cargo market due to strong customer base and global cargo network Multi-brand portfolio strategy via LCC subsidiary Jin Air. Cannibalisation between Korean Air and Jin Air is likely
Malaysia
Malaysia Airlines
Positions in the premium market and targets improve product and services after the delivery of A380 aircraft Uncompetitive with LCCs in domestic market and short-haul international Successfully turned around from unprofitability from 2007 due to route rationalisation The only carrier in the Philippines with premium international capability, yet has weak safety record Financial support from the new dominate shareholder (San Miguel) for future fleet renewal Controls the largest share of airport slots at NAIA, with its LCC subsidiary PAL Express Strong product and brand in the premium travel segment Multi-brand portfolio strategy covering all market segments: Scoot (a long haul LCC) and Tiger Airways (a shorthaul LCC), Silkair (a full-service carrier as feeder for ASEAN traffic), Singapore Airlines (premium) Strong balance sheet
Philippines
Philippines Airlines
Singapore
Singapore Airlines
Thailand
Thai Airways
A long-haul carrier highly exposed to European leisure travel market Extensive network in Asia Multi-brand portfolio strategy via 49%-owned LCC Nok Air, yet Nok Airs scale is small
Fig 18: Flag carrier dominance (as measured by share of total seat capacity)*
Air India/AirIndia Express JAL Garuda/Citilink PAL/PAL Express Thai Airways/Thai Smile Malaysia Airlines/Firefly Korean Air/Jin Air SIA/SilkAir/Scoot Qantas/Jetstar Cathay Pacific/Dragonair 0%
*April 2013 Source: CAPA, Standard Chartered Research
20% 23% 25% 29% 30% 36% 40% 42% 48% 49% 10% 20% 30% 40% 50% 60%
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ASEANs open-skies are a misnomer; they are far less ambitious than the EUs single aviation market
Regulation: In Asia, aviation regulations can favour all domestic airlines, the flag carrier or
certain airlines. The degree of regulatory support seriously affects the competitive dynamics of any airline. The details of each countrys regulations are in our country book. The Malaysian and Singaporean governments have been supportive of LCCs, as higher LCC penetration has benefited their tourism sectors and overall economies. This openness has hurt the flag carriers by intensifying competition. In India and Indonesia, the incumbent carriers are protected by restrictive ASAs. ASEANs much-discussed goal of establishing open skies within the 10 -member group by 2015 is somewhat misleading, in our view. Not only is the version being targeted far less ambitious than the European Unions, with only third, fourth and fifth freedom relaxations considered, but the two earlier multilateral agreements that are supposed to already be in force have not been ratified by all members. Ownership and control is a further impediment to a true single aviation market. According to the ASEAN agreement substantial ownership and control must be in the hands of native carriers, with the definition of substantial varying from 51 -60% depending on the country. Australia is the only country in our LCC universe that permits foreign investors to own and operate 100% of a domestic airline.
Airport congestion is a serious impediment to LCC growth in many places
Airport constraints: Several major airports in Asia are operating beyond intended capacity,
and the limited capacity to release new or suitable slots to LCCs has constrained their growth opportunities. Manilas Ninoy Aquino International Airport (NAIA), Jakartas Soekarno -Hatta International Airport, and Hong Kong International Airport (HKIA) are among the most congested, with little margin for error or delay at peak times. The re-opening of Bangkoks Don Mueang airport in 2012 and the imminent opening of Kuala Lumpur International Airport 2 have eased slot concerns for LCCs in these markets and will enable them to attract more travellers by offering better schedules and shorter turnaround times. Fig 19: Main airport slot usage*
Off-peak% Hong Kong International Manila Ninoy Aquino Jakarta Soekarno-Hatta Kuala Lumpur International Tokyo Haneda & Narita Singapore Changi Bangkok Don Mueang & Suvarnabhumi Seoul Gimpo & Incheon Chennai International Melbourne Tullamarine 0%
*April, 2013, Friday used as most comparable day of the week. Source: CAPA, Standard Chartered Research
Peak% 33% 36% 24% 24% 85% 83% 83% 82% 36% 31% 78% 78%
9%
15% 36% 14% 20% 40% 60% 65% 67%
75% 74%
80%
100%
Countries with structurally lower costs allow LCCs to be profitable while offering truly low fares.
Structural cost base: We attribute the later and slower development of LCCs in North Asia to
regulatory protection of incumbents, under-served markets, and expensive operational environments. With the exception of liberal Australia and Singapore, countries with high labour costs have been slow to adopt LCCs and have very low LCC penetration rates. Low labour costs are a key competitive advantage for South and Southeast Asian nations, as cost savings can be directly passed to consumers, making ticket prices more attractive. India diminishes this advantage somewhat by imposing punitive charges at airports and taxes on aviation fuel.
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Fig 20: GDP per person employed, 2011* (constant 1990 PPP$)
Australia Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Thailand 0 10,000 16,311 20,000 30,000 40,000 50,000 60,000 70,000 8,601 50,303 26,009 8,939 11,037 44,567 45,158 49,898 65,798
*Most recent data available Source: World Bank, Standard Chartered Research
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Fig 21: Main airports in markets covered

Country Australia The main airport Melbourne Tullamarine Airport / Sydney Airport Comments
Melbourne has two runways and four terminals, including a dedicated LCC terminal (T4), which is
being expanded and set to be complete in 2014.

Two more runways and a fifth terminal are also planned, with the first due to be completed in
2020.
These developments should incentivise Jetstar and Tiger Australia to maintain their base of
operations at Tullamarine for the foreseeable future. Hong Kong Hong Kong International Airport (HKIA)
HKIA is extremely congested, with available slots relegated to off-peak times late at night or in the
early morning.
The issue of whether or not and how to expand HKIA remains undecided and controversial. Due to the strong demand from premium carriers for slots, we believe the airport authority is
unlikely to make concessions or accommodate LCCs. India India Gandhi International Airport/ Chennai International Airport
IGIAs T3 began operations in 2010, and the three-runway airport has capacity for 10mn more
passengers than the 35.9mn it handled in 2012.

Aeronautical charges at IGIA are very high (INR 300 for domestic and up to INR 1,700 for
international flights), making it among the most expensive airports in the world and highly inhospitable to LCCs.
Charges at Chennai are lower (INR 166 for domestic and up to INR 667 for international flights),
making it more amenable to LCCs.

Chennai has just completed an extensive modernisation and expansion plan, making it attractive
as an LCC base serving southern India. Indonesia SoekarnoHatta International Airport

In 2012, Soekarno-Hatta processed 15mn passengers beyond its intended capacity, despite the
opening of a third terminal in 2009.

Expansion that will more than double the capacity of terminals 2 and 3 is scheduled for
completion by end-2013, but may be delayed to 2015; T3 houses LCCs Lion, AirAsia and Tiger Mandala. Japan Tokyo Narita/ Haneda International Airport
High fees and charges at Narita (84% of traffic international) and neighbouring Haneda (89% of
traffic domestic) hamper the LCC business model by forcing LCCs to pass them on to consumers.
Narita is turning an existing building into a dedicated LCC terminal, due for completion in 1Q14. The terminal will have no aerobridges and simple interior equipment to reduce costs (and thus
fees). Korea Incheon International Airport Kuala Lumpur International Airport (KLIA)
Incheon has been planned to expand in phases, staying ahead of the demand curve. Phase two,
completed in 2008, allows it to comfortably handle 44mn passengers, 5mn more than it saw in 2012. Expansion to 62mn/100mn is planned by 2017/2020.
Malaysia was one of the first countries in Asia to open a dedicated LCC terminal (in 2006). The
Malaysia
terminal was expanded in 2008 as construction began on a new LCCT.

KLIA will unveil the new, much larger dedicated LCC Terminal (KLIA2) in mid 2013; it will become
the new home base for AirAsia and Malindo. Philippines Ninoy Aquino International Airport (NAIA)
Severe congestion at NAIA has resulted in Clark International Airport increasingly serving Manila
as an LCC airport, despite being 80km from the city; this is a disadvantage for the LCCs based there.
Since space constraints rule out the possibility of a third runway or outward expansion, the
government is considering turning Clark into the capitals main gateway, but the issue remains undecided. Singapore Changi International Airport
The three-runway, three-terminal airport has consistently remained ahead of the demand curve,
with a fourth terminal due for completion in 2017.

Changi opened a dedicated Budget Terminal in 2006, which it closed in 2012 to make room for
the new T4, which will cater primarily to LCCs. Thailand Bangkok Suvarnabhumi Suvarnabhumi airport has been running beyond its intended capacity of 45mn and is scheduled to Airport/ expand capacity to 60mn passengers by 2017. Don Muang The old Bangkok airport, Don Muang, has been re-opened as an LCC airport to ease congestion. International Airport
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Scorecard: The best-positioned Asia LCCs

After analysing the macro environment for LCCs in 10 Asian markets, we dug into the
competitive environment in each market to discover the LCCs with the highest growth potential based on the competitive dynamics in their local environment.
We evaluated the 10 largest Asian LCCs by total seat capacity (excluding LCCs in Japan,
China and India) by scoring them on 10 criteria and adapting a scorecard framework.
Based on our scorecard, we conclude that AirAsia is the best positioned pan-Asian LCC, while
Asia Aviation and Lion Air represent the strongest single-country businesses. Heated competition for control of markets with strong growth; we analyse competitive dynamics In the first section we discussed the market potential for LCCs in 10 markets and concluded that Thailand and the Philippines are the most hospitable bases for LCCs. Of course LCCs can struggle even in the most favourable environment if the competitive situation changes, they pursue the wrong strategy or neglect to sharpen their competitive advantages. Indeed, markets with high growth potential are most likely to attract more new entrants, thus eroding the attractiveness of the market.
10 criteria for 10 LCCs

We evaluate the 10 largest LCCs in Asia on 10 criteria We have adapted a similar scorecard framework for the 10 largest Asian LCCs to discover the most attractive businesses with the strongest long-term growth potential. While market potential in the LCCs home base is important, a markets competitive structure and an LCCs competitive advantages also play roles in an LCCs success. We use the following criteria to assess the LCCs in our universe: (1) domestic growth potential; (2) international growth potential; (3) domestic competitive environment; (4) international competitive environment; (5) threat of new entrants; (6) economies of scale and cost performance; (7) infrastructure support; (8) regulatory support; (9) balance sheet strength; and (10) management and strategy. While we do give clear quantitative definitions for our scores, we use more qualitative analysis in our company scorecard than our country scorecard to present our view for each LCC. Fig 22: Our criteria for evaluating growth potential
Criteria Domestic growth potential Definition Identify the market potential for the LCCs home market based on our country scorecard.
International growth potential Identify the market potential for the LCCs short-haul international market from its home base based on our country scorecard. Domestic competitive environment International competitive environment Threat of new entrants Analyse the competitive environment in the LCCs domestic market, including the number of local airlines, their capacity expansion plans, strategy, and route plans. Analyse the competitive environment in the short-haul international market from the LCCs home base, including the number of international airlines, their capacity expansion plans, strategy, and route plans. Project the likelihood that new entrants might be attracted to and attempt to enter the LCCs home market and initiate a price war to gain market share
Economies of scale and cost Economies of scale are key to LCCs unit costs and profitability. The operat ional environment seriously performance affects cost management. Infrastructure support Regulatory support Balance sheet strength Management and strategy Access to key airports and air slots is critical for growth. Regulatory support is necessary for setting up operations, access to air slots, approval for new routes, fair competition with incumbents etc. LCCs will make losses before reaching critical economies of scale. Balance sheet strength is required for expansion and new operations when cash flow is negative, and to survive price wars LCCs strategies to differentiate their value propositions, compete against rivals, and grow both domestically and internationally, are key to their success
Source: Company, Standard Chartered Research estimates
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Scorecard: Asia Aviation, Lion Air, and AirAsia

Our scorecard suggests AirAsia remains the best positioned pan-Asian LCC, while Asia Aviation and Lion Air represent the strongest single-country businesses. Based on our scorecard, Asia Aviation, Lion Air, and AirAsia are the bestpositioned Asia LCCs
Asia Aviation: Thailand and the Philippines are the most hospitable bases for the LCC
industry domestically and internationally, based on our country scorecard. Asia Aviation has been growing market share and profit as the largest LCC in Thailand, with limited competition, as Thai Airways has shifted its focus to the international premium market. The availability of airport slots and low cost operations have allowed Asia Aviation to continue to gain market share.
Lion Air: Despite competitive disadvantages to Garuda in the international market, Lion
remains well positioned domestically due to the successful implementation of its low-cost business and regulatory support. Its strong funding sources should allow the carrier to develop its pan-Asia print in the next three to five years.
AirAsia: Its successful strategy and brand image have enabled AirAsia to significantly expand
market share and penetrate six countries in Asia via partnerships since 2006. While we believe the group will eventually be the largest pan-Asia LCC, the threat to its cash-cow home market is our key short-term concern. On our proprietary scorecard, a score of 5 indicates the most favourable conditions for LCCs on a relative basis and a score of 1 indicates the least favourable conditions. For example, a score of 5 for Threat of new entrants indicates a very low probabi lity that a new competitor will enter the LCCs home market, either because the operating environment is not sufficiently favourable or because of regulatory protection. Conversely, a 1 indicates a very high probability that a new entrant will attempt to enter the market, due to a highly attractive environment or minimal regulatory impediments. We use a simple aggregate for the results of all 10 criteria to arrive at an overall ranking. Fig 23: Scorecard: The key Asia LCCs
Company Home market Domestic growth potential International growth potential Domestic competitive environment International competitive environment Threat of new entrants Economies of scale & cost performance Infrastructure support Regulatory support Balance sheet strength Management and strategy Single-market total Secondary market Growth potential Competition structure Economies of scale & cost performance Diversified total Lion Air ID 5 3 4 2 5 5 5 5 3 2 39 MY 3 1 1 44 AirAsia MY 3 4 4 4 2 4 5 4 2 5 37 TH 5 5 2 49 Asia Indonesia Jetstar Cebu Air Aviation AirAsia Citilink AU PH TH ID ID 2 2 5 4 2 4 5 3 3 4 34 JP 3 1 2 40 4 5 4 5 3 3 3 3 3 4 37 NA 37 5 5 4 5 3 2 5 4 5 4 42 NA 42 5 3 1 3 5 2 1 1 1 3 25 NA 25 5 3 2 3 5 2 4 5 4 4 37 NA 37 Nok Air TH 5 5 3 2 3 1 5 3 1 3 31 NA 31 PAL Tiger Express Airways PH SG 4 5 3 3 3 2 3 3 2 2 30 NA 30 NA 3 NA 2 3 2 4 3 3 2 22 AU 2 1 1 26
Source: Companies, Standard Chartered Research estimates
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Company comparisons
Domestic growth potential: Based on our country scorecard, we believe Indonesia, the
Opportunities in Indonesia, the Philippines and India
Philippines, and India enjoy the highest domestic market growth potential due to their large populations and fast-growing disposable income. In contrast, Australia is a well-penetrated, mature economy of just 20mn people in which growth opportunities might come only from market share gain. We therefore believe the growth potential for Lion and Citilink is high, while Cebu and PAL Express have strongly penetrated their domestic markets and should grow in line with market growth. Jetstars growth is unlikely to come from its home market, in our view. Fig 24: Domestic total air traffic CAGR (2013-15E)
Australia India Indonesia Japan Korea Malaysia Philippines Thailand 0.0% 5.0% 10.0% 6.1% 6.8% 7.0% 0.4% 8.3% 8.3% 12.7% 11.7% 12.0% 10.4% 15.0% 20.0% 4.5% 3.9% 2013-15E CAGR 2009-12 CAGR 14.4% 17.8% 16.7%
10.1%
Source: Government data, Standard Chartered Research estimates
Indonesias tight restrictions of bilateral ASAs limit the international potential of its LCCs
International growth potential: Based on our country scorecard, we believe Thailand and
the Philippines have the largest growth potential in the international LCC market due to their low LCC penetration rates for international routes, more growth opportunities from different destinations in the ASEAN region and China, and material unsatisfied demand. Given the limited bilateral agreements between Indonesia and other countries, Indonesias international market is served more by international airlines than Indonesia-based carriers. Fig 25: International total air traffic CAGR (2013-15E)
Australia Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Thailand -5.0% -2.5% 0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 9.7% 9.6% 10.0% -3.1% 2013-15E CAGR 2009-12 CAGR 1.8% 6.7% 6.7% 7.4% 7.3%
12.3% 13.4% 13.3%
11.6% 11.4% 12.6% 12.4% 11.2% 13.3% 13.3% 15.0%
Source: Government data, Standard Chartered Research estimates
Domestic competitive environment: The airline industry is always competitive. However,
domestic markets can be protected by policies that favour domestic carriers. The competitive structures in Australia and Malaysia appear to be the best among the 10 markets in our analysis due to their duopoly structure. As highlighted earlier, a strong home base is important in enabling LCCs to build economies of scale before they expand to the more competitive international market. This partially explains why AirAsia and Jetstar have grown to become the leading LCC groups in Asia today.
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However, we think the duopoly structures in Malaysia and Australia are likely to be broken in a few years. Malindo, part of the Lion Air Group, has entered Malaysias domestic market and could threaten AirAsias dominance (see the AirAsia company section for further analysis). Tiger Australia, if it operates successfully as an LCC franchise in the Virgin Australia group, is likely to take market share from the Qantas-Jetstar alliances (see the Tiger company section for further analysis). Fig 26: Number of LCCs based in each market
Australia Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Thailand 0 1 2 3 2 3 3 3 4 5 6 7 8 6 0 5 5 7 2
Source: CAPA, Standard Chartered Research
The more fragmented a domestic LCC market, the more competition tends to compress margins
The most fragmented domestic markets in the region are India, Japan, the Philippines, and Indonesia. Although these markets are growing, intensifying competition has constrained yield expansion. Smaller players and new entrants are likely to maintain lower ticket prices to grab market share and achieve economies of scale to lower unit costs. However, Cebu Air and Lion Air enjoy significant cost advantages over their competitors and have market shares of nearly 50% in their home markets. In the long run, we think the smaller players will find it difficult to survive, and believe Cebu and Lion are likely to remain the dominant LCCs in their home markets. Fig 27: Number of international LCCs serving each market
Australia Hong Kong India Indonesia Japan Korea Malaysia Philippines Singapore Thailand 0 2 4 6 8 10 12 14 16 18 11 17 19 20 11 17 6 11 14 6 14
Many popular shorthaul routes in Asia remain underserved by LCCs
International competitive environment: Given the relatively low LCC penetration rates for
international markets in Asia, full-service carriers dominate most international routes, though we expect LCCs to challenge them and take short- to medium-haul market share. We believe most ASIAN LCCs will continue to grow in international markets, with the probable exception of Indonesian LCCs, as their growth opportunities are constrained by Indonesias limited bilateral agreements with other countries and competition from Garuda.
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Markets with strong growth and earnings potential tend to attract new entrants
Threat of new entrants: Based on AirAsias share price performance after the
announcement that Malindo was entering Malaysia, the consensus view is that Malindos aggressive expansion is likely to drag down AirAsias domestic yield and market share in Malaysia. However, we think Malindos business model and competitiveness have not been proven. Elsewhere, we think AirAsia Philippines and Jetstar Hong Kong might not threaten incumbents Cebu Air and Cathay Pacific in the medium term as penetrating key routes and building economies of scale takes time. Fig 28: New LCCs entering each market in 2012 and 2013E
Country Australia Hong Kong India Japan Malaysia Philippines Thailand Airline/s Tiger Australia reinstated Jetstar Hong Kong India AirAsia Peach Jetstar Japan AirAsia Japan Malindo AirAsia Philippines AirAsia X No. of LCCs prior to entry 1 0 5 4 5 6 1 3 2 Entry 3Q11 2H13 2H13 1H12 2H12 2H12 1Q13 1H12 2H13
Source: Companies, Standard Chartered Research
Economies of scale and cost performance: In the LCC market it is axiomatic that lowest
Lowest cost wins
cost wins, because the competitor with the lowest costs can cut fares the most while sustaining the smallest loss. Building scale to help achieve a low cost base is therefore critical, as is cost discipline in avoiding the temptation to offer frills and instead turn ancillary benefits (baggage, meals etc.) into revenue opportunities. AirAsia is the best-in-class at this, in our view, maintaining much lower costs than Cebu despite flying longer sectors (distance per trip). Given the different salary levels in each country, we believe unit cost comparisons across Asian LCCs might not be entirely accurate, as most operate only in their local market with expenses mostly in the local currency. When translating the data to US dollars, the numbers are also affected by exchange rates.
Fig 29: Unit cost per ASK, 2012

Cost per ASK ex-fuel (US) AirAsia Malaysia Indonesia AirAsia Citilink Thai AirAsia Cebu Pacific Tiger Airways Jetstar 0.00 2.00 4.00 6.00 Cost per ASK (US) 2.31 4.53 2.37 4.73 3.00 6.23 3.02 5.44 3.03 6.04 3.14 5.42 6.88 8.00
Fig 30: Ex-fuel unit cost vs. average sector length, 2012
3.40 3.20 3.00 2.80 2.60 2.40 2.20 2.00 800 1,000 1,200 1,400 1,600 1,800
Cebu
Thai AirAsia
Tiger
Malaysia AirAsia
Indonesia AirAsia
Lack of airport slots can be an intractable impediment for an LCC
Infrastructure support: In our country pages, we note that the availability of airport slots in
Malaysia and Thailand means greater growth opportunities for LCCs in those countries. In contrast, the constraints at many other airports have protected flag airlines and larger incumbent LCCs from the threat of new competition, as the former have preferential access to better slots.
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Fig 31: Infrastructure strength and weakness for the eight LCCs
LCC Lion Air AirAsia Malaysia Jetstar Cebu Air Asia Aviation PAL Express AirAsia Indonesia Tiger Airways Comments Lion has the largest market share at Jakartas congested airport, ensuring its dominance in the domestic market. AirAsia has used the advantages of LCC terminals in Malaysia to grow domestically and internationally. Infrastructure constraints are more likely at HKIA than its other hubs, as HKIA is more congested. Expansion has been constrained by congestion at NAIA, but it has enjoyed a larger share at NAIA and is better positioned than new entrants due to its early mover advantage. The re-opening of Don Muang airport has resulted in lower airport charges and more time slots for Asia Aviation. Expansion has been constrained by congestion at NAIA, but it has a larger share at NAIA and is better positioned than new entrants due to its early mover advantage. AirAsia Indonesia has been struggling at the congested Jakarta airport and has reserved more slot resources for international routes. Airport slots are available in Singapore and Australia but the expansion of SEAir (Tigers subsidiary in the Philippines) and Mandala (Tigers subsidiary in Indonesia) are likely to be constrained.
Fig 32: Percentage of seats served from hub airports, April 2013
Tiger Airways (Singapore Changi) Nok Air (Bangkok Don Mueang) Asia Aviation (Bangkok Don Mueang) AirAsia Malaysia (Kuala Lumpur International) PAL Express (Manila Ninoy Aquino) Cebu Pacific (Manila Ninoy Aquino) Jetstar (Sydney & Melbourne) Lion Air (Jakarta Soekarno-Hatta) Citilink (Surabaya Juanda) Indonesia AirAsia (Jakarta Soekarno-Hatta) 0%
Source: CAPA, Standard Chartered Research,
100% 95% 91% 79% 78% 76% 70% 64% 44% 41% 20% 40% 60% 80% 100%
Some LCCs receive some form of state support for protectionist or economic reasons
Regulatory support: Some LCCs are in effect protected by state regulators, which restrict
ASAs with other countries to limit their international carriers exposure to foreign competition or give domestic airlines priority for airport slots. Other LCCs receive no protection at all because their governments follow an ultra-liberal regulatory approach to aviation, which can disadvantage them if their neighbours are not playing by the same rules.
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Fig 33: Regulatory support

LCCs Lion Air Comments The Indonesian government has tightly restricted bilateral ASAs with other countries to protect Lion Air and Garuda from foreign competitors. The government also ensures that Lion and Garuda receive priority for slots at Indonesias airports. The government reserved domestic trunk routes for AirAsia during the domestic route rationalisation in 2006, resulting in AirAsias dominance in the domestic market. Malaysia operates a liberal air service regime, and without providing direct assistance, has encouraged Malindo Air to enter the market and challenge AirAsia. Australia operates a liberal air service regime, and provides no preferential treatment to national carriers whatsoever. Regulatory approval seems long but fair. Due to slot constraints at NAIA, the Philippine government has restricted foreign c arriers access to the airport to protect Cebu Air and PALs presence. The Thai government has actively encouraged AirAsias presence by granting it tax incentives and the use of Don Muang International Airport to accommodate its ambitious expansion plans. It hopes making Thailand an LCC hub will spur tourism and economic growth. IAA has not found it easy to acquire slots at Indonesias domestic airports for domestic expansion. The Indonesian government has tightly restricted bilateral ASAs with other countries to protect Lion and Garuda from foreign competitors. The government also ensures that Lion and Garuda receive priority for their desired slots at Indonesias airports. As a subsidiary of Garuda, Citilink enjoys favourable regulations. Despite its status as a subsidiary of flag carrier Thai Airways, Nok Air does not receive particularly favourable policy support and has to compete with other domestic LCCs. However, foreign carriers cannot be majority owners of an airline based in Thailand. Same protections as Cebu Air. Singapore, like Australia, operates a liberal air service regime, and provides no preferential treatment to national carriers. One could argue that since it is surrounded by neighbours that subsidise their airlines to some extent, not providing support has the effect of penalising Tiger relative to its peers.
AirAsia Malaysia
Jetstar Cebu Air Asia Aviation Indonesia AirAsia Citilink
Nok Air PAL Express Tiger Airways
MAA is relatively highly levered to fund the expansion of all its unlisted affiliates
Balance sheet strength: Since several of the LCCs in our report are unlisted, we have
objectively evaluated their balance sheet conditions based on publically available information. We think Lion Air has a robust but nonetheless levered balance sheet, similar to that of AirAsia, given its order book of over 550 aircraft; we further assume that Jetstar has the strength of Qantas balance sheet behind it and that PAL Express is backed by San Miguel. Nok Air is planning an IPO in 2H13 to fund fleet expansion. Fig 34: Net gearing (2012E)*
Asia Aviation Citilink (Garuda) Jetstar (Qantas) Cebu Pacific Tiger Airways AirAsia Malaysia PAL Express (San Miguel Corp) Nok Air (Thai Airways) -150% -100% -50% 0% 50% 100% 150% -98% 30% 54% 55% 68% 116% 127% 196% 200% 250%
*FY13E used for Tiger Airways given 31 March year end; parent companies used for unlisted subsidiaries and associates. Source: Companies, Standard Chartered Research estimates
AirAsia and Jetstars cross-border JV business model is an innovative, growthmaximising strategy
Management and strategy: We award higher scores to airlines that are explicitly working to
maximise shareholder value (e.g. AirAsia and Jetstars strategie s of developing pan-Asian networks by setting up JVs in high-growth Asian countries beyond their home markets). We are less convinced that PAL Express made the right decision to withdraw from the budget segment entirely, as the Philippines remains a relatively poor country and the LCC segment is likely to experience by far the greatest growth in the countrys airline sector going forward. Lion Airs decision to launch an effectively full-service, low-fare carrier in Malaysia (Malindo) and a full-service carrier in Indonesia (Batik) in addition to its turbo-prop regional brand Wings Air adds layers of complexity we think will very likely distract from and diminish cost-discipline. 23
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The country book
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Australia
Fig 35: Profile of the Australian market
Population Area GDP per capita Tourist arrivals Domestic air passengers International air passengers LCC penetration rate (domestic) LCC penetration rate (international)
Source: Australian Bureau of Statistics, IMF, CAPA, Standard Chartered Research
2012 22.8mn 7,682,300 sq km USD 67,912 6.1mn 56.5mn 29.6mn 38.8% 16.1%
Market potential
Australia has a mature tourism market, and is relatively isolated geographically In 2006-12, visitor arrivals to Australia grew at a CAGR of just 1.8%, indicative of Australias isolated geographical position and the maturity of its tourism sector. We forecast a 2013-15 visitor arrival CAGR of 2.4%, largely due to increasing arrivals from China, which has accounted for 66% of the increase in visitors to Australia since 2010. Fig 37: Inbound tourists by country of origin, 2012
50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 New Zealand China 20% 28% 10% 2% 3% 3% 4% 10% 6% 6% 8% United Kingdom USA Japan Singapore Malaysia Korea Hong Kong India Others
Fig 36: International tourism market Inbound

10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2006-12 CAGR: Arrivals : 1.8% Receipts: 8.3% Receipts (USD bn, RHS) Arrivals (mn, LHS) 6.6 6.1 6.3 6.4
5.9 5.9 5.5 5.6 5.6 5.6
33.4
20.7
25.6
28.3
28.0
32.3
34.2
34.3
35.1 2014E
2012
2006
2007
2008
2009
2010
2011
2013E
2015E
36.0
Source: Bureau of Statistics, World Bank, Standard Chartered Research estimates
Source: Tourism Australia, Standard Chartered Research
Visitors from China have surged 38% since 2010, whereas Japanese visitors have declined by 11%.
Japan and the UK have seen the biggest decline in outbound visitors to Australia, falling 11% and 8% respectively in 2010-12. This could be down to a number of factors including the strength of the Australian dollar, and the weak economies and ageing populations in Japan and the UK dampening appetite for long-distance travel. These figures suggest Jetstar Japan may face some headwinds in enticing Japanese passengers to exploit Jetstars pan -Asia Pacific network to visit Australia on higher-yielding long-haul trips. Australia already enjoys a high level of flight penetration and a competitive LCC segment. We expect domestic passenger growth to track GDP growth fairly closely, increasing at a steady but unspectacular CAGR of 3.4% in 2013-15. Australias high per capita income and increasing flight connectivity to the ASEAN region should be supportive of international passenger growth significantly outpacing domestic passenger growth and continuing to grow at 5.2% p.a. through 2015.
We forecast domestic and international air passenger traffic CAGRs of 3.4% and 5.2% in 2013-15
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Fig 38: Air passenger forecasts

Domestic pax, mn (LHS) Int'l YoY (RHS) 80.0 60.0 40.0 4% 20.0 0.0 2% 0% 2006-12 CAGR: Domestic 4.2% International 5.5% Int'l pax, mn (LHS) Domestic YoY (RHS) 10% 8% 6%
Fig 39: LCC and flight penetration vs. GDP per capita
Seats per population 7.00 3.93 4.10 4.18 6.00 5.00 4.00 1.60 1.63 1.79 1.84 0.89 1.13 1.25 1.35 3.00 2.00 1.00 0.00 2004 2005 2006 2007 2008 2009 2010 2011 2012 1.57 GDP per capita (RHS) LCC penetration (LHS) Flight penetration (LHS) 4.55 4.68 4.80 4.24 4.44 USD 5.09 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
2006
2007
2008
2009
2010
2011
2012
2013E
2014E
2015E
Source: DITRD, CEIC, Standard Chartered Research estimates
Source: IMF, CAPA, Standard Chartered Research estimates
Regulation
Australia operates one of the worlds most liberal air service regimes
The Australian government is publicly committed to encouraging moves beyond the bilateral
system toward plurilateral, regional and multilateral agreements regulating international air services.
Australia is one of the few countries in the world that allows 100% foreign ownership of
domestic airlines.
Competitive environment
Qantas and its LCC subsidiary Jetstar dominate the market, with over 60% of capacity The Australian aviation market is dominated by the Qantas Group. In 2001, Qantas introduced a clear market segmentation strategy, and has executed it well. It has expanded its market share via its LCC subsidiary Jetstar, to over 60% of the domestic market from 50% in the 90s. Jetstar and AirAsia are the only LCCs in the Asia-Pacific region to have experience operating crossborder JVs across Asia-Pacific as an avenue to grow beyond their home markets. The other half of Australias aviation duopoly is Virgin Australia. Previously LCC Virgin Blue, Virgin Australia rebranded itself as a full-service carrier in 2011 to compete with Qantas for lucrative premium business and government travellers. Fig 40: Domestic market share* (% of seats)
3% 4% 1% 1% Qantas Airways Virgin Australia 40% Jetstar Airways Tiger Airways Australia 7.3% Regional Express 29% Skywest Other 3.6% 4.9% 10.8% 7.4% 8.4% 32.2% 8.5% 16.9%
Fig 41: International market share* (% of seats)
Qantas Airways Virgin Australia Jetstar Airways Emirates Singapore Airlines Air New Zealand Cathay Pacific Malaysia Airlines Other
22%
*As of April 2013. Source: CAPA, Standard Chartered Research estimates
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In April 2013, Virgin Australia received regulatory approval for its acquisition of 60% of LCC Tiger Airways Australia from Singapores Tiger Airways, with the acquisition expected to be completed in 2013. It will give Virgin an LCC to compete with Qantas Jetstar in the budget segment. Although Tiger Australia will remain operationally independent of Virgin Australia, with its own Air Operator Certificate and management team and without code sharing, we think Tiger Australia should be able to leverage Virgins experience and resources in Australia to gain market share.
Supply and demand outlook

We forecast narrowbody fleet seat capacity to grow 6.2% in 2013 and 9.3% in 2014 We expect seat capacity in Australia to rise 4.8%/7.4% YoY in 2013/2014. Given the expected additional supply from Jetstar and Tiger Australia, seat capacity for narrow-body aircraft will increase faster, at 6.2% and 9.3%, respectively. We forecast 2013-15 domestic passenger and international passenger CAGRs of 3.4% and 5.2%, respectively. We base the domestic CAGR on 1.05x our in-house GDP growth estimates of 3.1% (2013), 3.3% (2014) and 3.3% (2015) for Australia. Fig 42: Supply and demand forecasts for Australia
2011 Supply by seats Narrow-body aircraft (No.) Wide-body aircraft (No.) Total seats (mn) Qantas Jetstar Virgin Australia Tiger Australia Regional Express Demand by passenger numbers (mn) Domestic International YoY Narrow-body aircraft Wide-body aircraft Supply by seats Qantas Jetstar Virgin Australia Tiger Australia Regional Express Demand by passengers Domestic International
2012 322 78 72,162 34,092 13,494 20,998 1,980 1,598 56.5 29.6 9.5% 5.4% 8.7% 3.9% 7.1% 19.6% 10.0% 0.0% 4.1% 5.2%
2013E 341 80 75,616 35,034 14,697 21,767 2,520 1,598 58.4 31.2 5.9% 2.6% 4.8% 2.8% 8.9% 3.7% 27.3% 0.0% 3.3% 5.2%
2014E 368 82 81,196 36,338 17,577 22,443 3,240 1,598 60.4 32.8 7.9% 2.5% 7.4% 3.7% 19.6% 3.1% 28.6% 0.0% 3.5% 5.2%
2015E 398 82 86,572 36,674 20,457 23,703 4,140 1,598 62.5 34.4 8.2% 0.0% 6.6% 0.9% 16.4% 5.6% 27.8% 0.0% 3.5% 5.2%
294 74 66,367 32,814 12,594 17,561 1,800 1,598 54.3 28.2 13.5% 10.4% 15.6% 14.3% 8.3% 28.6% 0.0% 0.0% 0.6% 5.1%
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Fig 43: Key airlines in Australia*

Airline Qantas Airways Business Model Fleet size/type Routes/ (destinations) Qantas Airways Intra-Australia (54) New Zealand (4) Other Oceania (2) Indonesia (1) Thailand (1) Hong Kong (1) Philippines (1) Singapore (1) China (1) Japan (1) Africa (1) Europe (1) Middle-East (1) Latin America (1) North America (5) Jetstar Airways Intra-Australia (18) New Zealand (5) Fiji (1) Indonesia (2) Singapore (1) Thailand (2) Philippines (1) China (1) Japan (2) Hawaii (1) Virgin Australia Intra-Australia (34) New Zealand (4) Other Oceania (9) Indonesia (1) Thailand (1) Middle East (1) North America (1) VARA Intra-Australia (15) Indonesia (1) Main hub Qantas Airways Sydney Kingsford-Smith International Airport Jetstar Airways Melbourne Tullamarine International Airport Listed on Australian Securities Exchange Qantas Airways (QAN AU) 9x A330-200 10x A330-300 Full-service carrier 12xA380-800 (8x on order) 8x B737-400 Flag-carrier of Australia 65x B737-800 (10x on order) 10x B747-400 Parent of wholly-owned subsidiary 6x B747-400ER Jetstar, a pan-Asia Pacific low-cost 21x B767-300ER carrier (2x DHC-8Q-402NG on order) Jetstar Airways Operates cross-border JVs in: 53x A320-200 (54x on order) Singapore (Jetstar Asia 49% owned) 6x A321-200 Vietnam (Jetstar Pacific 27% owned) 11x A330-200 Japan (Jetstar Japan 33.3% owned) (78x A320-200neo on order) (14x B787-8 on order)
Virgin Australia
Listed on Australian Securities Exchange Virgin Australia (VAH AU) 6x A330-200 4x B737-700 Full-service carrier with a relatively low- (23x B737-8 on order) cost base a legacy of its pre-2011 67x B737-800 (42x on order) incarnation as an LCC. 5x B777-300ER 6x ERJ 170-100IGW Acquired 100% of Skywest Airlines in 17x ERJ 190-100IGW April 2013, a regional carrier serving VARA Western Australia, rebranding it as 6x ATR 72-500 Virgin Australia Regional Airlines (VARA). 5x ATR 72-600 (5x on order) 2xA320-200 8x F-27-050 10x F-28-0100 Low-cost carrier 60% owned by Virgin Australia, with the remaining 40% retained by Singapores Tiger Airways Holdings. Identical product to the rest of Tiger group offerings 11x A320-200
Virgin Australia Brisbane International Airport VARA Perth Airport International Airport
Tiger Airways Australia
Intra-Australia (12)
Melbourne Tullamarine International Airport
Regional Express
Regional carrier flying turboprops to towns across South-eastern Australia
47x SAAB 240B/PLUS
Intra-Australia (35)
Sydney Kingsford-Smith International Airport
*As of May 2013. Source: Company information, CAPA, Standard Chartered Research, April 2013
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Hong Kong
Fig 44: Profile of the Hong Kong market
2012 Population Area GDP per capita Tourist arrivals International air passengers LCC penetration rate (international)
Source: IMF, CIA World Factbook, Hong Kong Tourism Board, CAPA, Standard Chartered Research
7.2mn 1,054 sq km USD 36,667 48.6mn 27.8mn 5.2%
Market potential
Almost three quarters of visitors to Hong Kong, and 33% of visitors arriving by air, are Chinese In 2006-12, visitor arrivals to Hong Kong increased at a CAGR of 12%, driven by the increasing affluence of neighbouring China and growing number of Chinese eligible to travel to Hong Kong. Visitors from mainland China now compose 72% of visitors to Hong Kong. We forecast a 2013-15 visitor arrivals CAGR of 11%, allowing for slightly slower growth in arrivals from China. Visitors arriving by air constituted just 25% of total visitors in 2012, with China the largest source such arrivals, at 33%. Of the remainder, 22% are from Japan, Taiwan and Korea, with visitors from the four ASEAN nations within a four-hour flying distance of Hong Kong constituting a further 14%. This suggests significant potential for short-haul leisure travel at the right price-point. Fig 45: International tourism market Inbound
80.0 70.0 60.0 50.0 40.0 30.0 20.0 15.5 18.2 20.3 20.4 27.3 33.2 38.2 43.4 48.4 53.2 10.0 0.0 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 10.0 0.0 Receipts (USD bn, RHS) 67.6 Arrivals (mn, LHS) 61.6 2006-12 CAGR: 55.2 Arrivals 11.5% 48.6 Receipts 16.2% 41.9 36.0 28.2 29.5 29.6 25.3 60.0 2% 50.0 40.0 30.0 20.0 2% 2% 3% 3% 3% 4% 4% 4% 5% Total visitors by air: 11,559,293 6% 6% 11% 12% 33%
Fig 46: Visitors by air: Country of origin, 2012

China Taiwan Japan USA South Korea Philippines Singapore Australia United Kingdom Malaysia Thailand Indonesia India Canada Others
Source: Hong Kong Tourism Board, CEIC, Standard Chartered Research
Source: Hong Kong Tourism Board, CEIC, Standard Chartered Research
Regulation
Hong Kong is generally open to granting reciprocal freedoms of the air
Only five passenger airlines have Air Operator Certificates (AOCs) in Hong Kong, with three
granted in the last decade. There are no restrictions on ownership but restrictions on the allocation of AOCs effectively achieve the same result; only airlines partnered with airlines from mainland China have been granted AOCs.
The government has implemented a policy of incremental liberalisation of air service since the
opening of HKIA in 1998 via bilateral ASAs. Hong Kong has signed 57 ASAs with other countries, compared to Singapores 90 (though this metric a lone is not a comprehensive measure of openness). It is worth noting that Hong Kong might be limited by other countries refusal to open their domestic territories to competition with the likes of Cathay Pacific, therefore preventing more open-sky ASAs from being signed. For Hong Kong, these restrictions extend to cargo.
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Hong Kongs LCC penetration is the second lowest in Asia at 6% Hong Kong has the second lowest rate of LCC penetration in Asia (6% in 2012), trailing only Taiwan (at 5%), according to CAPA. Flag carrier Cathay Pacific (which includes Dragon Air), controls 50% of seat capacity at HKIA. However, competition from LCCs is rising: Jetstar Hong Kong has secured an AOC and plans to launch in 2H13; in April 2013, Hong Kong Express Airways announced its intention to transform into an LCC later in the year, and Chinese LCC Spring is planning an expansion with four new routes from mainland destinations (Chongqing, Hangzhou, Nanjing and Xiamen). Jetstar Hong Kong, 50% owned by China Eastern Airlines (670 HK, IL, PT HK 3.50), will be able to access to China, while connecting to its affiliates in North Asia (Jetstar Japan) and Southeast Asia (Vietnams Jetstar Pacific and Singapores Jetstar Asia Airways). Such connectivity will be vital for Jetstar to compete with the pan-Asian network of the AirAsia group. Fig 48: which is just 5.4% of the total*
5.4% LCCs Cathay Pacific Dragonair 2.0% 24.0% 33.2% 2.3% 2.6% 2.6% 4.7% 7.4% 15.8% Hong Kong Airlines China Airlines Thai Airways China Eastern Airlines Singapore Airlines Air China Other - FSC
The Cathay Pacific group dominates, controlling 50% of capacity
Fig 47: LCC capacity share at HKIA (seats per week)*...
AirAsia Group** 3.3% 12.1% 35.8% Cebu Pacifc Tiger Airways Group*** Jetstar 6.5% Spring 14.8% 18.4% Others Jeju Air
9.1%
*April 2013. **Air Asia Group includes: AirAsia (22%), Thai AirAsia (9%), AirAsia Philippines (5%). ***Tiger Airways Group includes: Tiger Airways (9%), SEAir/Tiger Philippines (6%). Source: CAPA, Standard Chartered Research estimates
*Seats per week at HKIA; April 2013. Source: CAPA, Standard Chartered Research estimates
These developments will increase pressure on Cathay in the long run; however, we think LCCs impact on Cathy in the short to medium term should be limited for the following reasons:
High cost of operations in Hong Kong: New entrants and LCCs find it difficult to achieve
We expect LCCs role in Hong Kong to increase in the long run, but impact will be minimal in the shortto medium-term
cost leadership over incumbent carriers such as Cathay given premium airport charges, expensive ground operations, and high labour and distribution costs in Hong Kong. This implies that a Hong Kong-based LCC requires a stronger balance sheet to survive as the losses incurred might be larger and last longer than originally planned.
Airport capacity constraints: Tight capacity has constrained growth opportunities for LCCs.
Similar capacity constraints at first- and second-tier Chinese airports also prevent LCCs from flying popular routes to China. LCCs can only obtain slots at off-peak times.
Strong competition: Hong Kong is one of the most important air hubs in Asia and most
international airlines and major Asian LCCs have access to Hong Kong. A Hong Kong-based LCC would not have significant cost advantages and differentiation from these regional LCCs, which already serve routes between Hong Kong and other key regional cities.
Cathays focus on business and strong connectivity to China: Cathay generates most of
its profitability from premium class and long-haul business and is well positioned in this segment. Its global network is well connected via Dragonair to over 20 Chinese cities, transporting business travelers to and from these cities; Cathay enjoys competitive advantages and benefits from the rise in travel demand from China. This has helped it maintain its leading position in Hong Kong and Asia and defend market share against competitors.
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We expect seat capacity in Hong Kong to rise 8.2%/5.5% YoY in 2013/2014. We expect Cathay Pacific to add wide-bodied aircraft to increase frequencies on lucrative long-haul routes, while Dragon Air will retire some of its older aircraft and Hong Kong Airlines and Hong Kong Express will expand their short-haul offerings. We have not included Jetstar Hong Kong since it has yet to gain all necessary regulatory approvals to begin operations. We forecast a 2013-15 passenger traffic CAGR of 7.4%. Fig 49: Supply and demand forecasts for Hong Kong
2011 Supply by seats Narrow-body aircraft (No.) Wide-body aircraft (No.) Total seats (mn) Cathay Pacific Dragon Air Hong Kong Airlines/Express Demand by passenger numbers (mn) International YoY Narrow-body aircraft Wide-body aircraft Supply by seats Cathay Pacific Dragon Air Hong Kong Airlines / Express Demand by passengers International
2012 32 138 47,091 35,087 8,546 3,458 27.8 14.3% 5.3% 5.2% 3.2% 0.0% 57.8% 5.5%
2013E 33 152 50,959 39,225 7,302 4,432 29.9 3.1% 10.1% 8.2% 11.8% -14.6% 28.2% 7.4%
2014E 33 161 53,780 42,925 6,423 4,432 32.1 0.0% 5.9% 5.5% 9.4% -12.0% 0.0% 7.4%
2015E 29 164 54,106 44,195 5,479 4,432 34.4 -12.1% 1.9% 0.6% 3.0% -14.7% 0.0% 7.4%
28 131 44,748 34,010 8,546 2,192 26.4 0.0% 4.0% 2.7% 4.0% -3.5% 8.6% 6.0%
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Fig 50: Key airlines in Hong Kong

Airline Cathay Pacific Business Model Listed on Hong Kong Stock Exchange (293 HK) Full-service carrier Hong Kong flag carrier Parent of wholly-owned subsidiary Dragonair, a full-service regional carrier 45% owned by Swire Pacific (19 HK) Fleet size/type Cathay Pacific 15x B747-400 31x B777-300ER (19x on order) 12x B777-300 5x B777-200 15x A330-300 12x A330-300E (11x on order) 11x A330-300X 11x A340-300X (20x A350-900 on order) (26x A350-1000 on order) Dragonair 15x A320-200 6x A321-200 8x A330-300 9x A330-300X Routes/ (destinations) Cathay Pacific China (2) Taiwan (1) Japan (5) Korea (1) Indonesia (2) Malaysia (2) Philippines (2) Singapore (1) Thailand (1) Vietnam (1) India (4) Pakistan (1) Sri Lanka (1) Middle East & Africa (6) Europe (7) Australia (6) New Zealand (1) North America (6) Dragonair China (20) Taiwan (3) Japan (2) Korea (2) ASEAN (9) South Asia (4) China (17) Taiwan (1) Japan (1) Korea (1) Thailand (2) Indonesia (1) Malaysia (1) Vietnam (1) China (5) Main hub Hong Kong International Airport
Hong Kong Regional full-service carrier Airlines
10x A320-200 (16x on order) 6x A330-200 45% owned by China-based Hainan 3 x A330-300 (3x on order) Airlines, remainder owned by Mr Mung 1x A330-300E Kin Keung (15x A350-900XWB on order) (10x A380-800 on order)
Hong Kong International Airport
Hong Kong Effectively identical product offering to 2x B787-800 Express Hong Kong Airlines, but currently planning to transform itself into an LCC in 2H13 Same management as Hong Kong Airlines, with different AOC 45% owned by China-based Hainan Airlines Jetstar LCC, aiming to launch in 4Q13 Hong Kong Member of Qantas Jetstar Group Identical product to the rest of Jetstar group offerings JV between China Eastern Airlines (50%) and Qantas (50%).
As of May 2013. Source: Company information, CAPA, Standard Chartered Research
3x A320-200 (18x by end-2015)
China Japan Korea Southeast Asia
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India
Fig 51: Profile of the Indian market
2012 Population Area GDP per capita Tourist arrivals Domestic air passengers International air passengers LCC % of domestic seats LCC % of international seats
Source: IMF, CIA World Factbook, Bureau of Immigration - Government of India, CAPA, Standard Chartered Research
1.2bn 2,973,193 sq km USD 1,492 6.6mn 57.8mn 11.7mn 66% 16%
Market potential
Indias diverse geography, rich history, and wealth of World Heritage sites including the worldfamous Taj Mahal, make it one of the worlds most well -known, if not most visited, tourist destinations. Though it enjoys a degree of cost competitiveness and adequate infrastructure given its level of economic development, India suffers from relatively low levels of ATM and hotel room penetration, which diminish its desirability as a tourist destination. Fig 52: International tourism market Inbound
12.0 10.0 8.0 6.0 4.0 Receipts (USD bn, RHS) Arrivals (mn, LHS) 2006-12 CAGR: 8.0 Arrivals 6.9% 7.3 6.6 Receipts 12.7% 6.3 5.8 5.1 5.3 5.2 4.4 8.8 30.0 25.0 20.0 15.0 10.0 7.3% 33.5% 12.7% 15.5%
Fig 53: Inbound tourists by country, 2011*

USA UK Bangladesh Sri Lanka Canada Germany France Malaysia Japan Australia C.I.S China Others
10.7
11.8
11.1
14.2
16.6
17.7
19.2
20.7
8.6
2.0 0.0
22.3
5.0 0.0 2.3% 2.8% 3.1% 3.1% 3.3% 3.7% 3.8% 4.8% 4.1%
2007
2006
2008
2009
2010
2011
2012
2013E
2014E
Source: Ministry of Tourism, WTTC, Standard Chartered Research
2015E
*Most recent data available Source: CEIC, Standard Chartered Research
We forecast a 201216 visitor CAGR of 10%
The World Travel and Tourism Council projects Indias tourist arrivals to grow at a 2013-15 CAGR of 7.7%, while Indias Ministry of Tourism has set the more ambitious target of drawing 11.24mn visitors by 2016, implying a CAGR of 12.3%. We forecast annual visitor growth of 10% for our investment horizon, taking the mean of the two projections and given the likelihood that it will see increasing numbers of Chinese and Southeast Asian visitors supplementing its American and Western European tourists as the regions middle class grows. We expect receipts to grow at a slightly more moderate 2013-15 CAGR of 8% as Asian travellers tend to be more frugal and cost-conscious than Western travellers. As positive as the signs are for inbound international tourism however, the domestic aviation market is where the greatest promise lies, in our view. India is the second most populous country in the world and is expected to overtake China by 2030 according to UN projections. Its demographic profile is better too, as the average age in India will be just 31 in 2030 (compared to 41 in China and 52 in Japan). At just 0.11 passenger seats per capita in 2012, it has one of the lowest rates of air travel penetration in the world. Admittedly, some of this can be explained by poverty; at an estimated USD 1,592 in 2012, per capita GDP is among the worlds lowest. But Vietnam, with comparable per capita GDP (USD 1,523), has air travel penetration more than three times as high at 0.38 passenger seats per capita. We forecast 2013-15 CAGRs of 14.4%/12.3% for domestic/international passengers, assuming GDP growth of 6-7% a year over the same period.
India has enormous potential for LCCs
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Fig 54: Air passenger growth

100 80 60 Domestic pax (LHS) Int'l pax (RHS) Int'l pax YoY (RHS) Domestic pax YoY (RHS) 60%
0.20 Seats per population 0.09 GDP per capita (RHS) LCC penetration (LHS) USD Flight penetration (LHS) 0.12 0.11 0.06 2012 60 0.10 0.10 0.11 2,000
40%
0.15 0.07
1,500
0.06
20% 40 20 0 0%
0.10
1,000
-20%
0.00 2005 2006 2007 2008 2009 2010 2011
0.00
0.05
0.01
0.03
0.04
0.04
0.04
0.05
500
2010
2006
2007
2008
2009
2011
2012
2013E
2014E
Source: IATA, Directorate General of Civil Aviation (DGCA) of India, Standard Chartered Research
2015E
Six of Indias seven most populous cities have spare capacity, but secondary airports need investment
We think there are two downside risks that could hinder the rapid development of Indias domestic aviation sector. The first is infrastructure: Mumbai airport was designed with a capacity of 30mn passengers a year, a threshold surpassed in 2011. Bangalore was built with a capacity of 9.8mn passengers a year; in 2011, it handled 12.5mn. The Airport Authority of India must stay ahead of the development curve to handle the rising tide of Indias middle -classes who will be able to afford air travel and eager to fly in the coming decade. To its credit, with the opening of new terminals at Kolkata and Chennai and the initial-phase opening of T2 at Mumbai in the coming 12 months, six of Indias seven most populous cities will have airport capacity that exceeds demand, but Indias secondary airports are in urgent need of investment and expansion if growth is to be supported. Fig 56: Airport capacity at Indias seven largest cities
Delhi Mumbai Bangalore Hyderabad Ahmedabad Chennai Kolkata Others combined 0 10 20 30 40 50 Estimated capacity (mn) Pax traffic, 2011 (mn)
*Mumbai includes T2 extension in 2013E. Source: Airport Authority of India, CAPA, Standard Chartered Research
The second major downside risk is regulation.
Regulation
Regulatory regime one of the worlds most protectionist, interventionist and extractive
The government has only allowed foreign airlines to invest in the aviation sector since
September 2012, and still imposes a 49% limit on ownership.

Aviation fuel is heavily taxed, hugely inflating Indian carriers largest operating cost. There is a
refinery transfer price to buy the fuel, the refiner then receives an import parity supplement, and the oil marketing companies then add another layer of costs known as the marking add on. Finally, the Indian Government applies levies and local states then apply a state sales tax. Indian states set their own sales tax rates, which range between 4-30% and average 22-26%.
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India has a long history of protectionist and economically self-defeating policies. Most of its
bilateral ASAs are restrictive in nature, with many having limits on capacity, designated airports and even approved airlines and pricing. Only the US enjoys an open skies agreement with India, though India significantly liberalised its ASA with the UK in 2004.
Domestic market fragmented and beset by policy-related challenges The Indian aviation market is a very challenging environment, beset by structural challenges that must be addressed by policy makers. These include: an inflated cost base far in excess of global peers, prohibitive borrowing costs, a severe imbalance between supply and demand for aircraft, destructive price wars resulting in pricing-below-cost, and high levels of leverage. Many of these factors are inter-related, and all can trace their roots to government policy. High international fuel prices have been aggravated by national and state taxes, and airport charges are expensive. India also has one of the highest borrowing costs globally (our house research forecasts a Reserve Bank of India policy rate of 7.75 for FY14), and since investors demand a heavy risk premium, the real cost of capital is much higher. Fleet expansion by finance or operating leases thus becomes prohibitively expensive, resulting in capacity deficiencies and acute gearing ratios as operators are strangled by debt servicing. The governments ongoing subsidy of Air India props up a lossmaking, inefficient aviation industry The government has compounded these problems by continuing to subsidise and bailout the flag carrier, enabling Air India to continue to price below cost, resulting in a spiral of destructive price wars. Regulations prohibiting investment by foreign airlines kept out international expertise until September 2012, and remaining issues continue to deter foreign investment. The Indian authorities handling of Kingfishers October 2012 grounding added to its reputation for bureaucracy and political impasse. By resisting attempts by lessors and financiers to repossess the aircraft they had leased to Kingfisher, authorities further raised the industrys risk premium, effectively freezing capacity growth for the time being. Fig 58: International market share (% of passengers)*
Air India Air India 18.6% 21.4% 16.8% Jet Airways JetLite IndiGo SpiceJet GoAir 28.6% 6.4% AirIndia Express 3.2%
Fig 57: Domestic market share (% of passengers)*

1.0% 7.3%
12.6% 11.2% 10.3%
Jet Airways Emirates Air India Express Qatar Airways Air Arabia IndiGo 5.4% 3.9% Singapore Airlines Other
46.5%
3.3%
3.6%
Should the government address even a couple of these issues, for example by letting market forces dictate Air Indias fate and reducing taxes and airport charges to levels more commensurate with international standards, the potential upside to Indian consumers and investors could be enormous. Barriers to foreign investment have already been removed, and other proposed reforms are not radical. If an established regional LCC with a proven track record for setting up foreign JVs decided to enter the market, it would likely enjoy far more favourable borrowing costs than its Indian competitors, and likely be able to acquire assets at enticing prices from any of several stressed airlines in the Indian market.
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Fig 59: Key airlines in India

Airline Business model Fleet size/type Jet Airways 10x A330-200 (5x on order) 4x A330-300 14x ATR 72-500 7x B737-700 46x B737-800 (36x on order) 2x B737-900 2x B737-900ER 5x B777-300ER (10x B787-8 on order) JetKonnect 1 ATR 72-600 Routes/ (destinations) Jet Airways Intra-India (51) Hong Kong (1) Thailand (1) Singapore (1) Nepal (1) Bangladesh (1) Sri Lanka (1) Middle East (10) Europe (2) North America (2) JetKonnect Intra-India (49) Air India Intra-India (55) Other South Asia (4) Middle East (13) ASEAN (3) Northeast Asia (5) North America (4) Europe (3) Australia (1) Air India Express Intra-India (12) Other Asia (3) Middle East (10) Intra-India (28) Nepal (1) Thailand (1) Singapore (1) Middle-East (2) Intra-India (45) Afghanistan (1) Nepal (1) Maldives (1) Sri Lanka (1) Middle East (2) Intra-India (22) Main hub Jet Airways Mumbai Chhatrapati Shivaji International Airport JetKonnect Mumbai Chhatrapati Shivaji International Airport Jet Airways Listed on the Bombay Stock Exchange (JET IN, NR) Full-service carrier Parent of wholly-owned subsidiary JetKonnect, a domestic low-cost carrier
Air India
Air India 6x B787-8 (21x on order) Flag carrier of India 8x B777-200LR 12x B7770399ER (3x on order) Parent of wholly-owned subsidiary 5x B747-400 Air India Express, an LCC 2x A330-200 20x A321-200 Part of the Indian government-owned 18x A320-200 Air India Limited; repeatedly 24x A319-100 subsidised and bailed out of financial 4x CRJ-700 trouble 7x ATR42 Air India Express 21x B737-800 Full-service carrier Regional LCC Privately owned by InterGlobe Enterprises Employs hub-and-spoke model 66x A320-200 (32x on order) (150x A320neo on order) (20x A321-200 on order)
Air India Mumbai Chhatrapati Shivaji International Airport Air India Express Kozhikode Calicut Airport
IndiGo
Delhi Indira Gandhi International Airport
SpiceJet
Listed on the Bombay Stock Exchange (SJET IN, NR) Short-haul LCC
33x B737-800 (28x on order) 6x B737-900ER 15x DHC8 Q400
Delhi Indira Gandhi International Airport
GoAir
Domestic LCC Privately owned by Wadia Group
15x A320-200 (5x on order) (72x A320neo on order)
Delhi Indira Gandhi International Airport Bengaluru (Bangalore) Chhatrapati Shivaji (Mumbai) Indira Gandhi (Delhi) Chennai International Airport
Kingfisher Listed on the Bombay Stock Exchange (KAIR IN) Full-service carrier Plagued by financial difficulty and crises, it is currently grounded AirAsia India JV between AirAsia group (49%), Tata Sons (30%) and Amit Bhatia (21%), to begin operations in 2H13 Low-cost, short-haul carrier Identical product to the rest of AirAsia group offerings
1x A319-133 2x A320-232 3x ATR72-500 1x B727-044 All others repossessed by lessors
None - grounded
3x A320-200
Intra-India
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Indonesia
Fig 60: Profile of the Indonesian market
2012 Population Area GDP per capita Tourist arrivals Domestic air passengers International air passengers LCC penetration rate (domestic) LCC penetration rate (international)
Source: IMF, CIA World Factbook, Ministry of Tourism and Creative Economy, CAPA, Standard Chartered Research
244.5mn 1,811,569 sq km USD 3,592 8.0mn 76.5mn 21.1mn 52.1% 41.5%
Market potential
Despite Denpasar (Bali) being one of the worlds most renowned tourist destinations, accounting for 36% of tourist arrivals to Indonesia in 2011 and 13% of the countrys entire hotel capacity, Indonesia has attracted relatively modest numbers of tourists relative to its size and population. Indonesias poor international connectivity limits its tourism market This is probably largely due to infrastructure constraints. Indonesias international flight connectivity lags many of its ASEAN peers due to its slow adoption of air service liberalisation (29 international destinations from Soekarno-Hatta International Airport compared to 93 from KLIA), while the countrys protected domestic carriers have some of the worst safety records in the world. Indonesias major ports and airports are already operating beyond capacity, and roads and other land infrastructure are underdeveloped. Fig 62: Inbound tourists by country of origin, 2011*
12.0 Singapore 10.0 8.0 6.0 4.0 10.5 11.4 2.9% 2.9% 4.0% 5.4% 7.5% 12.2% 13.7% 17.0% 14.7% 19.7% Malaysia Europe Australia China Japan Korea Republic Philippines Taiwan Other
*Most recent available Source: CEIC, Statistics Indonesia, Standard Chartered Research

12.0 10.0 8.0 6.0 4.0 Receipts, USD bn (RHS) Arrivals, mn (LHS) 10.2 9.4 2006-12 CAGR: 8.7 Arrivals : 8.7% 7.6 8.0 Receipts: 12.7% 7.0 6.2 6.3 5.5 4.9
6.3
4.4
5.3
7.3
7.6
8.6
9.1
0.0 2013E 2014E 2015E
9.7
2.0
2.0 0.0
2009
2006
2007
2008
2010
2011
Source: Statistics Indonesia, Standard Chartered Research
Indonesias domestic air traffic grew at a 16.7% CAGR in 2009-12
Better air connectivity with the rest of Asia and the world as Indonesias aviation sector liberalises is obviously an attractive prospect. However, we see an even greater opportunity in Indonesian aviation its domestic market. Indonesia is the fourth most populous country in the world, it is a far-flung archipelago of over 17,000 islands spread across more than 5,000km, and its people are young and growing more prosperous. In 2009-12, the number of domestic air passengers increased at a CAGR of 16.7% (to 76.5mn). The Indonesia National Air Carriers Association expects c.10mn more domestic air passengers a year in 2013-15. Infrastructure constraints could still dampen Indonesias potential aviation growth. According to data from government airport operators Angkasa Pura I and Angkasa Pura II, 16 of Indonesias 20 largest airports are currently operating above design capacity, with Jakarta being by far the most congested: more than 70% of all passengers fly into or out of the capital. Although there are plans to upgrade Terminal 2 and 3 and build a new Terminal 4 from 2013 to accommodate 75mn passengers by end-2015, the plans could be delayed. Acquiring new airport slots or improving links to secondary airports is critical for airlines to further expand market share. 37
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Fig 63: Domestic air passenger traffic growth

140 120 100 80 60 40 20 0 2013E 2014E 2015E 2006 2007 2008 2009 2010 2011 2012 48.1 40.2 43.0 42.1 57.6 2006-12 pax CAGR: 11.3% 2012-15E pax CAGR: 17.8% 66.4 89.8 76.5 Domestic pax, mn (LHS) Trip per population (RHS) 125.0 106.1 0.70 0.60 0.50
0.60 0.50 0.40 0.21 0.25 0.17 0.30 0.20 0.10 0.00 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Seats per population GDP per capita (RHS) LCC penetration (LHS) Flight penetration (LHS) 0.28 0.36 USD 0.41 0.45 0.22 0.06 0.05 4,000 3,500 3,000 2,500 2,000 1,500 0.00 0.01 0.02 0.02 0.03 0.04 1,000 500 0
0.27
0.27
0.30 0.20 0.10 0.00 -0.10
Source: Statistics Indonesia, Standard Chartered Research estimates
Source: CAPA, IMF, Standard Chartered Research
Regulation
Indonesias protectionism is the major impediment to adoption of ASEANs multilateral ASAs
Indonesia is prone to bouts of populist protectionism. It has asked for delayed implementation
of open skies in ASEAN, been slow to adopt agreed steps on the roadmap towards liberalisation, and in an April 2010 Ministry of Transport press release committed to protecting national carriers even after the open skies policy is implemented. The country still limits third, fourth and fifth freedoms to other ASEAN countries and only trades routes through carefully negotiated bilateral ASAs.
In 2001, the Ministry of Transportation loosened the rules for starting airlines by removing
restrictions on fleet size and the age and type of aircraft for start ups. The number of operating licences issued sharply increased as a result.
Foreign ownership of airlines is capped at 49%.
Domestic market is fiercely competitive, but Lion Air is dominant, with close to 50% of capacity In 2007-09, the EU banned all Indonesian carriers from entering the region after Garuda suffered several fatal accidents. Lion Air took advantage of Garudas weak reputation and gained significant market share with its low-cost business model. After the EU ban was lifted in 2009, Garuda began an aggressive revitalisation plan, including a total image overhaul, replacing its fleet and expanding its routes. It has made a remarkable recovery (winning the CAPA Airline Turnaround of the Year award in 2010), and is aggressively competing with Lion Air over lost market share. Only IAA and Tiger Mandala operate a true low-cost business model; most others have opted for various hybrids offering some frills, business class seating, and relatively low fares. This has served Lion Air well enough in our view, but Sriwijaya risks being stuck in the middle without a clear identity or value proposition, and Batavia went bankrupt in January 2013. Competition in the domestic market is fierce: Garuda and its low-cost subsidiary Citilink seek to compete with Lion Air while IAA and Tiger Mandala are attempting to establish themselves. We see higher growth potential for LCCs in international air travel where the penetration rate is lower. IAA already has a strong market share, but will compete with Lion Air, which has ambitions of expanding across Asia.
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0.25
0.40
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3.5% 6.8% 20.4% 4.6% 11.1% 45.1% 1.0% Garuda Indonesia AirAsia
Fig 66: International market share (% of seats)*

Garuda Indonesia AirAsia 15.6% AirAsia Lion Air 16.4% Singapore Airlines Malaysia Airlines
7.4%
Sriwijaya Air Lion Air Citilink Wings Air Merpati Nusantara Airlines Tiger Mandala 3.2% 3.3% 7.3% 5.1% 5.4% 8.6% 34.9%
Cathay Pacific China Airlines Other
*As of April 2013 Source: Airline Leader, CAPA, Standard Chartered Research estimates.
*As of April 2013. Source: Airline Leader, CAPA, Standard Chartered Research estimates

Forecast 2012-15 domestic/international passenger traffic CAGRs of 17.8%/13.4% We expect seat capacity in Indonesia to rise 10%/14% YoY in 2013/2014. While Batavia went bankrupt in January 2013 and Merpati Nusantara is going through a debt restructuring, our supply growth estimate, which we base on other carriers aircraft delivery p lans, is obviously low. We believe actual ASK expansion is likely to be higher, as we think the surviving carriers will turn around their aircraft faster to capture more market share. We forecast domestic/international passenger CAGRs of 17.8%/13.4% in 2013-15. Fig 67: Supply and demand forecasts for Indonesia
2011 Supply by seats Narrow-body aircraft (No.) Wide-body aircraft (No.) Total seats (mn) Garuda Group Lion Air Indonesia AirAsia Sriwijaya Air Tiger Mandala Merpati Nusantara Batavia Air Demand by passenger numbers (mn) Domestic International YoY Narrow-body aircraft Wide-body aircraft Supply by seats Garuda Group Lion Air Indonesia AirAsia Sriwijaya Air Tiger Mandala Merpati Nusantara Batavia Air Demand by passengers Domestic International
2012 311 19 56,277 17,588 21,948 1,260 6,087 1,260 1,639 6,495 76.5 21.1 20.1% 5.6% 17.8% 17.9% 32.2% -58.8% 33.4% 250.0% 0.9% -2.1% 15.2% 8.9%
2013E 348 20 61,799 20,967 25,150 5,400 6,843 1,800 1,639 89.8 23.9 11.9% 5.3% 9.8% 19.2% 14.6% 328.6% 12.4% 42.9% 0.0% -100.0% 17.3% 13.4%
2014E 396 26 70,559 26,471 27,129 7,020 7,599 2,340 106.1 27.2 13.8% 30.0% 14.2% 26.3% 7.9% 30.0% 11.0% 30.0% -100.0% 18.1% 13.4%
2015E 417 35 74,370 31,303 23,732 8,640 8,355 2,340 125.0 30.8 5.3% 34.6% 5.4% 18.3% -12.5% 23.1% 9.9% 0.0% 17.9% 13.4%
259 18 47,763 14,912 16,608 3,060 4,563 360 1,625 6,635 66.4 19.4 7.5% 12.5% 9.8% 3.2% 23.4% -5.6% 16.5% -10.5% 0.3% 15.3% 11.0%
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Fig 68: Key airlines in Indonesia

Airline Indonesia AirAsia Business Model JV between Fersindo Nusaperkasa, an Indonesian investment company (51%) and AirAsia group (49%) Low-cost, short-haul carrier Identical product to the rest of AirAsia group offerings Lion Air Lion Air 67x B737-900ER (108x on order) 2x B737-300 Low-cost, short-haul carrier 7x B737-400 15x B737-800 (11x on order) Parent of wholly-owned subsidiary 67x B737-900ER (111x on order) Wings Air, a regional shuttle-carrier 2x B747-400 (5x B787-8 on order) Parent of wholly-owned subsidiary 1x DC-9-82 Batik Air, a full-service carrier (201x B737-9MAX on order) (60x/109x A320-200/neo on order) (65x A321-200 on order) Wings Air 20x ATR 72-500 2x ATR 72-600 (38x on order) 2x DHC-8-301 4x DC-9-82 1x DC-9-83 Batik 3x B737-900ER Largest privately-owned airline in Asia by ASKs Listed on Indonesia Stock Exchange Garuda (GIAA IJ, NR) 10x A330-200 (1x on order) 6x A330-300 (18x on order) Full-service carrier 3x B737-300 4x B737-500 Flag-carrier of Indonesia 56x B737-800 (4x on order) 2x B747-400 Parent of wholly-owned subsidiary 1x B777-300ER (10x on order) Citilink, a low-cost regional carrier 8x CRJ1000 (10x on order) Citilink 6x B737-300 1x B737-400 20x A320-200 (25x A320-200neo on order) Medium-service regional hybrid carrier (relatively low fares, all economy, some frills) 13x B737-200 12x B737-300 7x B737-400 11x B737-500 4x B737-800 1x B737-200 7x B737-300 3x B737-400 1x B737-500 7x CASA212-200 6x DHC-6-300 3x F-28-0100 3x CN-235-10 13x Y7-MA60 7x A320-200 Fleet size/type 22x A320-200 Routes/ (destinations) Intra-Indonesia (11) Australia (1) Malaysia (3) Thailand (2) Singapore (1) Vietnam (1) Main hub Jakarta Soekarno-Hatta International Airport
Lion Air Intra-Indonesia (40) Malaysia (2) Singapore (1) Vietnam (1) Wings Air Intra-Indonesia (53) Other ASEAN (2) Batik Air Intra-Indonesia (8)
Lion Air Jakarta Soekarno-Hatta International Airport Wings Air Surabaya Juanda Airport Batik Air Manado Sam Ratulangi Airport
Garuda
Garuda Intra-Indonesia (36) China (4, including HK) Japan (3) South Korea (1) Taiwan (1) ASEAN (3) Middle-East (2) Australia (3) Europe (1) Citilink Intra-Indonesia (15)
Garuda Jakarta Soekarno-Hatta International Airport Citilink Surabaya Juanda Airport
Sriwijaya Air
Intra-Indonesia (38) Malaysia (1) Singapore (1)
Jakarta Soekarno-Hatta International Airport
Merpati Majority-owned by the Indonesian Nusantara government. Airlines Regional shuttle carrier Heavily indebted. Government reportedly considering winding it down. Tiger Mandala Low-cost carrier 33% owned by Singapores Tiger Airways, identical product to the rest of Tiger group offerings
As of May 2013. Source: Companies, CAPA, Standard Chartered Research
Intra-Indonesia (28) Malaysia (1) Timor-Leste (1)
Sultan Hasanuddin International Airport
Intra-Indonesia (7) Malaysia (1) Singapore (1) Thailand (1)
Jakarta Soekarno-Hatta International Airport
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Japan
Fig 69: Profile of the Japanese market
Source: IMF, CIA World Factbook, Japan National Tourism Organisation, CAPA, Standard Chartered Research
127.6mn 364,485 sq km USD 46,736 8.4mn 84.9mn 14.0mn 20.3% 4.4%
Market potential
Japan has the thirdlargest domestic aviation market in the world Japans domestic aviation market is the third largest in the world (after the US and China) with just under 100mn passengers in 2012, but we expect it to fall behind Indonesia, India and Brazil in our forecast horizon. Domestic passenger numbers have declined 20% since peaking in 2007, though we expect LCC demand to arrest and reverse this trend in spite of Japans de teriorating demographic profile. Japan attracted just 6.2mn visitors in 2011, but this was an outlier as a result of the March 2011 Thoku earthquake and nuclear disasters, which depressed tourism for months afterwards. In 2012, visitor numbers rebounded to the pre-2011 level, but were affected by the Sino-Japanese tensions in the last four months of the year. We forecast modest visitor growth (5% CAGR in 2013-15), reaching 9.7mn visitors in 2015 as a weakening yen compensates for the lost demand from China. Fig 71: Inbound tourists by country, 2012
South Korea 20 18 16 14 12 10 8 6 4 2 0 Taiwan 2% 2% 2% 2% 3% 6% 17% 9% 17% 16% 24% China USA Hong Kong Thailand Australia United Kingdom Singapore Canada Others
Source: Japan National Tourist Organization, CEIC, Standard Chartered Research Source: Japan National Tourist Organization, Standard Chartered Research
We forecast a 201315 visitor growth CAGR of 5.0%, driven by LCC growth and yen weakness

Receipts (USD bn, RHS) 12 10 8 6 4 11.5 12.4 13.8 12.5 15.4 10.0 15.0 16.5 17.8 2014E 18.9 2015E 2 0 2013E 2006 2007 2008 2009 2010 2011 2012 2006-2012 CAGR: Arrivals 2.2%; Receipts 4.5% 8.6 8.4 8.3 8.4 7.3 6.8 6.2 Arrivals (mn, LHS) 9.2 9.7
8.8
We forecast 2012-15 domestic/international passenger CAGRs of 7%/10%
By 2011, just 42% of the population was of working age, supporting 21% of dependent young people and a staggering 37% of elderly dependents. The number of domestic and international air passengers declined at CAGRs of 2.1% and 3.6% in 2006-12 as a result of this demographic trend, but we forecast 2012-15 CAGRs of 7%/10% for domestic/international passengers as LCCs gain traction and market share.
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Fig 72: Air passenger traffic

160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 2006-12 CAGR: Domestic pax - (2.1%) International pax - (3.6)% Domestic pax, mn Int'l pax, mn
3.00 2.50 1.58 1.57 Seats per population GDP per capita (RHS) LCC penetration (LHS) Flight penetration (LHS) USD 50,000 40,000
1.57
1.57
1.55
1.59
1.55
1.55
2.00 1.50
1.52
1.59 0.22 2012
30,000 20,000
1.00
0.10
0.05
0.04
0.05
0.05
0.10
0.50 0.00
0.01
0.02
0.03
10,000 0
2006
2008
2010
2003
2004
2005
2007
2009
2008
2006
2007
2009
2010
2011
2012
2013E
2014E
Source: Ministry of Land, Infrastructure and Transport, Standard Chartered Research
2015E
Regulation
Japan has liberalised aggressively to become more attractive to LCCs
In the late 2000s, Japan began aggressively deregulating its aviation market to make it more
hospitable to LCCs, a process that accelerated with the bankruptcy of JAL and rationalisation of over 50 JAL domestic routes.
In July 2007, Korea became Japans first partner to abolish restrictions on entry points and,
with the exception of flights to and from airports that were already experiencing capacity constraints, to abolish limits on frequency.
The Japan Civil Aviation Bureau (JCAB) has since reached liberal ASAs with China, Hong
Kong, Macau, Malaysia, Singapore, Thailand, and Vietnam.

China and Japan finally agreed to an open-skies arrangement in August 2012, weeks before
the September deterioration in relations; and the Japan-China routes have therefore not seen any growth (the opposite, in fact).
Market is dominated by ANA and JAL, but LCCs are rapidly gaining market share Until recently, the Japanese aviation market was dominated by All Nippon Airways (ANA, 9202 JP, NR), Japan Airlines (JAL, 9201 JP, NR) and their small feeder subsidiaries. This is no longer the case. LCCs share of seats in the combined domestic and international markets has risen from under 3.4% in 2009 to 14% in 2012 (20% for domestic seats). Since the expense of air travel in Japan has depressed demand, we expect strong growth in the Japanese LCC market despite the competition between several players, as Japanese are looking for cheaper air travel options. LCCs will be able to draw upon a vast network of modern secondary airports to generate traffic and cash. We think the losers from the growth of the LCC market will predictably be Japans full service carriers. ANA is already seeing cannibalisation from both its AirAsia Japan and Peach affiliates, according to data from CAPA, and we see no reason for this trend to abate. ANA and JAL will have to slash fares, concentrate on their premium offerings, cut capacity and reduce costs where possible. Despite its lead in market share, we think Japanese LCC leader Skymark (9204 JP, NR) could lose strategic focus and muddle its value proposition if it follows through on plans to embark on full-service long-haul services in 2013 using A380s. The viability of a mixed-service model is not proven and we remain sceptical of its chances of success given increasing competition from true LCCs.
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Spring Airlines, a Chinese LCC, plans to aggressively fill the gap in China-Japan services created by the territorial dispute between the countries by rekindling demand with its low fares. Spring will launch new China-Japan routes in 2013, and plans to launch a Japan-based JV at Tokyo Narita in 2H13. We think the biggest winners are likely to be Jetstar Japan and AirAsia Japan, as they already have strong brands and expertise in running true LCCs, and are likely to make up for their relatively small size in this crowded market by opening city pairs between Japan and the rest of their network through Jetstar Pacific and AirAsia X, thus broadening their connections and generating additional traffic for their respective groups. Fig 74: Domestic market share (% of seats)*
2.0% 2.3% 2.9% 2.1% 2.7% 6.6% 48.4% 1.9% 1.4% 0.7% 1.6% ANA JAL JTA JAC Skymark Air Do Solaseed 27.4% Starflyer Jetstar Japan Peach AirAsia Japan Others
*As of April 2013. Source: CAPA, Standard Chartered Research

ANA JAL 12.1% 35.5% Korean Air Delta Airlines 14.9% 7.6% 7.3% 3.1% 4.5% 4.7% 4.8% 5.5% Asiana Airlines United Airlines China Airlines Cathay Pacific Thai Airways China Southern
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Fig 76: Key airlines in Japan

Business model Fleet size/type Routes/ (destinations) All Nippon Airways Intra-Japan (53) North America (6) Europe (4) China (9) India (2) Korea (1) Taiwan (1) Southeast Asia (6) ANA Wings Intra-Japan Main hub All Nippon Airways Tokyo Haneda Airport ANA Wings Tokyo Haneda Airport All Nippon Listed on Tokyo Stock Exchange (9202 All Nippon Airways Airways JP, NR) 18x A320-200 14x B737-700 Full-service carrier 2x B737-700ER 22x B737-800 (9x on order) Japans largest airline 5x B747-400D 25x B767-300 Parent of wholly-owned charter-airline 25x B767-300ER subsidiaries AirJapan and ANA Wings 16x B777-200 10x B777-200ER (2x on order) 7x B777-300 19x B777-300ER 17x B787-8 (19x on order) (30x B787-9 on order) (15x Mitsubishi MRJ90 on order) ANA Wings 15x B737-500 21x DHC-8Q Japan Airlines (JAL) Japan Airlines 7x B787-8 (18x on order) (20x B787-9 on order) 13x B777-300ER 7x B777-300 11x B777-200ER Full-service carrier 15x B777-200 32x B767-300ER Flag carrier of Japan 17x B767-300 11x B737-800 Parent of majority-owned subsidiary domestic airline Japan Transocean Air Japan Transocean Air 13x B737-400 Japan Air Commuter Parent of majority-owned subsidiary 11x DHC8-Q400 feeder airline Japan Air Commuter 4x/7x Saab 340B/BPLUS Listed on Tokyo Stock Exchange (9201 JP, NR); de-listed after declaring bankruptcy in 2010; emerged from bankruptcy in 2011; relisted via IPO in September 2012 Low-cost carrier Listed on the Tokyo Stock Exchange (9204 JP, NR) Air Do Low-cost domestic carrier 7x B737-500 2x B737-700 2x 767-300 2x B767-300ER 7x B737-400 6x B737-800 9x A320-200 Intra-Japan (13) Tokyo Haneda Airport 29x B737-800 (6x A380-800 on order)
Japan Airlines Intra-Japan (37) China including HK (6) India (1) ASEAN (7) Europe (4) North America (8) Oceania (3) Japan Transocean Air Intra-Japan (10) Japan Air Commuter Intra-Japan (17)
Japan Airlines Tokyo Haneda Airport Japan Transocean Air Okinawa Naha Airport Japan Air Commuter Kagoshima Airport
Skymark
Intra-Japan (13)
Tokyo Haneda Airport
Solaseed Starflyer Jetstar Japan
Low-cost domestic carrier Low-cost regional carrier
Intra-Japan (7) Intra-Japan (4) Korea (1) Intra-Japan (7)
Tokyo Haneda Airport Tokyo Haneda Airport Narita Narita Airport
LCC, with identical product to the rest of 11x A320-200 Jetstar group offerings 33% owned by Qantas, 33% owned by JAL, 16.7% owned by Mitsubishi Corp. and 16.7% owned by Century Tokyo Leasing Corporation
Peach
Low-cost regional carrier Owned by ANA, First Eastern Investment Group, and Innovation Corporation of Japan
8x A320-200
Intra-Japan (7) Korea (1) Taiwan (1) Hong Kong (1) Intra-Japan (5) Korea (2)
Osaka (Kansai)
AirAsia Japan
LCC, with identical product to the rest of AirAsia group offerings JV between ANA (51%) and AirAsia group (49%)
4x A320-200
Narita (Tokyo)
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Korea
Fig 77: Profile of the Korean market
2012 Population Area GDP per capita Tourist arrivals Domestic air passengers International air passengers LCC penetration rate (domestic) LCC penetration rate (international) 50.0mn 96,920 sq km USD 23,113 11.1mn 21.9mn 48.0mn 29.4% 5.0%
Source: IMF, CIA World Factbook, Korea National Tourism Organization, Korean Airports Corporation, CAPA, Standard Chartered Research
Market potential
Strong transport network relegates LCC growth opportunities to the international market Since domestic tourism in Korea has traditionally been well-supported by the countrys efficient network of subways, buses and other forms of public transport, we believe Korea LCCs will focus on the international market. Routes to and from Jeju Island have been the busiest domestic LCC routes. Korea has become a popular tourism spot since 2000. Foreign tourism to Korea grew at a CAGR of 9.9% in 2003-12 after attracting just 4.8mn visitors in 2003. We attribute this to the Korean wave the increase in the popularity of, and interest in, Korean popular culture across Asia. Fig 78: International tourism market Inbound
20.0 16.0 12.0 8.0 4.0 10 10 10 12 6 0.0 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 6 Receipts (USD bn, RHS) Arrivals (mn, LHS) 2006-12 CAGR: Arrivals 10.4% Receipts 16.1% 6.9 6.2 6.4 7.8 8.8 13.7 11.1 9.8 12.4 15.0 10.0 5.0 0.0 25.0 15.2 1.4% 20.0 1.6% 3.0% 3.2% 3.5% 4.9% 6.3% 25.5% 6.4% 12.7% 31.6%
Fig 79: Visitors by country of origin, 2012

Japan China Europe USA Taiwan Thailand Hong Kong Philippines Malaysia Singapore Others
Source: Korea Tourism Organisation, Standard Chartered Research
14.1
15.9
18.0
Source: Korea Tourism Organisation, Standard Chartered Research
LCC penetration grew from base of 0.5% of seat capacity in 2006 to 14.3% in 2012 We forecast a 201315 tourist arrival CAGR of 11%
Given the small domestic market and regulatory protection of incumbents, LCCs developed later in Korea than in the ASEAN countries, and accounted for less than 0.5% of Koreas seat capacity in 2006. The number of LCC seats rose at a CAGR of 80% in 2006-12, and LCCs accounted for 14.3% of total seat capacity in 2012. This has facilitated continued strong growth in Koreas tourism market, including more day trips from Japan to Seoul in 2012. (This trend has reversed since 4Q12 with the sharp depreciation in the Japanese yen. There have been more day trips from Korea to Japan.) We forecast a 2013-15 tourist arrival CAGR of 11%, rising to 15.2mn visitors in 2015.
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80.0 Domestic pax (mn, LHS) Int'l pax (mn, LHS) Int'l pax YoY (RHS) Domestic pax YoY (RHS) 30.0%
3.00 2.50 20.0% 1.50 1.00 2.00 Seats per population 1.42 GDP per capita (RHS) USD LCC penetration (LHS) Flight penetration (LHS) 1.52 1.53 1.51 1.56 1.63 1.73 0.25 2012 1.37 30,000 25,000 20,000 15,000 10,000
60.0
40.0
10.0%
1.33
1.35
0.00
0.00
0.50 0.0 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E -10.0% 0.00
0.00
0.01
0.03
0.04
0.13
0.17
20.0
0.0%
0.20
5,000 0
2003
2004
2005
2006
2007
2008
2009
2010
Source: IATA, Korea Airports Corporation, Standard Chartered Research
Regulation
The Korean government allowed the 20-year duopoly of Korean Air and Asiana to be broken
in 2006, with the launch of Jeju Air. Further gradual loosening of protectionist regulations has allowed more competition to evolve.
The Korean government has been increasingly liberalising its bilateral ASAs with other
Recently embraced air service liberalisation to turn Incheon International Airport into a hub
countries to facilitate its goal of turning Seouls Incheon International Airport into an international hub.
Open-sky agreements granting unlimited fifth freedom rights are already in place with the US
and Canada.
Point-to-point open skies agreements have been signed with Vietnam, China, Japan, Malaysia,
Myanmar, Cambodia, Thailand, Sri Lanka, Azerbaijan, Ukraine, the UK (cargo), Australia (cargo), Germany, and Austria. These agreements allow multiple designations of airlines and free access to designated routes, are not subject to frequency or capacity control, and grant extensive bilateral fifth freedom rights.
Despite this movement towards liberalisation, ownership by foreign airlines remains capped at
49%, and a 2008 attempt by Singapores Tiger Airways to start a JV in Korea was blocked after strong protests and lobbying by Korean airlines.
Lack of home market, poor access to China, expensive airports make environment challenging for LCCs Despite some market potential, we see a tough operational environment for Korean-based LCCs:
Lack of home market: Domestic routes are insignificant and marginally profitable for Korean
airlines. All Korean LCCs thus have to compete in the international market to achieve profitability and some have abandoned domestic routes entirely (see Figure 85).
Lack of flight rights to China: Most routes suitable for LCCs from Korea are to China and
Japan. However, there is no open sky agreement between Korea and China and it is difficult for LCCs to win flight rights to China.
Expensive airports: Despite having a second airport in Seoul (Kimpo), LCCs do not pay
lower airport charges flying from Kimpo Airport, and ground operation costs are generally high in Korea. Airports charges are also high in Japan. Incheon, Kimpo and first-tier Japanese airports are congested.
Not no-frills service: Korean LCCs offer baggage and meals bundled in their fares out of
fear of offending customers used to very high standards of service. The traditional LCC model is not being fully applied in Korea, in our view.
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Fig 82: Domestic market share (seats per week)*
Fig 83: International market share (seats per week)*

Korean Air
9.3% 9.8% 10.2% 46.0% Korean Air Asiana Airlines Eastar Jet Jin Air 24.7% t'way 2.0% 2.2% 2.5% 3.0% 3.1% 3.8% 26.5% 33.4%
Asiana Airlines China Eastern Jeju Air China Southern Thai Airways Air China 23.5% Air Busan Other
Although the government has reserved some golden routes for Koreas LCC industry, independent Korean LCCs such as Tway and Eastar Jet might remain under financial pressure. We believe they might not be able to sufficiently reduce their unit costs in the medium term to compete with Japanese LCCs and Jin Air and Air Busan, which are supported by Korean Air and Asiana, respectively. Korean LCCs will face more pressure from Japan unless they unbundle services and control costs Japans Peach Aviation and AirAsia Japan already serve South Korea from their bases in Japan, and Jetstar Japan will likely enter the fray later in 2013. Korean Air and Asiana have been differentiating themselves at the high end of the market, facilitating premium travel within Asia and between Asia and North America, while also waiting for a revival in air freight. Jin Air currently operates 9 aircraft for 12 destinations. Although half of these routes duplicate Korean Airs, Jin Air enjoys the better schedule. While cannibalisation is inevitab le, Korea Air has left some short-haul markets to Jin Air rather than other LCCs. Air Busan has developed faster than Jin Air given the differentiated hub in Pusan. Both Jin Air and Air Busan are currently profitable.
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Forecast 2012-15 domestic/international passenger traffic CAGRs of 4.9%/12.6% We expect seat capacity in Korea to rise 7.3%/10.9% YoY in 2013/2014. With LCCs led by Jin and Jeju continuing to grow their international routes and Korean Air adding capacity in long- and medium-haul premium travel, we forecast domestic/international passenger CAGRs of 4.9%/12.6% in 2013-15. Fig 84: Supply and demand forecasts for Korea
2011 Supply by seats Narrow-body aircraft (No.) Wide-body aircraft (No.) Total seats (mn) Korean Air Jin Air Asiana Airlines Jeju Air Air Busan t'way Eastar Jet Demand by passenger numbers (mn) Domestic International YoY Narrow-body aircraft Wide-body aircraft Supply by seats Korean Air Jin Air Asiana Airlines Jeju Air Air Busan t'way Eastar Jet Demand by passengers Domestic International
2012 112 121 55,945 30,134 1,512 18,528 2,280 1,292 945 1,254 21.9 48.0 28.7% 0.8% 9.6% 1.1% 33.3% 15.6% 50.0% 38.2% 25.0% 43.2% 3.0% 11.9%
2013E 122 127 60,052 31,602 1,701 20,052 2,660 1,649 945 1,443 22.7 54.1 8.9% 5.0% 7.3% 4.9% 12.5% 8.2% 16.7% 27.6% 0.0% 15.1% 3.7% 12.6%
2014E 125 144 66,620 36,787 1,890 20,866 3,040 1,649 945 1,443 24.0 60.9 2.5% 13.4% 10.9% 16.4% 11.1% 4.1% 14.3% 0.0% 0.0% 0.0% 5.7% 12.6%
2015E 130 148 68,679 37,463 2,079 21,680 3,420 1,649 945 1,443 25.3 68.6 4.0% 2.8% 3.1% 1.8% 10.0% 3.9% 12.5% 0.0% 0.0% 0.0% 5.4% 12.6%
87 120 51,062 29,810 1,134 16,031 1,520 935 756 876 21.3 42.9 16.0% 13.2% 16.2% 13.9% 20.0% 18.7% 14.3% 26.4% 100.0% 0.0% 3.9% 6.5%
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Fig 85: Key airlines in Korea

Airline Korean Air Business model Listed on Korea Stock Exchange (003490 KR, NR) Full-service carrier Korean flag carrier Parent of wholly-owned subsidiary Jin Air, an LCC Fleet size/type Korean Air 3x A300-600 8x A330-200 5x A330-300 10x A330-300X (6x on order) 6x A380-800 20x B737-800 16x B737-900 4x B737-900ER 15x B747-400 18x B777-200ER 4x B777-300 11x B777-300ER (5x B747-8 on order) (10x B787-9 on order) (10x Bombardier CS300 on order) Jin Air 9x B737-800 10x A320-200 24x A321-100/200 1x/7x/4x A330-300/E/X 7x B767-300 12x B777-200ER (1x on order) 4x B747-400 (6x A380-800 on order) (8x A350-800XWB on order) (12x A350-900XWB on order) (10x A350-1000XWB on order) 12x B737-800 (6x on order) Routes/(destinations) Korean Air Intra-Korea (13) North Asia (39) ASEAN (14) South Asia (2) Oceania (6) Europe (11) North America (13) CIS (5) Middle East & Africa (6) South America (1) Jin Air Intra-Korea (3) North Asia (11) Guam (1) Laos (1) Philippines (3) Thailand (1) Intra-Korea (12) North Asia (38) ASEAN (11) India (1) CIS (4) Europe (4) Oceania (3) USA (5) Main hub Korean Air Seoul Incheon International Airport Jin Air Jeju Airport
Asiana Airlines
Listed on Korea Stock Exchange (020560 KR, NR) Full-service carrier
Seoul Incheon International Airport
Jeju Air
Regional LCC
Intra-Korea (3) Thailand (1) Philippines (2) Guan (1) Vietnam (1) Hong Kong (1) China (2) Japan (3)
Jeju Airport
Air Busan
Regional LCC Affiliate of Asiana Airlines (46% owned); other owners include the City of Busan (5%) and other Busan companies (49%)
4x B737-400 2x B737-500 2x A321-200 1x A320-200
China including HK and Macau Busan Gimhae (6) Airport Japan (3) Philippines (1) Taiwan (1) Thailand (1) Intra-Korea (3) Taiwan (1) Japan (1) China (3) Thailand (1) Intra-Korea (5) Taiwan (1) Japan (2) China (1) Thailand (2) Malaysia (1) Seoul Gimpo International Airport
Tway
Regional LCC Privately owned, with key investors including Korea Deposit Insurance Corporation and YeaRimDang Publishing
5 x 737-800
Eastar Jet
Regional LCC Subsidiary of the privately-held Eastar Group
1x B737-600 5x B737-700 3x B737-800
Seoul Gimpo International Airport
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Malaysia
Fig 86: Profile of the Malaysian market
Source: IMF, CIA World Factbook, Tourism Malaysia, CAPA, Standard Chartered Research
Market potential
Malaysia hosted 25mn tourists in 2012; we forecast a 2012-15 visitor CAGR of 3.6% Already one of the worlds most-visited countries, Malaysia has one of the largest tourism industries in Asia. According to the Ministry of Culture, Arts and Tourism, foreign visitors reached 25mn in 2012 contributing MYR 60.6bn of revenue, with arrivals/tourism revenue growing at CAGRs of 6.1%/8.9% since 2006. Given the increasing connectivity of LCCs to Malaysia and its clear appeal as a tourist destination, we forecast a 2013-15 arrival/revenue CAGR of 3.6%/5.3%. Fig 88: Inbound tourists by country of origin, 2012
Singapore 1.9% 2.0% 2.0% 2.8% 5.0% 5.0% 52.0% 13.5% Indonesia China Thailand Brunei India Philippines Australia 6.2% 9.5% Japan Others

40.0 35.0 30.0 25.0 20.0 15.0 10.0 Receipts (USD bn, RHS) 80.0 2006-12 CAGR: Arrivals (mn, LHS) Arrivals 6.1% 70.0 Receipts 8.9% 27.9 26.9 60.0 25.0 25.9 23.7 24.6 24.7 22.1 50.0 21.0 17.6 40.0 30.0 20.0
53.4
36.3
46.1
49.6
56.5
58.3
60.6
63.8
67.2
5.0 0.0
70.8 2015E
10.0 0.0
2013E
Source: Tourism Malaysia, Standard Chartered Research
2014E
2009
2006
2007
2008
2010
2011
2012
Source: Tourism Malaysia, Standard Chartered Research

Domestic pax (mn, LHS) Int'l pax YoY 50.0 40.0 30.0 20.0 10.0 0.0 2013E 2014E 2015E 2006-12 CAGR: Domestic pax 6.0% Intl pax 10.3% Int'l pax (mn, RHS) Domestic pax YoY 25% 20% 15% 10% 5% 0% -5%
Seats per population 3.5 3.0 1.69 1.60 1.67 1.72 2.5 2.0 1.5 1.0 0.5 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1.30 1.89 GDP per capita (RHS) LCC penetration (LHS) Flight penetration (LHS) 2.39 2.43 1.24 2.02 2.17 USD 14,000 12,000 10,000 1.19 8,000 6,000 4,000 2,000 0
2007
2008
2006
2009
2010
2011
Source: Malaysia Airports Holdings, Standard Chartered Research
2012
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0.02
0.18
0.26
0.34
0.48
0.69
0.92
1.02
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Regulation
Malaysias liberalisation disproportionately benefited AirAsia
Malaysia grants unlimited third, fourth and fifth freedoms to reciprocating ASEAN countries. In August 2006, the Malaysian government implemented a domestic route rationalisation plan,
awarding MAS and AirAsia the rights to operate on 19 domestic trunk routes; AirAsia also won the exclusive right to operate 96 domestic non-trunk routes. Although the policy was intended to encourage competition, MAS has been forced to offer premium services with price floor restrictions.
MAS set up Firefly in 2007. The government allowed it to operate on all domestic routes, but
also restricted it to operating only certain types of aircraft (mainly turboprops).

The Singapore-Kuala Lumpur route was dominated by MAS and SIA as a duopoly for 30
years. However, in late 2007, the Malaysian government allowed AirAsia and Tiger to operate on the route, starting with two daily flights each and increasing the frequency thereafter.
Competitive envrionment
AirAsia dominant, with 50% of domestic capacity and over 25% of international capacity Since the 2006 domestic route rationalisation scheme, AirAsia has gained market share in the domestic market. In 2012, it had a 60% domestic market share (by airport throughput numbers) and management thinks the market now has an optimal split between AirAsia and MAS. Although AirAsia targets maintaining domestic market share in 2013, the market is concerned about competition from the new entrant Malindo, which began operations with three B737s in March 2013. Fig 92: International share by pax numbers at KLIA
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Others SIA Thai Air SilkAir KLM Tiger Qatar Cathay Emirates Indo AirAsia AirAsia X AirAsia MAS
Fig 91: Domestic market share by passenger numbers

AirAsia 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% MAS Others
59.0%
54.7%
55.4%
58%
60%
60%
49.1%
55%
45.4%
51%
53%
38.4%
33.1%
32.8%
31.5% 2011
10%
2003 16%
2007
2008
2009
2010
2011
2002
2004
2005
2006
2012
2003
2004
2005
2006
2007
2008
2009
2010
Source: Malaysia Economic Planning Unit, companies, Standard Chartered Research estimates
Source: Malaysia Airports Holdings, Standard Chartered Research estimates
We see higher growth potential for LCCs in outbound international travel, where the penetration rate remains low. In 2008-12, the AirAsia Group and Cathay Pacific gained market share in international business (mainly from MAS).
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29.2%
23%
27%
29%
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6.9% 1.4%

Malaysia Airlines AirAsia
Malaysia Airlines 40.5% AirAsia Firefly 51.3% Berjaya Air 1.9% 2.3% 2.7% 2.8% 5.3%
24.9%
AirAsia X 27.1% Indonesia AirAsia SilkAir Emirates 26.3% Cathay Pacific Jetstar Asia
6.7%
Others

Malindos entry will result in fleet capacity in Malaysia growing 21% in 2013E Forecast 2013-15 domestic/international passenger traffic CAGRS of 6.1%/12.6% We expect seat capacity to increase 21%/9% YoY in 2013/2014, based on airlines reported aircraft delivery schedules. The material rise in supply in 2013 is due to capacity from the new entrant Malindo and aggressive expansion by AirAsia to protect its existing market share. We forecast 2013-15 domestic/international passenger CAGRs of 6.1%/12.6%. We base our domestic CAGR on 1.2x our in-house GDP growth estimates of 4.7% (2013), 5.3% (2014) and 5% (2015). We derive the multiple from the average multiple of passenger growth to GDP growth in 2010-12. Fig 95: Supply and demand forecasts for Malaysia
2011 Supply by seats Narrow-body aircraft (no.) Wide-body aircraft (no.) Total seats (mn) MAS AirAsia AirAsia X AirAsia Group Malindo Demand by passenger numbers (mn) Domestic International YoY Narrow-body aircraft Wide-body aircraft Supply by seats MAS AirAsia Group Malindo Demand by passengers Domestic International
2012 153 57 56,241 26,415 11,520 3,393 14,913 17.2 32.8 10.1% 5.6% 8.9% 14.8% 4.2% 3.9% 6.1%
2013E 183 65 67,912 28,162 13,320 5,655 18,975 1,800 18.2 36.9 19.6% 14.0% 20.8% 6.6% 27.2% 5.7% 12.6%
2014E 209 68 73,935 29,009 13,500 7,163 20,663 3,600 19.4 41.5 14.2% 4.6% 8.9% 3.0% 8.9% 100.0% 6.4% 12.6%
2015E 222 66 75,089 28,003 13,680 7,163 20,843 5,400 20.6 46.8 6.2% -2.9% 1.6% -3.5% 0.9% 50.0% 6.1% 12.6%
139 54 51,628 23,014 10,260 4,047 14,307 16.6 30.9 11.2% 12.5% 11.3% 12.2% 10.6% 11.1% 10.3%
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Fig 96: Key airlines in Malaysia

Airline AirAsia Business Model Listed on Bursa Malaysia (AIRA MK, OP) Low-cost, short-haul carrier Cross-border JVs with: Thai AirAsia (45%) Indonesia AirAsia (48.9%) Philippines AirAsia (40%) AirAsia Japan (33%) AirAsia India (49%) AirAsia X 18% owned by AirAsia IPO planned for mid-2013 Low-cost, medium- and long-haul carrier Malaysian Airline (MAS) MAS 3x A330-200 3x A330-300 Full-service carrier 12x A330-300E (3x on order) 6x A380-800 Flag-carrier of Malaysia 19x B737-400 39x B737-800 (26x on order) Parent of wholly-owned subsidiary 3x B747-400 MASwings, a full-service intra-Borneo 16x B777-200ER regional carrier (20x ATR 72-600 on order) (6x DHC-6-400 on order) Parent of wholly-owned subsidiary MASwings Firefly, a full-service point-to-point 4x DHC-6-400 regional carrier 10x ATR72-500 Firefly Joined the oneworld alliance in 2x B737-400 February 2013 12x ATR 72-500 Listed on Bursa Malaysia (MAS MK, NR) Fleet size/type Routes/ destinations Main hub KLIA 66x A320-200 (93x on order) Intra-Malaysia (18) (264x A320-200neo on order) China (8, including HK, Macau) India (7) Indonesia (17) Thailand (7) Other ASEAN (13)
1x A330-300 9x A330-300E (17x on order) 1x A330-300X (10x A350-900XWB on order)
China (4) Japan (3) Nepal (1) South Korea (1) Taiwan (1) Australia (4) Middle East (1) MAS Intra-Malaysia (30) China (6, including HK) Other North Asia (4) Australia and New Zealand (6) India (5) Other South Asia (4) ASEAN (18) Europe (5) US (1) Middle East (1) MASwings Intra-Malaysia (22) Brunei (1) Indonesia (2) Firefly Intra-Malaysia (11) Southern Thailand (3) Singapore (1) Sumatra, Indonesia (4) Intra- Malaysia (3)
KLIA
MAS KLIA MASwings Miri International Airport Firefly KLIA
Malindo Air JV between Malaysian National Aerospace and Defence Industries (51%) and Lion Air of Indonesia (49%) Hybrid-service regional carrier with free baggage, meals, in-flight entertainment and business class Identical plane configuration and interior to Indonesian full-service carrier Batik Air, a subsidiary of Lion Air
2x B737-900ER
KLIA
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The Philippines
Fig 97: Profile of the Filipino market
Source: IMF, CIA World Factbook, Department of Statistics Philippines, CAPA, Standard Chartered Research
Market potential
The Philippines has enjoyed moderate growth in tourist arrivals since arrivals shrank 3.9% in 2009, and its burgeoning domestic LCC market drove a 2009-12 domestic traffic growth CAGR of 11.7%. Despite the outwardly positive signs, the Philippines has attracted fewer tourists than its regional neighbours in the past, drawing only 1.7% of the tourist arrivals in Asia Pacific in 2011, trailing Malaysia (12.1%), Thailand (7.8%), and Vietnam (2.5%), according to the United Nations World Tourism Organisation. EU and FAA restrictions against Filipino carriers have limited international connectivity An EU ban on Philippine carriers entering EU airspace and FAA restrictions against Philippine carriers expanding in the US have not helped matters; there have not been direct flights between Europe and the Philippines since April 2012. Poor transport infrastructure can make reaching holiday destinations difficult for the visitors who do arrive in the Philippines. Fig 99: Inbound tourists by country of origin, 2012
9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 4.0 5.5 3.0 2.9 3.2 3.6 3.9 4.8 6.0 7.4 1.0 0.0 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 3% 3% 3% 3% 4% 5% 6% 10% 24% 24% Korea USA Japan China Taiwan Australia 15% Singapore Canada Hong Kong Malaysia Others
Source: Philippines Department of Tourism, Standard Chartered Research

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2.8 3.1 3.1 3.0 Receipts, USD bn (RHS) Arrivals, mn (LHS) 2006-12 CAGR: Arrivals 7.0% Receipts (0.4%) 3.5 3.9 4.3 6.5 5.3 8.1
Source: Philippines Department of Tourism, Standard Chartered Research
Pinoy Homecoming initiatives seek to draw the 10mn+ overseas Filipinos home more often
Things are looking up, however. In March 2013, the International Civil Aviation Organisation lifted the Significant Safety Concerns warning it issued against the Philippines in 2008, implying that the EU and FAA are likely to follow suit, in our view. The government has set a target of 10mn international visitors by 2016, which would require a 2012-16 CAGR of 23.7%. While ambitious, we believe this is achievable with LCCs opening more routes to China, and particularly if the EU and FAA lift their restrictions in 2013. Overseas Filipinos will also remain a strong source of visitors, which the government is encouraging with Pinoy Homecoming initiatives. We believe international tourism has much greater growth potential, as the high base of domestic air travel makes further significant gains less likely.
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Domestic pax, mn (LHS) Int'l YoY 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 2013E 2014E 2015E 2006 2007 2008 2009 2010 2011 2012 2006-12 CAGR: Domestic pax 15.9% International pax 8.5% Int'l pax, mn (LHS) Domestic YoY 35% 30% 25% 20% 15% 10% 5% 0%
0.80 0.60 0.29 0.30 0.33 0.36 0.40 0.20 0.00 0.27 0.28 GDP per capita (RHS) LCC penetration (LHS) Flight penetration (LHS) USD 3,000 2,500 2,000
0.40
0.43
0.49
0.30 2012
0.53
Seats per population
0.13
0.17
0.22
1,500 1,000 500 0
0.04
0.04
0.04
0.06
0.08
0.10 2008
2009
2003
2004
2005
2006
2007
2010
Source: Philippines Civil Aeronautics Board, Standard Chartered Research estimates
Regulation
The government protects Manila, but has fully opened other airports to entice visitors and investment
Third, fourth and fifth freedoms into Manilas NAIA are restricted to protect domestic carriers at
the congested airport, whereas unlimited third, fourth and fifth freedoms have been granted to reciprocating ASEAN countries at all other cities and airports.
A new bill of air passenger rights passed by the Civil Aeronautics Board (CAB) dictates that
those buying plane tickets must get full, fair and clear disclosure of all the terms and conditions including policies on refunds, rebooking and o n delayed and cancelled flights. These onerous rules will invariably add to LCCs costs.
The Civil Aviation Authority of the Philippines (CAAP) insists that LCCs use aerobridges on all
flights.
With five LCCs serving the domestic market, and the worlds highest domestic LCC penetration rate of 78.4% in 2012, the market was overcrowded, plagued by overcapacity and ripe for consolidation. In 1Q13, that consolidation occurred with the rationalisation of domestic routes between PAL and PAL Express (formerly AirPhil Express), and a tie-up between Zest Air and AirAsia Philippines. Fig 102: Domestic market share (% of seats)*
4.6%

Cebu Pacific Philippine Airlines 16.4% 36.2% 23.2%
12.8% 49.9% 18.6%
Cebu Pacific Philippine Airlines PAL Express AirAsia/Zest Tiger SEAir
Cathay Pacific Korean Air Singapore Airlines Asiana Airlines Emirates
14.2% 2.7% 3.3% 3.4%

*As of April 2013. Source: CAPA, Standard Chartered Research.
7.3% 3.5%
Zest Air Other
3.9%
*As of April 2013. Source: CAPA, Standard Chartered Research. *
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Recent consolidation from five LCCs to three should result in a more benign environment in 2013
With effectively four LCCs operating instead of the five in 2012 and seat supply aligned more closely with demand, we expect the yield environment to be much more supportive in 2013. We believe Cebu Air will continue to dominate the market, as it has the largest number of slots at Manila, a larger order book of planes, and greater domestic market share than any the other two LCCs combined. We see higher growth potential for LCCs in international travel where penetration rate remains (relatively) lower at 28.3%, with Cebu likely to gain market share due to support from overseas Filipino workers, while Tiger SEAir and AirAsia Philippines grow their route connectivity with the rest of their respective networks.

We forecast seat capacity to grow 11% in 2013; and 2012-15 Domestic/international passenger CAGRs of 12.6%/9.7% We expect seat capacity to rise 11%/16% YoY in 2013/2014. More wide-body deliveries for Cebu and PAL will result in higher capacity growth in 2014. We forecast 2013-15 domestic/international passenger CAGRs of 12.6%/9.7%. We base our domestic CAGR on 2.2x our in-house GDP growth estimates of 5.8% (2013), 6.2% (2014) and 5.5% (2015). The multiple is derived from the average multiple of passenger number growth to GDP growth in 2010-12. Fig 104: Supply and demand forecasts for the Philippines
2011 Supply by seats Narrow-body aircraft (no.) Wide-body aircraft (no.) Total seats (mn) Cebu Air PAL Group Zest Airways AirAsia Tiger SEAir Demand by passenger numbers (mn) Domestic International YoY Narrow-body aircraft Wide-body aircraft Supply by seats Cebu Air PAL Group Zest Airways AirAsia Tiger SEAir Demand by passengers Domestic International
2012 107 21 22,640 6,276 13,088 1,942 360 974 20.6 16.7 16.3% 10.5% 15.9% 13.0% 13.6% 22.8% 0.0% 91.0% 9.6% 6.9%
2013E 117 23 25,021 7,846 12,819 2,662 360 1,334 23.2 18.4 8.4% 9.5% 10.5% 25.0% -2.1% 37.1% 0.0% 37.0% 12.7% 9.7%
2014E 130 28 29,137 8,696 14,825 2,662 1,080 1,874 26.3 20.1 11.2% 21.7% 16.5% 10.8% 15.6% 0.0% 200.0% 40.5% 13.3% 9.7%
2015E 145 35 34,477 10,086 17,875 2,662 1,800 2,054 29.4 22.1 12.4% 25.0% 18.3% 16.0% 20.6% 0.0% 66.7% 9.6% 12.0% 9.7%
92 19 19,526 5,556 11,518 1,582 360 510 18.8 15.7 21.1% 0.0% 17.0% 21.2% 9.1% 51.8% 0.0% 13.3% 9.7%
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Fig 105: Key airlines in the Philippines

Airline Philippine Airlines Business model Listed on Philippine Stock Exchange (PAL PM, NR) Fleet size/type Routes/(destinations) PAL Intra-Philippines (9) ASEAN (6) Guam (1) U.S.A. & Canada (6) China (5 including Hong Kong and Macau) Other North Asia (7) India (1) Australia (2) Middle-East (4) PAL Express Intra-Philippines (30) Malaysia (2) Singapore (1) Hong Kong (1) Intra-Philippines (33) China (6 including HK and Macau) Other North Asia (4) Singapore (1) Malaysia (2) Indonesia (2) Vietnam (2) Thailand (1) Cambodia (1) Brunei (1) Philippines AirAsia Intra-Philippines (3) China (2 including HK and Macau) Malaysia (1) Zest AirAsia Intra-Philippines (14) China (2) Other North Asia (3) Main hub PAL Manila Ninoy Aquino International Airport PAL Manila Ninoy Aquino International Airport PAL 4x A319-100 18x A320-200 Full-service carrier (34x A321-200 on order) (10x A321-200neo on order) Flag-carrier of the Philippines 8x A330-300 (10x on order) (10x A330-300X on order) San Miguel acquired 49% in April 2012, with 4x A340-300X aggressive plans to modernise and expand 5x B747-400 the airline 5x B777-300ER (1x on order) PAL Express Parent of wholly-owned PAL Express 12x A320-200 (formerly AirPhil Express), an LCC. 4x DHC-8Q-314 5x DHC-8Q-402
Cebu Air
Listed on Philippine Stock Exchange (CEB PM, OP) Low-cost carrier Planning to introduce long-haul offerings to Europe, Australia, USA and Middle-East in 3Q13
10x A319-100 25x A320-200 (17x on order) (30x A321-200neo on order) (8x A330-300 on order) 8x ATR72-500
Manila Ninoy Aquino International Airport
Philippines JV between Filipino investors (60%) and AirAsia / AirAsia group (40%) Zest Airways Low-cost, short-haul carrier (Zest AirAsia) Identical product to the rest of AirAsia group offerings Announced a tie-up with Zest in March 2013, currently integrating Zest as Zest AirAsia
Philippines AirAsia 2x A320-200 Zest AirAsia 1x A319-100 10x A320-200 3x Xian MA60
Philippines AirAsia Clark Diosdado Macapagal International Airport Zest AirAsia Manila Ninoy Aquino International Airport Manila Ninoy Aquino International Airport
Tiger SEAir
Low-cost carrier 40% owned by Singapores Tiger Airways, identical product to the rest of Tiger group offerings
2x A319-100 3x A320-200
Intra-Philippines (10) China (1) Hong Kong (1) Thailand (1) Singapore (1)
As of May 2013. Source: CAPA, companies, Standard Chartered Research
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Singapore
Fig 106: Profile of the Singaporean market
2012 Population Area GDP per capita Tourist arrivals International air passengers LCC penetration rate
Source: IMF, CIA World Factbook, Department of Statistics Singapore, CAPA, Standard Chartered Research
5.4mn 687 sq km USD 51,162 14.4mn 25.6mn 29.7%
We forecast a 201215 tourist arrival CAGR of 14%, and a resident outbound travel CAGR of 11.6%
Market potential
Since a drop in visitors in 2009 in the wake of the global financial crisis, Singapore has experienced a sharp recovery in tourist numbers, likely helped by the opening of two world-class casinos and the first Universal Studios theme park in the ASEAN region in 2010. Given Singapores strong and mature tourism industry and these mega attractions, we forecast a 2012 15 visitor arrivals CAGR of 14%. Fig 108: Visitors by country/region of origin, 2012
35.0 30.0 25.0 20.0 15.0 10.0 5.2% 10.7% 6.2% 7.1% 8.2% 17.9% 3.3% 3.3% 4.5% 14.1% 19.4% Indonesia China Europe Malaysia Australia India Japan Philippines USA Hong Kong SAR Others
Source: Singapore Tourism Board, Standard Chartered Research

25.0 20.0 15.0 10.0 10.9 13.9 17.7 18.4 22.5 26.1 30.6 2015E 5.0 7.8 9.8 0.0 2006 2007 2008 2009 2010 2011 2012 2013E 2014E Receipts, USD bn (RHS) Arrivals, mn (LHS) 21.5 2006-12 CAGR: 18.8 Arrivals 6.7% 16.4 Receipts 15.4% 14.4 13.2 11.6 9.8 10.3 10.1 9.7
8.7
5.0 0.0
Source: Singapore Tourism Board, Standard Chartered Research
Fig 109: Singapore residents outbound air travel

10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Departures, mn 2006-12 CAGR: 9.6% 2012-15E CAGR: 11.6% 5.6 4.9 3.7 4.2 5.0 6.1 6.5 7.0 8.0 9.0
Fig 110: Growth at Changi Airport

80.0 70.0 60.0 50.0 40.0 30.0 35.0 36.7 37.7 37.2 42.0 46.5 Commercial aircraft movements, '000 (RHS) Passenger movements, mn (LHS) 59.8 51.2 53.8 66.5 400 300 200 500
416.9 2015E
214.2
220.7
231.9
240.4
263.6
301.7
324.7
340.9
377.0
20.0 10.0 0.0 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
100 0
2006
2007
2008
2009
2010
2011
2012
Source: Singapore Tourism Board, Standard Chartered Research estimates
Source: Changi Airport Group, Standard Chartered Research estimates
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Regulation
Singapore has one of the most liberal air service regimes in the world
Singapore has always maintained a very liberal approach to commercial aviation. There are
no ownership restrictions on airlines, though new entrants must seek government approval.
Singapore grants unlimited third, fourth and fifth freedoms to reciprocating ASEAN countries
and has bilateral open-sky agreements with over 40 countries.

Since Singapore has no domestic aviation market, the latter freedoms of the air have less
relevance.
The only limitation on new entrants is the number of slots at Changi Airport, but Changis
management has a good record of expanding capacity in time to meet growth.
Market is dominated by the Singapore Airlines group, with a 50%+ capacity share Singapore Airlines has a four-brand strategy to pursue growth in all value segments of the market to offset the weakness in its traditional premium business travel and cargo businesses. The highly-profitable Silkair (targeting short-haul premium travelers) is set to grow at an accelerated rate, in our view, while Tiger (short-haul LCC) and Scoot (medium- and long-haul LCC) pursue code-sharing and other cooperation where possible to compete at the budget end of the market. We think this strategy is likely to pay off in the medium to long term, but SIAs near -term outlook remains challenging, in our view. With Tiger, AirAsia and Jetstar concentrating their efforts on expanding and fighting for market share in other Asian markets, and the Singapore market relatively mature, we think LCCs (except Scoot) are likely to expand only moderately in Singapore in 2013. Fig 111: Market share (% of seats)*
Singapore Airlines Tiger Airways SilkAir 32.3% 33.7% Scoot Jetstar Asia AirAsia 2.4% 2.5% 3.1% 3.9% 5.4% 1.9% 6.9% 7.9% Cathay Indonesia AirAsia Emirates Others
Fig 112: International capacity share (% of seats)*

2.7% 6.8% 1.2% Southeast Asia Northeast Asia 10.8% 44.9% 8.5% Southwest Pacific Western Europe 25.2% Middle East Others South Asia

We forecast fleet seat capacity to grow 5.2% in 2013; and a 201315 passenger traffic CAGR of 9.1% We expect seat capacity in Singapore to rise 5.2%/9.3% YoY in 2013/2014. More wide-body deliveries for Singapore Airlines will result in higher capacity growth in 2014. We forecast a 2013-15 passenger traffic CAGR of 9.1%. We assume an initial reduction in traffic in 2013 as Gulf carriers divert Kangaroo-route traffic through the Middle East instead of Singapore, before a recovery in 2014E to the 2010-12 average of 11.2% on the strength of increased short-haul business and leisure travel in ASEAN.
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Fig 113: Supply and demand forecasts for Singapore

2011 Supply by seats Narrow-body aircraft (no.) Wide-body aircraft (no.) Total seats (mn) Singapore Airlines SilkAir Scoot Tiger Airways Jetstar Asia Demand by passenger numbers (mn) International YoY Narrow-body aircraft Wide-body aircraft Supply by seats Singapore Airlines SilkAir Scoot Tiger Airways Jetstar Asia Demand by passengers International
2012 61 105 41,915 30,743 3,000 1,152 3,600 3,420 25.6 7.0% 0.0% 2.0% -3.0% 16.6% -9.1% 18.8% 10.1%
2013E 68 111 44,819 32,425 3,142 1,152 4,500 3,600 26.9 11.5% 5.7% 6.9% 5.5% 4.7% 0.0% 25.0% 5.3% 5.0%
2014E 69 123 48,561 35,735 3,284 1,442 4,500 3,600 29.9 1.5% 10.8% 8.3% 10.2% 4.5% 25.2% 0.0% 0.0% 11.2%
2015E 69 140 53,731 38,875 3,284 3,472 4,500 3,600 33.3 0.0% 13.8% 10.6% 8.8% 0.0% 140.8% 0.0% 0.0% 11.2%
57 105 41,100 31,686 2,574 3,960 2,880 23.3 32.6% -4.5% 2.0% -5.1% 5.8% 69.2% 33.3% 10.7%
Fig 114: Key airlines in Singapore

Airline Business Model Fleet size/type Routes/ (destinations) SIA Africa (3) Asia Pacific (36) Europe (13) Latin America (1) Middle East (3) North America (5) SilkAir Asia Pacific (42) Scoot Asia Pacific (8) Main hub Singapore Changi International Airport Singapore Listed on Singapore Exchange (SIA, SP) SIA Airlines 21x A330-300 Singapore flag carrier; full-service carrier 5x A340-500 19x A380-800 (5x on order) Parent of wholly-owned full-service 31x B777-200ER regional carrier SilkAir 7x B777-300 19x B777-300ER (8x on order) Wholly-owned medium-haul LCC Scoot (40x A350-900XWB on order) SilkAir Holds 33% stake in Tiger Airways 17x A320-200 (1x on order) 6x A319-100 Member of Star Alliance; joined in 2000 (23x B737-800 on order) (31x B737-8MAX on order) Scoot code-shares with Tiger Airways Scoot 5x B777-200ER(20x B787-9 on order) Tiger Airways Low-cost, short-haul carrier Minority-owned (33%) by SIA Cross-border JVs with: Tiger Australia (40%) Tiger Philippines/SEAir (40%) Tiger Indonesia/Mandala (33%) Jetstar Asia LCC, identical product to the rest of Jetstar group offerings JV between Singaporean Westbrook Investments (51%) and Qantas (49%).
As of May 2013. Source: Companies, Standard Chartered Research
Tiger Singapore 21x A320-200 (24x on order)
Intra-ASEAN (13) China (5 including HK & Macau) Taiwan (1) India (6) Bangladesh (1) Sri Lanka (1) Australia (1) China (8 including HK & Macau) Intra-ASEAN (10) Japan (1) Taiwan (1) Australia (1)
Singapore Changi International Airport
17x A320-200
Singapore Changi International Airport
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Thailand
Fig 115: Profile of the Thai market
Source: Bank of Thailand, IMF, National Statistical Office of Thailand, CAPA, Standard Chartered Research
Market potential
The tourism market has proven resilient despite natural disasters and political unrest Thailands tourism sector has shown its remarkable resilience by its ability to attract nearly 8mn additional tourists since 2008 (a 53% rise), despite the political upheavals and natural disasters the country has suffered. While the number of tourists fell 3% in 2009 following the temporary closure of Bangkoks Suvarnabhumi Airport in November 2008 due to political demonstrations, the 21% surge in visitors in 2011 pushed the total to 19.2mn despite serious flooding in parts of Thailand. In 2012, visitors reached a record 22.3mn. This is despite the fact that Thailand has the lowest international LCC penetration rate among Southeast Asias five largest markets. Fig 117: Inbound tourists by country/region, 2012
Int'l pax, mn (LHS) Domestic pax YoY (RHS) 30% 20% 3.4% 40.0 20.0 0.0 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 10% 0% -10% 3.7% 4.2% 4.4% 4.5% 5.2% 6.1% 11.4% 12.5% 19.3% 25.3% Europe China Malaysia Japan Korea India Laos Australia Singapore USA Others
Fig 116: Air passenger forecast

Domestic pax, mn (LHS) Int'l pax YoY (RHS) 80.0 60.0 2006-12 CAGR: Domestic pax - 6.7% International pax - 5.9%
Source: Tourism Authority of Thailand, Standard Chartered Research
Source: Tourism Authority of Thailand, Standard Chartered Research
2.00 1.60 1.20 0.80 0.26 0.34 2012 0.19 0.19 0.06 0.40 0.00 2003 2004 2005 2006 2007 2008 2009 2010 2011 0.11 0.15 0.17 0.21 0.92 0.98 Seats per population GDP per capita (RHS) LCC penetration (LHS) 1.20 Flight penetration (LHS) 1.07 1.07 1.08 USD 1.29 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
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Arrivals from China and India are rising fastest, at 2009-12 CAGRs of 51% and 17%, respectively
Thailand is gaining popularity with visitors from India and China, the worlds two most populous countries, both within easy flying distance of Bangkok. In 2009-12, visitors from China and India grew at staggering CAGRs of 51% and 17%, respectively, and we expect strong growth to continue as LCCs look to increase routes and frequencies to these markets. We see great potential for international visitor arrivals to Thailand and forecast a 2013-15 CAGR of 17%. All LCCs now benefit from being situated at Bangkoks old downtown airport Don Mueang, providing an attractive alternative to the newer but out-of-the-way Suvarnabhumi. Although the six airports managed by Airports of Thailand (AOT), including Suvarnabhumi and Don Muang, are the busiest in Thailand, there are another 28 airports overseen by the Thai Department of Civil Aviation (DCA), which are chronically under-used. To stimulate new business, the DCA has cut the landing and parking fees at 10 of its airports to half of AOTs regular charges, and expects more point-to-point services between the airports it oversees in future. These signals suggest potential capacity remains to be exploited, particularly by LCCs.
Most domestic airports remain underused, presenting significant potential opportunities for LCCs
Regulation
Ambitions to become an LCC hub to attract tourists and investment
Thailand grants unlimited third, fourth and fifth freedoms to reciprocating ASEAN countries. The DCA deregulated the minimum air fare on all domestic flights to improve competition in
2003.
Foreign ownership of airlines is capped at 45%. The government has indicated a strong willingness to invest in infrastructure and allow foreign
competition in the aviation sector to support Thailands ambitions of becoming a regional LCC hub.
Competitive envrionment
Fragmented LCC segment and underserved markets present opportunities for LCCs Thai Airways (THAI TB, NR) is going through a period of transition as it modernises its fleet, adding newer and more fuel-efficient aircraft and retiring older planes, while struggling to find the right business model for its new hybrid subsidiary, Thai Smile. We believe Asia Aviation (Thai AirAsia/TAA) poses the greatest threat to the Thai Airways group, as it has already grown to equal size serving domestic routes and enjoys excellent connectivity across the ASEAN region. In 2013, TAA and Nok will expand their fleets by nine and six aircraft, respectively. Nok flies exclusively domestic routes, but TAA (which already allocates just under half of its capacity to international) will grow both its domestic and international presence. Fig 120: International market share (% of seats)*
Thai Airways Thai AirAsia 16.8% 28.7% Thai Airways Thai AirAsia Nok Air 24.3% 28.5% Bangkok Airways Orient Thai Airlines 2.7% 2.1%
Fig 119: Domestic market share (% of seats)*

1.7%
AirAsia 29.7% 46.5% Cathay Pacific Emirates Bangkok Airways 7.1% Tiger Airways Qatar Airways 3.2% 2.9% Others 3.2%
2.6%
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We see high growth potential for LCCs in international travel where the penetration rate remains low. Thai Smile and Thai Airways costs remain too high to compete with AirAsia, in our view, and with AirAsia X looking to setup a base in Thailand in 2H13, further pressuring Thai Airways on medium-haul routes, TAA is likely to be the major beneficiary, in our view.

Expect 2013-15 domestic/international passenger traffic CAGRs of 9.3%/13.3% We expect seat capacity in Thailand to rise 8.5%/7.3% YoY in 2013/2014. Given the development of LCCs, seat capacity for narrow-body aircraft will increase much faster at 20% and 15%, respectively. We forecast 2013-15 domestic passenger and international passenger CAGRs of 9.3% and 13.3%, respectively. We base the domestic CAGR on 2.2x our in-house Thai GDP growth estimates of 4.0% (2013), 5.5% (2014) and 6.0% (2015). While domestic routes have been well served by LCCs, we expect higher international traffic growth than domestic from 2013. Fig 121: Supply and demand forecasts for Thailand
2011 Supply by seats Narrow-body aircraft (No.) Wide-body aircraft (No.) Total seats (mn) Thai Airways (inc. Smile) Nok Air Bangkok Airways Orient Thai Thai AirAsia AirAsia X Demand by passenger numbers (mn) Domestic International YoY Narrow-body aircraft Wide-body aircraft Supply by seats Thai Airways (incl. Smile) Nok Air Bangkok Airways Orient Thai Thai AirAsia AirAsia X Demand by passengers Domestic International
2012 79 93 41,161 28,382 2,712 2,474 2,733 4,860 14.2 47.7 29.5% 16.3% 21.6% 15.5% 29.0% 23.0% 127.2% 22.7% 14.8% 14.6%
2013E 91 94 44,661 29,585 2,622 2,474 3,483 6,120 377 15.5 54.0 15.2% 1.1% 8.5% 4.2% -3.3% 0.0% 27.4% 25.9% 9.3% 13.3%
2014E 101 97 47,929 30,897 2,367 2,474 3,483 7,200 1,508 17.5 61.2 11.0% 3.2% 7.3% 4.4% -9.7% 0.0% 0.0% 17.6% 300.0% 12.7% 13.3%
2015E 108 102 51,007 31,723 2,211 2,474 3,483 8,100 3,016 20.0 69.3 6.9% 5.2% 6.4% 2.7% -6.6% 0.0% 0.0% 12.5% 100.0% 13.9% 13.3%
61 80 33,850 24,572 2,103 2,012 1,203 3,960 12.4 41.6 29.8% 6.7% 10.8% 5.2% 36.9% 7.4% 220.8% 15.8% 14.9% 13.4%
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Fig 122: Key airlines in Thailand

Airline Thai AirAsia Business Model JV between Thailands Asia Aviation, a Thai holding company (55%) and AirAsia group (45%) Asia Aviation is listed on the Stock Exchange of Thailand (AAV TB) Low-cost, short-haul carrier Identical product to the rest of AirAsia group offerings Thai Airways International Thai Airways 9x A300-600 11x A330-300 Full-service carrier 14x A330-300E 1x A330-300X Flag-carrier of Thailand 6x A340-600 4x A380-800 (2x on order) Parent of wholly-owned subsidiary 16x B747-400 Thai Smile, a regional hybrid carrier 5x B737-400 offering close to full service (but 8x B777-200 business plan is still in flux) 6x B777-200ER 6x B777-300 9x B777-300ER (6x on order) (4x A350-900XWB on order) Thai Smile 6x A320-200 (5x on order) Listed on Stock Exchange of Thailand (THAI TB, NR) Low-cost domestic carrier Operationally-independent associate (49%-owned) of Thai Airways International IPO planned for mid-2013 Bangkok Airways Regional full-service carrier IPO planned for 2H13 10x A319-100 5x A320-200 8x ATR 72-500 Intra-Thailand (9) Hong Kong (1) Cambodia (2) Myanmar (1) Bangladesh (1) India (1) Laos (2) Malaysia (1) Maldives (1) Singapore (1) Intra-Thailand (4) Hong Kong (1) China (1) Bangkok Suvarnabhumi International Airport 1x B737-400 11x B737-800 2x ATR 72-200 2x ATR 72-500 Fleet size/type 29x A320-200 Routes/ (destinations) Intra-Thailand (13) China (6, including HK and Macau) Indonesia (1) Malaysia (2) Vietnam (2) Myanmar (2) India (2) Singapore (1) Cambodia (1) Sri Lanka (1) Thai Airways Intra-Thailand (11) China (7, including HK) Other North Asia (7) Australia & New Zealand (5) India (8) Other South Asia (5) ASEAN (12) Europe (14) USA (1) South Africa (1) Middle East (3) Thai Smile Intra-Thailand (5) Asia (14) Main hub Bangkok Don Mueang International Airport
Thai Airways Bangkok Suvarnabhumi International Airport Thai Smile Bangkok Suvarnabhumi International Airport
Nok Air
Intra-Thailand (22) Also offers Fly n Ride and Fly n Ferry intra-Thailand destinations with high-speed catamaran, high-speed ferries or coach services completing the final leg of the journey (10)
Bangkok Don Mueang International Airport
Orient Thai Airlines
Regional shuttle carrier Also offers charter flights
3x B737-300 1x B737-400 4x B747-300 3x B747-400 1x B767-300 2x B767-300ER 4x MD-81/82
Bangkok Suvarnabhumi International Airport
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Appendix: Freedoms of the Air

In 1944, the Convention on International Aviation was held in Chicago to establish the framework for all future bilateral and multilateral agreements for the use of international air space. Five freedom rights were designed, but a multilateral agreement went only as far as the first two. The first five freedoms are regularly exchanged between pairs of countries in Air Service Agreements. Freedoms are not automatically granted to airlines; they are privileges that have to be negotiated and can be the subject to lobbying and political pressures. All other freedoms have to be negotiated by bilateral and (rarely) multilateral agreements, such as the 2009 ASEAN Multilateral Agreement on Air Services, which permitted third, fourth and fifth freedom access among the ASEAN capital cities. There are currently nine freedoms of the air. Fig 123: Freedoms of the Air illustrated
Source: Dept. of Global Studies & Geography, Hofstra University
First Freedom: The right to overfly a foreign country, without landing there.
Example: Tiger Airways overflying Malaysia en route to Bangkok from Singapore.

Second Freedom: The right to land in a foreign country to refuel or carry out maintenance on
the way to another country. Example: Tiger Australia stopping in Jakarta for fuel en route to Singapore from Melbourne.
Third Freedom: The right to carry passengers from a carriers home country to a foreign
country. Example: Cebu Air flying passengers from Manila to Singapore.

Fourth Freedom: The right to carry passengers from a foreign country to the carriers home
country. Example: Cebu Air flying passengers from Singapore back to Manila.
Fifth Freedom: The right to carry passengers between two foreign countries on a flight that
originates or terminates in the carriers home country. Example: Thai AirAsia flying passengers BangkokKuala LumpurSingapore
Sixth Freedom: The right to carry passengers from foreign country A to foreign country B via
the carriers home country. This is simply a combination of the third and fourth freedoms. Example: AirAsia flying passengers BangkokKuala LumpurJakarta
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Seventh Freedom: The right to operate international passenger services from a foreign
country without necessarily offering services to the carriers home country. Example: Ryanair flying from Milan to Kaunas.
Eighth Freedom: The right to carry passengers between two or more airports in a foreign
country on a flight that originates or terminates in the carriers home country; also referred to as consecutive cabotage. Example: Easyjet flying LondonParisToulouse
Ninth Freedom: The right to carry passengers between points in a foreign country without
originating or terminating in the carriers home country; also referred to as stand -alone cabotage. Example: Ryanair flying from Paris to Marseille. It is important to note that cross-border JVs are crucial for Asian LCCs to establish a pan-Asian or even pan-ASEAN network because neither already-implemented nor currently-discussed multilateral agreements contain provisions for seventh, eighth and ninth freedoms across the region. AirAsia, for example, can therefore only fly passengers between points in Indonesia using planes registered to Indonesia AirAsia.
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AirAsia
Is AirAsia Asias Ryanair?
Given market concerns on the potential risks to AirAsia
from Malindo, we examined Ryanairs history since 2000. We conclude that AirAsia remains the likely pan-Asia LLC winner, and think it should be able to maintain its ROE and cost leadership despite intensifying competition. Malindo does not operate a typical LCC model and we believe its low fares are not sustainable. We view AirAsias share price weakness as a buying opportunity for long-term investors. We derive our price target of MYR 4.40 using a sum-of-the-parts methodology.
OUTPERFORM
PRICE as of 20 May 2013
(unchanged)
PRICE TARGET
MYR 3.25
Bloomberg code
MYR 4.40
Reuters code
AIRA MK
Market cap
AIRA.KL
12-month range
MYR 9,029mn (USD 2,988mn)

EPS adj. est. change 2013E
MYR 2.49 - 3.85

-39.5% 2014E -48.6%
Does AirAsia = Asias Ryanair? The market has been worried about potential yield compression for AirAsia in Malaysia from 2013 given competition from new entrant, Malindo, a subsidiary of Lion Air. We have examined the history of Ryanair, the largest European LCC, during the period of intense competition in Europes LCC market, as a reference for AirAsias potential future. We conclude that AirAsia is still most likely to eventually be the dominant LCC in Asia (as Ryanair is in Europe). Ryanair has maintained its ROE by: (1) achieving greater aircraft productivity than competitors; (2) gearing up to reach a fleet size and scale that competitors were unable to match; and (3) squeezing competitors out of the market. Its share price has nearly tripled since 2004. AirAsia > Asias Ryanair. Furthermore, we believe AirAsias fleet will eventually be even larger than Ryanairs. (1) Asias LCC market potential is significantly larger than Europes given its larger population and area. (2) The number of LCCs in Asia is equivalent to that in the smaller European market now, and most Asian LCCs focus mainly on their domestic markets. (3) Regulatory constraints are greater in Asia, leaving a more profitable home market to AirAsia, and creating higher entry barriers for LCCs seeking to be pan-Asian players. Malindo is not a LCC. We think Malindos low fares could be temporary, as it does not operate the typical LCC model its parent Lion Air does in Indonesia. Its bundled ancillary services will certainly boost costs, leading to continued operating losses. We think its business model is likely to be unsustainable. Valuation. We derive our MYR 4.40 price target using a sumof-the-parts methodology, ascribing 2013E EV/EBITDA multiples of 8.2x for Air Asias Malaysian operations, and 10.8x for Thai AirAsia and Indonesia AirAsia. Our price target implies 2.0x 2013E PBR, in line with its historical trading average. Claire Teng, CFA
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AIRA MK MYR 3.25 MYR 4.40
Year-end: December Sales (MYR mn) EBITDA (MYR mn) EBIT (MYR mn) Pre-tax profit (MYR mn) Net profit adj. (MYR mn) FCF (MYR mn) EPS adj. (MYR) DPS (MYR) Book value/share (MYR) EPS growth adj. (%) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Div. payout (%) Net gearing (%) ROE (%) ROCE (%) EV/sales (x) EV/EBITDA (x) PBR (x) PER adj. (x) Dividend yield (%)
2012 4,996 1,720 1,158 2,054 817 (590) 0.29 0.24 1.93 46.1 380.0 34.4 23.2 16.4 35.5 116.2 40.0 9.1 3.1 8.9 1.4 11.5 7.1
2013E 5,744 2,169 1,474 1,338 1,104 (811) 0.40 0.08 2.24 35.2 -66.9 37.8 25.7 19.2 20.0 116.3 19.1 9.8 2.8 7.5 1.4 8.2 2.4
2014E 6,116 2,285 1,470 1,314 1,117 (1,376) 0.40 0.08 2.57 1.2 1.2 37.4 24.0 18.3 20.0 124.1 16.7 8.1 2.9 7.8 1.3 8.1 2.5
2015E 6,626 2,582 1,625 1,491 1,305 (434) 0.47 0.09 2.94 16.8 16.8 39.0 24.5 19.7 20.0 116.8 17.1 7.6 2.8 7.2 1.1 6.9 2.9
Share price performance

4.4 3.4
2.4 May-12
Aug-12
AirAsia
Nov-12
Feb-13
May-13
KUALA LUMPUR COMP INDEX (rebased)
Share price (%) Ordinary shares Relative to index Relative to sector Major shareholder Free float Average turnover (USD)
Source: Company, FactSet
-1 mth 10 6 -
-3 mth -12 mth 25 -3 14 -16 Tune Air Bhd (25.5%) 67% 8,340,061
Michael Parry
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Valuation
We maintain our Outperform rating, with a revised price target of MYR 4.40 We maintain our Outperform rating with a revised price target of MYR 4.40. We base our new price target on a sum-of-the-parts (SOTP) valuation. We derive our SOTP value by applying 2013E EV/EBITDA multiples of 8.2x for AirAsias Malaysian operations (Malay sia AirAsia, or MAA) and 10.8x for Thai AirAsia (TAA) and Indonesia AirAsia (IAA). We use SOTP as our primary valuation methodology as it captures the value of AirAsia and its large minority stakes in its associates TAA and IAA. TAA is listed (AAV TB, Not rated) and IAA targets an IPO in 2H13. We use EV/EBITDA to value each business as share prices are typically earnings-driven We use an earnings-based valuation (EV/EBITDA) to value each business, as share prices are typically driven by earnings for growth companies such as AirAsia. We use an asset-based valuation (PBR) as our secondary valuation methodology for a cross check. For cyclical fullservice carriers, we usually apply a PBR valuation to capture the bottom of the cycle.
Sum-of-the-parts
Our SOTP valuation values MAA at MYR 3.41 per share, its 45% stake in TAA at MYR 0.70 and its 48.9% stake in IAA at MYR 0.25, for a total of MYR 4.40. Fig 124: Sum-of-the-parts valuation
Value assumption Malaysia AirAsia, MAA (MYR mn) EBITDA 2013E EV/EBITDA Calculated EV Net debt Minority interests Calculated equity value for MAA Thai AirAsia, TAA (THB mn) EBITDA 2013E EV/EBITDA Calculated EV Net debt Calculated equity value for TAA Calculated equity value for TAA (MYR mn) AirAsia's share (45% holding) Indonesia AirAsia (IDR mn) EBITDA 2013E EV/EBITDA Calculated EV Net debt Calculated equity value for IAA Calculated equity value for IAA (MYR mn) AirAsia's share (48.9% holding) Total SOTP value Valuation (MYR)
Value (2013E) 2,169 8.2 17,786 7,251 10,536
Comments
Historically average forward EV/EBITDA adjusted by the EV of TAA.
4,070 10.80 43,960 (5,154) 49,114 4,788 2,154 Exchange rate (MYR:THB): 10.2586 The multiple on the average of historical forward EV/EBITDA for Air Asia in the first two years of listing, when it was in the high growth period.
699,340 10.80 7,552,877 2,685,526 4,867,351 1,534 750 13,440 12,096 4.40 Apply 10% conglomerate discount 2,779.1mn shares outstanding Exchange rate (MYR:IDR): 3,172.41 The multiple on the average of historical forward EV/EBITDA for Air Asia in the first two years of listing, when it was in the high growth period.
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Fig 125: Value breakdown for AirAsia

10%
19% MAA TAA IAA 71%
Source: Standard Chartered Research estimates
EV/EBITDA for each business segment

We value AirAsias Malaysian operations on historical forward EV/EBITDA We apply a 2013E EV/EBITDA multiple of 8.2x for Air Asias Malaysian operations. The multiple is based on the average of historical forward EV/EBITDA since listing, but removes the extreme value due to the negative EBITDA in 2008. To capture the value purely of MAA rather than the whole AirAsia group, we have adjusted our EV by reducing the value of TAA from 2011, the first year TAA made a positive contribution to AirAsia based on the equity method. We derive TAAs value from: (1) the market value of Asia Aviation (AAV TB, not rated) after the company listed on 30 May 2012; and (2) a 9.18x EV/EBITDA before Asia Aviation was listed, as Asia Aviation has traded on an average forward EV/EBITDA of 9.18x since listing. Asia Aviation is TAAs largest shareholder (with 51.1% ownership before it listed and 55% after it listed), with AirAsia owning the rest. After Asia Aviations listing, shareholders of Asia Aviation receive 55% of profits generated by TAA. Fig 126: AirAsia forward EV/EBITDA trading range (without TAA adjustment)
30 25 20 x 15 10 5 0 Nov 04 12MF EV/ EBITDA Avg +1 SD -1 SD
Sep 05
Aug 06
Jun 07
Apr 08
Feb 09
Dec 09
Nov 10
Sep 11
Jul 12
May 13
Source: Company, Bloomberg, Standard Chartered Research estimates
We apply a 2013E EV/EBITDA multiple of 10.8x for both TAA and IAA
We apply a 2013E EV/EBITDA multiple of 10.8x for TAA. We base the multiple on the average of historical forward EV/ EBITDA for AirAsia in its first two years of listing when the company was in the high growth period. AirAsia traded mostly between 9-12x forward EV/ EBITDA during this period. We apply a 2013E EV/EBITDA multiple of 10.8x for IAA. The multiple is in line with the multiple applied for TAA, as both companies are in the high growth period. Despite the challenges of doing business in Indonesia, IAA has been profitable and we think it will start to contribute to AirAsias earnings from 2015.
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Fig 127: AirAsia EV/EBITDA trading range, first two years after the IPO
16 15 14 x 13 12 11 10 9 8 Oct-04 Mar-05 Jul-05 Nov-05 Apr-06 Aug-06 Dec-06 12MF EV/ EBITDA Avg +1 SD -1 SD
Asset-based valuation
Use PBR as a secondary valuation method, deriving our PBR ratio using the Gordon Growth Model We obtain a reference fair value of MYR 4.40 based on 2.0x 2013E PBR. We derive the multiple from the Gordon Growth Model, assuming a cost of equity of 10.2%, long-term growth of 1% and a 2013E ROE of 19.1%. Fig 128: Price-to-book valuation
Item Risk-free rate Beta Risk premium Cost of equity Return on equity 2013E Long-term growth PBR multiple Book value 2013E (MYR) Valuation (MYR)
Assumptions 3.9% 1.50 4.2% 10.2% 19.1% 1.0% 196% 2.2 4.40
Comments Historical adjusted Beta according to Bloomberg
PBR derived from derivation of the Gordon Growth formula: ( ROE g )/( r - g )
The multiple is in line with AirAsias mean 12-month forward PBR of 2.0x since listing. Fig 129: AirAsia 12-month forward PBR
5 4 3 x 2 1 0 Nov 04 12MF PBR Avg +1 SD -1 SD
Sep 05
Aug 06
Jun 07
Apr 08
Feb 09
Dec 09
Nov 10
Sep 11
Jul 12
May 13
Source: Bloomberg, Standard Chartered Research Estimates
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Based on its current PBR of 1.4x, we believe the market is overly bearish
AirAsia is trading at just 1.40x forward PBR, half of one standard deviation below its mean PBR of 2.0x. We believe the market is pricing for significant yield compression and much lower earnings in 2013-14 on fears of overcapacity and intensifying competition in the ASEAN LCC market. We believe these fears are overblown and would view current prices as an excellent opportunity to accumulate. Fig 130: AirAsia 12-month forward PBR trading range vs.12-month forward ROE
5 4 3 x 2 1 12MF PBR 12MF ROE 40% 30% 20% 10% 0% -10% -20% -30% 0 -40% Nov 04 Nov 05 Nov 06 Nov 07 Nov 08 Nov 09 Nov 10 Nov 11 Nov 12 Nov 13 Nov 14
Source: Bloomberg, Standard Chartered Research estimates
PER
Our price target would imply 11.1x 2013E PER, below the 12.7x global sector average Finally, taking into account AirAsias low cyclicality, relatively stable margins and high growth, it is also appropriate to check our price target using the PER metric. At our price target of MYR 4.40, AirAsia would trade at 11.1x 2013E PER, below the global sector average of 12.7x. We believe the risks at this point are strongly asymmetrical to the upside potential, as the market has priced in concerns about yield deterioration due to competition and overcapacity. Fig 131: 2013E PER comparison
AirAsia 8.2 Cebu Air 13.0 Tiger Airways 95.3 easyJet* 14.9 JetBlue* 12.4 Ryanair* Southwest* Westjet* 15.7 13.5 11.1 Average (ex-Tiger) 12.7
*Not covered. Above data as of 20 May 2013. Source: Bloomberg, Standard Chartered Research estimates
Comparison with Ryanair

Our EV/EBITDA multiple for MAA is undemanding vs. Ryanairs at a similar stage Ryanair traded at an average forward EV/EBITDA multiple of 9.1x during the European LCC explosion in the mid-2000s. We therefore believe our assumed multiple of 8.2x for MAA, which is entering a period of high competition, is not demanding. Fig 132: Ryanair EV/EBITDA trading range, 2004-13
18 16 14 12 x 10 8 6 4 Mar 01 12MF EV/ EBITDA Avg +1 SD -1 SD
Jul 02
Nov 03
Mar 05
Jul 06
Nov 07
Mar 09
Jul 10
Nov 11
Mar 13
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AirAsias 1.4x 2013E PBR also appears attractive, as Ryanair normally traded above 2.5x forward PBR during the mid-2000s. Our price target of MYR 4.40 implies only 2.0x 2013E PBR. Fig 133: Ryanair 12-month forward PBR trading range vs. 12-month forward ROE
6 5 4 x 3 5% 2 1 0 Mar 00 0% -5% -10% Mar 13 12MF PBR 12MF RoE 25% 20% 15% 10%
May 02
Jul 04
Sep 06
Nov 08
Jan 11
Source: Bloomberg, Standard Chartered Research Estimates
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Is AirAsia Asias Ryanair?

AirAsias share price corrected sharply in 2H12, when Indonesian LCC Lion Air announced it
would start its first cross-border JV in Malaysia, challenging AirAsias monopoly in the Malaysian LCC market. We believe the market thinks the competition from Malindo in the Malaysian market will materially hurt AirAsias profitability from 2013.
We do not know how the competition will end, but believe Ryanairs experience in Europes
LCC wars in the 2000s could provide a useful guide to AirAsias potential futur e.
We believe AirAsia will be able to overcome the competitive challenges, if the company
follows Ryanairs strategies of: (1) maintaining greater aircraft productivity than competitors; (2) gearing up for aggressive fleet expansion to create economies of scale that competitors cannot achieve; and (3) squeezing unprofitable competitors with weak balance sheets out of the market.
We would view AirAsias share price weakness as a buying opportunity to accumulate what
we believe will eventually be Asias dominant LCC.
AirAsia now and Ryanair in the 2000s

AirAsias share price fell after Malindo entered Malaysia AirAsias share price corrected over 30% in 2H12 after Indonesias largest LCC Lion Air (not listed) announced on 11 September 2012 that it would enter the Malaysian market in 2013 via cross-border JV Malindo Air. The stock had traded at a mean of MYR 3.58 during the 12 months before the announcement and has struggled to break above MYR 3.00 in 1Q13. We think the market has assumed competition will significantly hurt AirAsias yield and profitability in Malaysia. Malindo launched operations in Malaysia in late March 2013, and the real impact of its presence remains highly uncertain. AirAsia has also entered into the early stages of the high-competition, high-growth phase of the LCC lifecycle, and the market seems to believe it might not be able to replicate its remarkable historical performance. We believe the history of Europes LCC market provides a useful map for the sectors future in Asia We therefore think it is useful to compare AirAsia to Ryanair, the leader in the global LCC sector. Both are led by outspoken, visionary CEOs, and both view cost leadership as the key to success and are zealous in their pursuit of achieving the lowest possible cost structure. We think the history of Ryanair and the European LCC sector could tell us much about the potential future of AirAsia. Fig 135: Ryanairs ROE and margin
25% 20% 15% 10% 5% 0% -5% Nov 04 Dec 10 Feb 06 Sep 09 Mar 12 Apr 07 Jul 08 May 13 -10% RoE (LHS) Operating margin (RHS) 35% 30% 25% 20% x 15% 10% 5% 0%
Fig 134: AirAsias share price

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
MYR
FY03
FY00
FY01
FY02
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Ryanair entered direct competition with LCCs all over Europe in the 2000s
Equity Research
Ryanair spent the 90s building its cash pile in its home market of Ireland and the UK and operating short routes to Europe from its bases at Dublin and Luton. Even after cabotage rights had been granted, Ryanair did not launch its first European base (Charleroi) until 2001, four years after deregulation had been completed. It followed this with Frankfurt-Hahn in 2002, Stockholm-Skavsta and Bergamo-Milan in 2003 and others. In 2012, Ryanair passed the 50-base mark with bases from Dublin, Ireland to Paphos, Cyprus. 73
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Fig 136: Ryanairs stock price, charted against the number of competing LCCs
7 6 5 4 3 2 1 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 RYA Px (LHS) Number of LCCs in Europe (RHS) 40 35 30 25 20 15 10 5 0
Source: Bloomberg, Airline Business, Standard Chartered Research
Ryanair has maintained a strong ROE and its leading position despite increased competition
This period of expansion, which also saw many LCC start ups, brought Ryanair into direct competition with LCCs all over Europe, including Wizz, Vueling and easyJet, leading to price wars that lowered average fares for consumers and compressing margins. However, Ryanair has managed to maintain its ROE and leading position since competition kicked in. The share price also had another bull run from 2005 after finding a bottom in 2004. Fig 137: SWOT analysis Ryanair in the early 2000s
Strengths First-mover advantage. Lowest costs by some margin (nearest competitor easyJet more than 50% higher) = lowest fares. Pushed the envelope in de-bundling and ancillaries to new frontiers, incentivising costsaving behaviour. Largest fleet among EU LCCs, derived from ruthless bargaining (mutually reinforcing). Extracted subsidies from secondary airports, again through ruthless bargaining. Owns training facilities, thus less likely to suffer from staff shortages. Strong brand recognition (notoriety). Opportunities Further aircraft orders facilitating ...further market share gains, facilitating ...the eventual raising of fares and yields once dominant scale and monopolistic market share had been achieved.
Weaknesses Seasonality of earnings Ryanair tended to ground aircraft over the loss-making winter period while relying heavily on strong JulySeptember months Legal costs Ryanairs confrontational approach to politicians, regulators, journalists and customers often landed it in court.
Threats Lack of industry capacity discipline. Rising EU taxes on air travel. Rising fuel prices and volatile currency movements.
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Fig 138: SWOT analysis AirAsia today

Strengths Among the lowest costs in the sector. Largest LCC fleet in Asia; strong relationship with Airbus. Operates in three of the highest GDP growth countries in ASEAN. Owns training facilities, thus less likely to suffer from staff shortages. Excellent use of social media, positive brand. Constantly developing new, innovative and nonconfrontational sources of ancillary revenue. Weaknesses Relatively high gearing.
Opportunities Further market share gains in JV markets.
Threats Lack of industry capacity discipline.
Consolidation and rationalisation of flag carriers. Overstretching itself with too many JVs (two of four yet to be profitable, fifth about to start in Optimally positioned for further air service India, one of the worlds most dysfunctional air liberalisation in the region. markets). Young, high-growth economic environment. Protectionism. Increasing Internet penetration. The pan-Asian ambitions of Jetstar and Lion/Malindo Air. Further ancillary development. Rising fuel prices. Insufficient airport capacity to keep pace with fleet growth.
Ryanairs success
Ryanair has maintained its leading position through three steps we think AirAsia will follow
Step 1: Higher asset efficiency

Ryanairs success can be attributed to its high asset turnover. Although margins were hurt by the rise in oil prices since 2004, improving asset turnover and aircraft productivity supported ROE. Ryanairs asset turnover was materially faster than its closest competitor easyJet before 2007. Higher aircraft productivity is one of the key attributes of lower unit cost. Ryanairs unit cost has been substantially lower than easyJets.
Fig 139: Rising asset turnover

60% 50% 40% 30% 20% 10% 0% -10% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 NPAT margin Asset turnover ROE
Fig 140: Aircraft productivity (mn ASKs per plane)

450 400 350 300 250 200 150 100 50 0 2007 2008 2009 2010 2011 2012 315 408 419 Ryanair 374 371 342 Easyjet 375 338 389 352 356
Ryanair FYE March, easyJet FYE September; thus RYA FY12 and EZJ FY11 for 2011. Source: Companies, Standard Chartered Research
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Fig 141: Cost per ASK leadership: 66% (5-yr mean: 61%)
9 8 7 6 5 4 3 2 1 0 2007 2008 2009 2010 2011 2012
Ryanair FYE March, Easyjet FYE September; thus RYA FY12 and EZJ FY11 for 2011. Source: Companies, Standard Chartered Research
Fig 142: CASK ex-fuel leadership: 108% (5-yr mean: 90%)

7.42 7.73 6 5 4 Ryanair 5.34 5.42 4.84 Easyjet 5.08 5.30 5.22
Ryanair 7.93 7.27 5.35 4.64 4.25 4.08 6.99
Easyjet 6.91
4.46 3 2 1 0
2.95
2.99
2.78
2.48
2.54
2007
2008
2009
2010
2011
2012
Ryanair FYE March, Easyjet FYE September; thus RYA FY12 and EZJ FY11 for 2011. Source: Companies, Standard Chartered Research
First, AirAsia could improve aircraft efficiency to lower unit cost and maintain ROE
Similarly, we believe AirAsia will eventually achieve significant unit cost leadership over its competitors. Although several countries in Asia have structurally lower cost bases (the Philippines and Indonesia, for example), comparing unit costs across Asia LCCs based in different countries is not entirely fair. Though the Jetstar Group beats AirAsia on ASKs flown per plane, we attribute this largely to longer sector lengths flown in Australia. Despite these disadvantages, AirAsia continues to enjoy lower unit costs than its competitors. Fig 144: Aircraft productivity, 2012 (mn ASKs/plane)
Fig 143: CASK, CASK ex-fuel leadership, 2012: 16%, 27%

Cost per ASK ex-fuel (US) Jetstar Citilink Cebu Pacific Thai AirAsia Tiger Airways Indonesia AirAsia AirAsia Malaysia -1.0 1.0 3.00 3.03 6.04 3.02 5.44 3.14 5.42 2.37 4.73 2.31 4.53 3.0 5.0 7.0 Cost per ASK (US) 6.88 6.23
Jetstar Group Citilink Tiger Airways Cebu Pacific Indonesia AirAsia Thai AirAsia AirAsia Malaysia 0 200 400 149 412 363 416 389 443
510
600
Step 2: Gear up to expand Part of Ryanairs ability to beat competitors on unit costs is derived from its scale. From only 36 aircraft in 2000, Ryanair now has over 300, making it the largest LCC in Europe by a significant margin. (Ryanairs fleet size was similar to easyJets before 2005, yet Ryanair grew much faster in 2006-11.) Economies of scale are also one of the key attributes of lower unit cost. To fund this rapid fleet expansion (2000-10 CAGR of 22.4%), Ryanairs gearing has slowly crept to 107%. This has also supported its margin performance, although margin was squeezed by the rise in oil prices. Now at the end of its high-growth stage of development, Ryanair has forecast far more moderate capacity growth of 3% going forward, and it is able to fund this entirely from its cash reserves and earnings.
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Fig 145: DuPont analysis of Ryanair

0.6 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 NPAT margin (LHS) Asset turnover (LHS) Equity multiplier (RHS) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
Fig 146: Fleet size advantage, 2012: 33% (5-yr mean: 28%)
350 300 250 200 150 100 41 50 36 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 118 85 75 58 35 42 90 96 FY12 54 72 87 103 133 163 181 232 Ryanair Easyjet 272 294 305
FY13
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Second, AirAsia could gear up to expand fleet size, create economies of scale, lower unit cost, and maintain ROE
Similarly, we believe AirAsia will be able to expand its cost advantage over competitors through rapid fleet expansion. Having learned from the industrys history, AirAsia initially grew its fleet more aggressively than peers, reaching 50 aircraft less than three years after listing, compared to Ryanair, which did not receive its fiftieth plane until nearly five years after listing. The AirAsia group has more than 380 aircraft outstanding on its order book, though some of these will undoubtedly replace ageing existing planes. To fund this expansion, we think AirAsia can: (1) rely on its admirable cash-generation; (2) gear up via borrowing; or (3) pursue initial public offerings of its cross-border JVs.
Fig 147: DuPont analysis of AirAsia

1.5 1.0 0.5 0.0 -0.5 NPAT margin (LHS) Asset turnover (LHS) Equity multiplier (RHS) 7 6 5 4 3 2 1 0
Fig 148: AirAsia fleet size

140 120 100 80 60 40 20 0
FY06
FY07
FY04
FY05
FY08
FY09
FY10
FY11
FY12
FY06
Step 3: Squeeze competitors

Ryanairs scale allows it to squeeze competitors by selectively initiating price wars on select routes and raising yields once it has achieved dominant scale and market share. That said, it is important to note that despite some consolidation in the European LCC market, there are still more than twice as many LCCs today as in 2000, and despite the competition, Ryanair remains enviably profitable (13% adjusted NPAT margin in FY12) while more than a dozen other operators have carved out profitable niches for themselves.
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FY05
FY07
FY08
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Fig 149: Number of LCC bases in Europe, major LCCs

200 Ryanair Easyjet Wizz Air Jet2 Norweigan Vueling GermanWings Others
150
100
50
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Airline Business, Standard Chartered Research
Fig 150: LCC churn in Europe since 2001*

40 35 30 25 20 15 10 5 0 -5 2001 2002 2003 2004 2005 2006 2007
*Not a comprehensive list. Source: Airline Business, Standard Chartered Research
Existing LCCs 4 7 6 8 19 12 12 -1 -1 -1 -2 24 30
New LCCs 2
Withdrawn LCCs 1 1 2
32
34
34
30
26
27
27
-5 2008
-4 2009 2010 2011
-4 2012
Third, we believe more competitors will be squeezed out of the market
We believe small players in Asia will continue to leave the market. Batavia Air left the Indonesia market without buyers willing to take its aircraft, and Merpati Nusantara is in serious financial distress. Zest Airways entered a merger with Philippines AirAsia. All but the three largest Korean LCCs are under financial pressure. Although the Asia-Pacific market is larger than Europe, people are generally poorer, and this implies that lower fares, and therefore lower unit costs, are necessary to boost demand. The greater geographic spread also implies that LCCs in Asia need a larger fleet and more funding support to be leading pan-Asian players. We therefore believe AirAsia will over time be able to squeeze competitors out of the market. However, we also believe the greater market size will allow more LCCs to survive. We think AirAsia is likely to continue to grow despite the advent of new competitors as the overall market is growing.
Share-price implications for AirAsia

Ryanairs share price fell 56% from its pre-global financial crisis peak of 4.10 (reached on 25 November 2002), to 1.18 on 20 October 2004, a peak -to-trough decline of 71%, including a decline of 30% on 28 January 2004 in response to the companys first profit warning. Many analysts at the time looked at the competition in Europe and concluded that Ryanairs days of strong profitability were over. One analyst was quoted (anonymously) as saying: What we're seeing now is a number of me-too operations jumping on a bandwagon. And that bandwagon is slowing down.
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Fig 151: Ryanairs share price charted against number of competitors

7 6 5 4 3 2 1 0 Jan-00 Aug-01 Apr-03 Nov-04 Jul-06 Feb-08 Oct-09 May-11 RYA Px (LHS) Number of LCCs in Europe (RHS) 40 35 30 25 20 15 10 5 0 Jan-13
Source: Bloomberg, Airline Business, Standard Chartered Research
Though competition doubled in the 2000s, Ryanair remains highly profitable
An investor who bought shares in Ryanair the day after the profit warning and held the position for three years would have more than doubled his investment and enjoyed a CAGR of 32%, in spite of the intense competitive environment in Europe in the mid-2000s. Even after the consolidation wrought by the global financial crisis, the number of LCCs in Europe had steadied at around 25 in 2010-12, more than twice the number in 2000, yet Ryanair remains highly profitable and its share price is testing all-time highs. AirAsias share price reacted similarly following Lion Airs 11 September 2012 announcement that it would enter the Malaysian LCC market via the establishment of Malindo Air. AirAsia shares fell from a peak of MYR 4.14 on 2 August 2011 to MYR 2.53 on 21 December 2012, a peak-to-trough decline of 39%. The price fell 15% in September 2012 alone, from MYR 3.47 on 3 September to MYR 3.02 on 28 September, abetted by bearish analyst warnings about overcapacity, price wars and strategic disruptions to AirAsias business strategy. The companys strong 2012 results arrested the decline, but the share pric e is still 27% off its August 2011 high. Based on Ryanairs history, we would consider this a significant buying opportunity for investors. Fig 152: Reaction of Ryanair and AirAsia share prices to increasing competition
7 6 5 4 3 2 1 0 Mar-97 RYA Px (LHS) AIRA Px (RHS) 7 6
We believe AirAsias share price will also recover as it proves its cost leadership
Ryanair profit warning Malindo unveiling
5 4 3 2 1 0 Mar-13 MYR
Mar-99
Mar-01
Mar-03
Mar-05
Mar-07
Mar-09
Mar-11
Source: Bloomberg, companies, Standard Chartered Research
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We consider competition concerns overblown
We believe the concerns about AirAsias competition are overblown. While yields will likely come under pressure on some routes, AirAsia has proven that it can keep costs under control while creating opportunities to extract revenue from passengers, and the companys scale and network breadth allow it to cut fares to combat new entrants on certain routes without harming overall yield across the network too much. AirAsias only challengers in terms of scale the Lion Air group and the Jetstar group cannot match it on unit costs (nor does the Lion Air group have any meaningful experience of operating cross-border JVs to expand its network beyond Indonesia and become a pan-Asian LCC). Europes experience suggests that even with significant competition, a wel l-run, lowest-cost LCC like Ryanair or AirAsia can continue to enjoy strong profitability and strong share price performance even amid intensifying competition. We continue to believe AirAsia will be the dominant LCC in Asia and expect strong operational and financial performance in 2013-15.
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AirAsia in Asia > Ryanair in Europe?

Despite the similarities between the two carriers, we believe AirAsia also enjoys structural
advantages over Ryanair in its operating environment.

The Asia-Pacific region has approximately seven times as many people as the EU, a younger
demographic profile, and much stronger economic growth (4.61% in 2012 compared to largely flat growth in Europe).
LCCs in Europe compete on a common footing due to the EUs single aviation market.
Nothing resembling a single aviation market is even being discussed in Asia. We think this gives AirAsia a decisive competitive advantage in developing a pan-Asian network, due to its extensive experience of successfully setting up and running cross-border JVs.
Greater market potential in Asia

Asia should be able to accommodate more LCCs than the EU given the size of the market The Asia-Pacific region (including Australia but excluding the Middle East and Central Asia) had only 30 LCCs in 2012 (now fewer due to consolidation), despite being home to approximately seven times as many people as the EU. And unlike the EU, which is experiencing anaemic growth and struggling with the ongoing Euro crisis, Asia-Pacific GDP grew 4.61% in 2012 and ASEANs grew 5.22%, and the trend will not reverse in the medium term. As economic growth continues to lift millions from poverty and expand the middle class, millions will be able to afford air travel for the first time. We think there is plenty of room for Asia LCCs to grow capacity. The EU, despite being a mature economic region, was able to sustain 25 LCCs in 2012, and the dominant players (Ryanair, easyJet) were highly profitable. Fig 153: Population, 2012
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 EU ASEAN APAC
Fig 154: Number of LCCs, 2012

3,484 35 30 25 20 15 14 % 25 30
Fig 155: GDP growth, 2012

6 5 4 3 2 1 0 0.08 EU ASEAN APAC % 5.22 4.61
People, mn
502
617
10 5 0 EU ASEAN APAC
Source: Airline Business, Standard Chartered Research
More protected domestic market in Asia

Barriers to becoming a regional LCC higher in Asia-Pacific than Europe Another crucial difference between the Asian LCC market and the European LCC market is aviation regulation. The European aviation market became a truly open and level playing field by 2000, with an enforcement body to ensure different countries stuck to the rules. This made the market far more competitive and price wars bloodier, as cabotage rights across the EU meant there were effectively no barriers to entry and expansion: any EU airline could set up a base in another country and fly between domestic destinations in a third EU country if they so wished. Asia remains (and will likely remain so for some time) far more disparate and fragmented, with dozens of different domestic civil aviation regulators, ownership restrictions, and complex multilateral and bilateral agreements between different countries and groups of countries. Barriers to entry are numerous and high in such an environment, making it far more difficult for LCCs to establish a network beyond their home country, let alone a pan-Asian network. Such a network requires a series of complex cross-border JVs, which only AirAsia and Jetstar have been able to execute successfully. Tiger formed two such ventures in 2012 (Mandala in Indonesia and SEAir in the Philippines), but both are quite small in scale. Lion Air launched Malindo in Malaysia in March 2013, but Malindos product resembles a full -service carrier.
l
Only AirAsia and Jetstar have built profitable, scaled networks of crossborder JVs
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Malindo is not an LCC

Unlike AirAsia, which charges passengers extra for everything beyond the airfare, Malindo has
bundled ancillaries including in-flight meals, entertainment and 15kg of free baggage into the fare, significantly raising costs while cutting off the largest source of traditional LCC ancillary revenue baggage.
Our analysis of Malindos likely unit costs leads us to believe its low fares are temporary; we
think it will have to raise fares to avoid haemorrhaging cash, and that it is thus a far greater long-term threat to Malaysias full-service carrier, Malaysia Airlines, than to AirAsia.
Malindos B737-900ERs are identical to Lion Airs newly-launched Indonesian full-service
subsidiary Batik Air in business and economy, with the same seats and in-flight entertainment systems; very different from the configuration of its Lion Air LCC planes. Lion Airs decision to launch its first cross-border JV with a differentiated product adds complexity and potential for customer confusion, and is likely to impede the long-term success of its pan-Asian ambitions, in our view.
Not, in fact, low cost

Malindos business model resembles a full-service carrier more than an LCC Malindos website and call centres became operational in March 2013, with flights from Kuala Lumpur to Kuching and Kota Kinabalu beginning on 22 March. Its slogan, Not just low cost suggests an LCC that provides more than what passengers expect for standard LCC fares, and indeed it does. Our research reveals an airline that veers so far from the traditional LCC business model that we think it cannot hope to achieve costs comparable to a disciplined LCC such as AirAsia. Fig 156: Malindo vs. AirAsia value proposition
Parameter Aircraft Configuration Seat pitch (economy) In-flight meals In-flight entertainment Baggage Counter check-in Seat selection Aerobridges Malindo Air Boeing 737-900ER 180 seats, two class configuration (168 economy, 12 business class) 32 inch Free Free, built-in 15kg free in economy, 30kg free in business Free No seat selection online; allocated at counter check-in On all Malindo flights AirAsia Airbus A320-200 180 seats, all economy configuration 29 inch Ancillary (MYR 12 for meal, MYR 9 for snack, MYR 9 for young coconut drink) None Ancillary (MYR 25 for 15kg) Ancillary (MYR 10) Ancillary (MYR 30 for exit row, MYR 6 for standard) None Aerobridges cost MYR 85 per bridge per use in Malaysia, and slow turnaround times
Malindos product indisputably differentiates itself from AirAsias more basic offering, but with this comes additional costs. Malindo appears to offer almost every operational item that AirAsia has either cut or turned into a revenue stream as part of its bundled product. Even the relatively minor cost of offering aerobridges on all flights will reduce turnaround times and hurt utilisation. This is not new or revolutionary: Malindo is a full service carrier without legacy costs, but it is not an LCC. We believe Malaysia Airlines has more to fear from Malindo than AirAsia Malaysia Airlines is the obvious comparable, especially since it has worked diligently to improve operational efficiency of late and has turned in two consecutive quarters of net profit after six consecutive quarters of losses. We have attempted to work out Malindos potential revenue and cost per available-seat kilometre based on comparisons to either Malaysia Airlines or AirAsia, where appropriate.
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Fig 157: Revenue per ASK comparison

30 25 20 15 10 5 0 AirAsia Malaysia Airlines Malindo (est.) MY sen Other revenue
Fig 158: Costs per ASK comparison

AirAsia Malaysia Airlines Malindo (est.) Others Leasing Charges Maintenance -15 -20 -25 -30
Airport services Cargo surcharges MY sen Cargo revenue Surcharges and fees Aircraft operating lease income Baggage fees Passenger seat sales
0 -5 -10
Fuel Depreciation Staff
Fig 159: Malindo RASK assumptions

Passenger fares Malindos business class fares are approximately half those offered by MAS on the same routes, and its economy fares attempt to match AirAsias. We therefore estimate it will achieve the average of the two airlines per ASK. The single largest ancillary income item for most LCCs, we cannot envision pricesensitive Malaysians regularly exceeding the allowable 15kg, nor business passengers needing more than 30kg for short trips. We thus estimate 10% of AirAsias baggage revenue per ASK. Malindos charges are similar to AirAsias
Baggage fees
Surcharges and fees
Fig 160: Malindo CASK assumptions

Staff Fuel Malindo is likely paying similar wages to AirAsia but having business class on board and free check-in demands more staff. We use the average of AirAsia and MAS. The B737-900ER is a slightly more expensive aircraft to run on a per-trip basis (+13.5%) but cheaper on a per-seat basis (-1%) than the A320 and will be structurally heavier thanks to the built-in entertainment system and business class; we settled on +12% over AirAsia. Maintenance costs are likely to be lower for brand-new aircraft but offset by increased costs of maintaining an in-flight entertainment system usually the second highest-cost maintenance item after engines; 50% higher than AirAsia. Malindo will be subject to similar charges as AirAsia, but probably lower initially since it will only fly domestic routes; 80% of AirAsias. We expect Malindo to lease its planes from Lion Air, and for the parent to offer heavily subsidised rates. We use Indonesia AirAsia's leasing rates. With a business class offering and meals included (even in economy), Malindo will have similar in-flight costs to MAS. Same as MAS due to free check-in and overall business model.
Maintenance
Airport charges Leasing In-flight costs Selling expenses
More accurately, Not Just Low Fare

Malindos aircraft are configured identically to those of Lion Airs full-service Batik Air Malindos low fares and much higher cost structure than AirAsia suggest that Malindo could be starting with roughly a -10% operating margin. The entire value proposition appears to us to compete with MAS rather than AirAsia. According to CAPA, Malindos product is identical to that of Lions newly-launched full-service subsidiary Batik Air in both economy and business class. The 737-900ERs being delivered to Batik and Malindo feature the same seats and in-flight entertainment (IFE) systems, while the additional 737-900ERs being delivered in Lion livery are configured with 213 seats in a single-class configuration without any IFE.
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Malindos fares have risen significantly since its launch, suggesting it was suffering heavy losses
With much of its business model decided by how its planes are configured, it will be much easier for Malindo to raise fares than restructure costs. We believe it is more likely to raise fares than suddenly charge for ancillaries, since we believe people can see the superiority of the Malindo product and will be willing to pay for it, whereas charging for things once offered for free tends to be unpopular with consumers. Malindos promotional fares did not last as long as we expected, as our desktop research shows fares on its initial-launch trunk routes have nearly tripled just two months after beginning operations, suggesting it was bleeding very heavily indeed. Fig 161: RASK vs CASK, Malaysian carriers
40 30 20 MY sen 10 0 -10 -20 -30 -40 AirAsia
Revenue per ASK 27.65 17.60
Cost per ASK
14.93
-14.00 -28.38 Malaysia Airlines
-16.74
Malindo Air (est.)
Even if Malindo pursued a lossmaking, price war, AirAsia would survive due to its cost structure
Conversely, our desktop research shows that AirAsia did not feel the need to savagely cut fares to undercut Malindos, and now that Malindos fares have rebounded, AirAsia is back to comfortably offering the lowest fares in the market. Our channel checks further suggest that AirAsias load factors have yet to show any impact from Malindos entry. If Malindo continues to attempt to compete with AirAsia on fares while offering a full-service product, it could impact AirAsias margins and earnings when Malind o achieves scale, but AirAsia will survive due to its world-leading low costs, whereas Malindo will likely suffer increasing losses as it grows in scale. Subsidising a severely loss-making Malindo would also weaken the parent Lion Air in Indonesia, and leave its 45% market share more vulnerable to Garuda, Citilink and Indonesia AirAsia.
We believe Malindo will eventually leave the budget segment and compete directly with Malaysia Airlines
We believe that after initially offering cheap promotional fares to attract customers, Malindo will gradually raise fares and settle into closer competition with Malaysia Airlines, allowing AirAsia to remain the dominant Malaysian budget carrier. We therefore believe the impact of Malindos entry on AirAsias margins and earnings will not be as disruptive or severe as the market seems to have discounted for, and that long-term margins of 15% remain eminently achievable for AirAsia. As a further read across of the sector, Lion Airs decision to launch its first cross -border JV with a product that deviates so much from its bread-and-butter Lion Air low-cost product in Indonesia adds complexity. Successful LCCs maintain uniform products because complexity increases costs. Lion Airs strategy will make it more difficult and costly for it to build a seamless Asian network as AirAsia and Jetstar are doing, in our view.
Lion Airs launch of a cross-border JV so different from its main product is a strategic blunder, in our view
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Financials
We forecast YoY EBIT growth of 27% to MYR 1.47bn in 2013, above the consensus estimate of MYR 1.18bn, as we think the market has overestimated the impact of Malindo, and MAA is likely to continue to grow earnings via capacity expansion. TAA is the major profit contributor among the associates. TAA is our favourite single country LCC in Asia based on our company scorecard analysis. The proceeds of its 2012 IPO make aggressive capacity expansion possible for TAA in a high growth and open market, with the major competitor leaving domestic routes to LCCs. IAA recognition is based on equity method accounting and will contribute to the bottom line only from 2015; AirAsia Japan (AAJ) recognition is also based on equity method accounting, and it has stopped registering losses since 4Q12 after the groups initial investments were reduced to zero by previous losses. TAA will be the sole contributor among the associates in 2013-14E. Fig 162: Financial summary (MYR mn)
Parameter Revenue EBITDA EBIT Pre-tax profit/(loss) Normalised net profit/(loss) 2011 4,495 1,733 1,163 777 555 2012 4,996 1,720 1,158 2,054 817 2013E 5,744 2,169 1,474 1,338 1,104 2014E 6,116 2,285 1,470 1,314 1,117 2015E 6,626 2,582 1,625 1,491 1,305
Income statement
We forecast 11% revenue growth in 2013 for MAA MAA: Revenue We forecast revenue growth of 11% in 2013 but single digit revenue growth in 2014-15, factoring the likely impact from Malindo. We expect MAA to expand capacity 12% in 2013, by adding 10 new aircraft and maintaining stable sectors as per its plan. We believe the Malaysian market will be able to absorb the additional capacity and therefore forecast load factors of 80% at a mild cost to passenger yields, which we expect to decline 2% YoY in 2013. This is largely due to MAAs more aggressive capacity growth rather than competition from Malindo. We expect passenger yield erosion to be somewhat offset by ancillary yields, which we have growing strongly at 17% YoY in 2012 by introducing fuel surcharges. We expect management to be successful in raising ancillary yields further by introducing WiFi on aircraft, online dating, and other innovative initiatives to complement its extensive suite of ancillary income sources, and forecast a 2013-15 ancillary yield CAGR of 7.1%. MAA: Operating expenses We expect operating expenses to grow a moderate 8% in 2013. We forecast expense growth to exceed revenue growth in 2014 and 2015 as yields decline, resulting in EBIT margin compression from 26% in 2013E to 24% in 2014E. Fuel will remain the largest cost factor, and our house view is that kerosene jet fuel prices will remain stable in 2013-14. The 33% increase in LCC planes in Malaysia will put upward pressure on wages. We forecast staff costs to grow faster than the rate of inflation in 2013 and more so in 2014 as Malindo ramps up its services. We forecast aircraft rental costs to rise slightly on a perplane basis as bullish expansion by LCCs across Asia drives up demand and therefore prices for leased aircraft.
We expect expenses to outpace revenue in 2014 and 2015 as yields decline
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Fig 163: Operating expenses breakdown (2013E)
Fig 164: EBIT and EBITDAR margin

EBIT Margin EBITDAR Margin 50%
5% 4% 13% 16% 17% Staff costs Depreciation Aircraft fuel MRO Operating lease 45% Others
40% 30% 20% 10% 0% -10% -20% 2008 2009 2010 2011 2012 2013E 2014E 2015E
We forecast a 201315 TAA revenue CAGR of 23%
TAA: Revenue We forecast a 2013-15 revenue CAGR of 23%. Management guides that TAA will add seven aircraft in 2013 and five to six a year in 2014-15. Capacity growth will accelerate to 27% YoY in 2014, as we expect TAA to add more international routes, enhancing the distance and ASK, after more balanced development in 2013. We think TAA could maintain a load factor of 80%. The domestic competitive structure is better than that in Indonesia and the Philippines, and we believe yield sacrifice for TAA during the fast stage of expansion should be relatively mild. However, we do factor in a small decline in passenger fare yield in 2014-15, despite increasing exposure to higher yield international routes. We believe a sustained rise in ancillary yield will provide strong support for total yield. Ancillary yield dropped 9% YoY in 2012; management attributed the decline to its strategy of reducing charges for bag check-in to simulate demand (implemented from 2Q12). In reality, passenger price sensitivity to ancillary services is fairly low. TAA has therefore gradually returned to the original baggage fee, which represents over 50% of total ancillary yield revenue. We would not be surprised if ancillary yield grows more than our assumed 9% YoY in 2013E. TAA: Operating expenses We estimate 19% YoY growth in operating expenses in 2013. We forecast lower expense growth than capacity growth in 2013 due to lower airport fees and stable oil prices. We believe the accelerating international expansion will boost expense growth to 28% in 2014, leading to a mild margin contraction. We estimate TAA will achieve an EBIT margin of 15% in 2013. Fig 166: EBIT and EBITDAR margin
35% 25% 15% 0.90 0.93 0.96 0.97 5% -5% -15% EBIT Margin EBITDAR Margin 2008 2009 2010 2011 2012 2013E 2014E 2015E
We expect TAA to achieve an EBIT margin of 15% in 2013,
Fig 165: Unit cost (cost/ASK)

2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 2011 2012 2013E 2014E 2015E
Unit cost (THB) 1.65 1.51
Unit cost ex-fue (THB)l 1.61 1.61 1.60
0.82
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We forecast a 201315 IAA revenue CAGR of 29%, driven by capacity expansion
IAA: Revenue We forecast a 2013-15 revenue CAGR of 29%, driven mainly by capacity expansion. Given the exit of Batavia Air, more airport slots in Jakarta are available. IAA therefore plans to re-focus on the domestic market in 2013 and target a higher market share by aggressively adding new aircraft. While we expect more airport slots to be released after terminal 3 of Jakarta International Airport is fully completed in 2014, we believe IAA will continue to aggressively expand capacity in 2014-15 to boost market share. We think competitors are highly likely to adopt a similar strategy. Based on management guidance, we expect IAA to add eight aircraft in 2013 and eight to nine aircraft a year in 2014-15. As IAA targets an IPO in 2H13, it will purchase more aircraft to support capacity expansion. In 2010-12, IAA maintained a load factor of 76-77%. We think market consolidation in the domestic market should help IAA maintain load factor at 76% in 2013, despite its aggressive ASK expansion. However, we believe load factor could be under pressure in 2014-15 due to intensifying competition. Relatively tight capacity supported passenger fare yield in 2012. We think IAA is likely to allocate more aircraft to domestic secondary routes and secondary hubs as Jakarta Airport is extremely congested, which could also pressure fare yield. Ancillary yield should continue to grow strongly, with the rise in disposable incomes in Indonesia. IAA: Operating expenses We expect operating expenses to grow nearly 30% a year in 2013-15 given aggressive capacity expansion and continued inflation in almost all cost items except fuel. While IAA should be able to increase economies of scale and lower unit cost by adding aircraft, margin could remain under pressure due to likely declines in passenger yield and load factors. Fig 168: EBIT and EBITDAR margin
Unit cost ex-fuel (INR) 425 426 427 35% 30% 25% 20% 15% 10% 241 5% 0% -5% -10% -15% EBIT EBITDAR Margin
We expect rises in almost all cost items except fuel to inflate operating expenses 30% p.a. in 2013-15
Fig 167: Unit cost (cost/ASK)

500 450 400 350 300 250 200 150 100 2011 2012 2013E 2014E 2015E
Unit cost (INR) 438 410
213
217
226
233
2008 2009 2010 2011 2012 2013E 2014E 2015E

We forecast AirAsia X and IAA to begin registering positive contributions by 2015
Other associates and JCs All associate recognitions are based on equity method accounting. There is no loss recognition from an associate after the companys interest in this associate is reduced to zero. There is no profit recognition from an associate before the accumulated loss is entirely reversed. We therefore do not expect Philippines AirAsia (PAA) or AirAsia Japan (AAJ) to recognise any positive or negative contributions through our investment horizon, as they could continue to make losses for another two years and accumulated losses that are highly unlikely to turn positive by 2015. IAA and AirAsia X (AAX) should start to make positive contributions sometime in 2015.
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Fig 169: Contributions from JCs and associates (MYR mn)

2011 JCs Asian Aviation Centre of Excellence AAE Travel Think Big Digital (BIG) Associates TAA IAA PAA AAJ AAX/Others
2012 9 -12 0 57 0 -7 -47 -9
2013E 10 -10 0 135 0 0 0 0
2014E 12 -10 0 156 0 0 0 0
2015E 14 -10 0 199 49 0 0 10
7 5 0 0 0 -6 0 -15
Balance sheet
We forecast capex of MYR 2.6bn p.a., with most planes leased to affiliates Capital expenditure AirAsia has aggressive fleet expansion plans; it has taken delivery of over 100 Airbus A320s and has over 350 more confirmed orders, with deliveries scheduled all the way out to 2026. Following management guidance, we expect the vast majority to be held under the parent and leased to affiliates where necessary. However, once affiliates have been listed, management has indicated that the JV companies will take at least half of new aircraft on their own balance sheets. All told, 85 new A320s will come under AirAsia Group ownership by end-2015E, and we forecast average capital expenditure of MYR 2.63bn per year. Fig 171: Net debt to equity ratio versus capex
Indonesia 350% 300% 250% 200% 150% 100% 50% 4Q12 2013E 2014E 2015E 0% 2009 2010 2011 2012 2013E 2014E 2015E
Fig 170: Fleet expansion plans

200 180 160 140 120 100 80 60 40 20 0
Malaysia Philippines
Thailand Japan
Capital expenditure (RHS, MYRmn) Net debt to equity ratio (LHS)
3,500 3,000 2,500 2,000 1,500 1,000 500 -
We expect this expansion to be funded by an 80:20 mix of debt: cash, which should be easily manageable given AirAsias proven ability to generate cash. Net debt to equity ratio The companys balance sheet is significantly stronger than it was a few years ago, with net debt to equity declining from a peak of 402% in 2008 to 116% in 2012. Given its prudent cash management and strong profitability, we expect net debt to equity ratio to remain in a manageable range of 1.1-1.3x in 2013-15 despite the significant capex for fleet expansion.
We expect net debtto-equity ratio to remain in a manageable range of 1.1-1.3x in 2013-15
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Income statement (MYR mn)

Year-end: Dec Sales Gross profit SG&A Other income Other expenses EBIT Net interest Associates Other non-operational Exceptional items Pre-tax profit Taxation Minority interests Exceptional items after tax Net profit Net profit adj. EBITDA EPS (MYR) EPS adj. (MYR) DPS (MYR) Avg fully diluted shares (mn) 2011 4,495 870 0 292 1,163 (312) 6 (80) 0 777 (222) 0 0 555 555 1,733 0.20 0.20 0.05 2,762 2012 4,996 1,034 0 124 1,158 (299) (2) 37 1,160 2,054 (176) 0 0 1,879 817 1,720 0.68 0.29 0.24 2,782 2013E 5,744 1,474 0 0 1,474 (271) 135 0 0 1,338 (234) 0 0 1,104 1,104 2,169 0.40 0.40 0.08 2,779 2014E 6,116 1,470 0 0 1,470 (314) 158 0 0 1,314 (197) 0 0 1,117 1,117 2,285 0.40 0.40 0.08 2,779 2015E 6,626 1,625 0 0 1,625 (385) 251 0 0 1,491 (186) 0 0 1,305 1,305 2,582 0.47 0.47 0.09 2,779
Cash flow statement (MYR mn)

Year-end: Dec EBIT Depreciation & amortisation Net interest Tax paid Changes in working capital Others Cash flow from operations Capex Acquisitions Disposals Others Cash flow from investing Dividends Issue of shares Change in debt Other financing cash flow Cash flow from financing Change in cash Exchange rate effect Free cash flow 2011 1,163 571 (324) (22) (24) 41 1,404 (612) (156) 388 (107) (487) (77) 5 (244) 16 (300) 617 0 792 2012 1,158 562 (298) (8) 713 (821) 1,306 (1,896) (17) 125 (148) (1,935) (139) 2 887 (1) 749 120 0 (590) 2013E 1,474 695 (271) (234) 1 0 1,664 (2,476) 0 0 0 (2,476) (221) 0 1,981 0 1,760 948 0 (811) 2014E 1,470 815 (314) (197) 107 0 1,882 (3,258) 0 0 0 (3,258) (223) 0 2,607 0 2,383 1,007 0 (1,376) 2015E 1,625 957 (385) (186) 70 0 2,080 (2,514) 0 0 0 (2,514) (261) 0 2,011 0 1,750 1,317 0 (434)
Balance sheet (MYR mn)

Year-end: Dec Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets PP&E Intangible assets Associates and JVs Other long-term assets Total long-term assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible bonds Deferred tax Other long-term liabilities Total long-term liabilities Total liabilities Shareholders funds Minority interests Total equity Total liabilities and equity Net debt (cash) Year-end shares (mn) 2011 2,105 8 1,110 20 552 3,794 8,586 7 676 842 10,112 13,906 594 1,137 463 2,194 7,187 0 0 488 7,675 9,869 4,036 0 4,036 13,906 5,676 2,780 2012 2,226 0 1,363 24 333 3,945 9,786 7 1,769 1,140 12,702 16,647 726 1,896 409 3,031 7,718 0 0 544 8,263 11,294 5,353 0 5,353 16,647 6,219 2,779 2013E 3,174 0 1,567 24 333 5,098 11,567 7 1,904 1,140 14,618 19,716 726 2,043 467 3,236 9,699 0 0 544 10,243 13,479 6,236 0 6,236 19,716 7,251 2,779 2014E 4,181 0 1,669 24 333 6,206 14,010 7 2,062 1,140 17,219 23,425 726 2,223 495 3,445 12,306 0 0 544 12,850 16,295 7,130 0 7,130 23,425 8,851 2,779 2015E 5,497 0 1,808 24 333 7,662 15,567 7 2,313 1,140 19,028 26,689 726 2,393 535 3,654 14,317 0 0 544 14,861 18,515 8,174 0 8,174 26,689 9,546 2,779
Financial ratios and other

Year-end: Dec Operating ratios Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Effective tax rate (%) Sales growth (%) Net income growth (%) EPS growth (%) EPS growth adj. (%) DPS growth (%) Efficiency ratios ROE (%) ROCE (%) Asset turnover (x) Op. cash/EBIT (x) Depreciation/capex (x) Inventory days Accounts receivable days Accounts payable days Leverage ratios Net gearing (%) Debt/capital (%) Interest cover (x) Debt/EBITDA (x) Current ratio (x) Valuation EV/sales (x) EV/EBITDA (x) EV/EBIT (x) PER (x) PER adj. (x) PBR (x) Dividend yield (%) 2011 19.4 38.6 25.9 12.4 28.5 13.9 -47.7 -47.5 -47.5 nm 2012 20.7 34.4 23.2 16.4 8.5 11.1 238.3 235.8 46.1 380.0 2013E 25.7 37.8 25.7 19.2 17.5 15.0 -41.2 -41.2 35.2 -66.9 2014E 24.0 37.4 24.0 18.3 15.0 6.5 1.2 1.2 1.2 1.2 2015E 24.5 39.0 24.5 19.7 12.5 8.3 16.8 16.8 16.8 16.8
14.5 10.1 0.3 1.2 0.9 1.9 79.2 103.2
40.0 9.1 0.3 1.1 0.3 2.0 90.3 139.7
19.1 9.8 0.3 1.1 0.3 2.0 93.1 168.4
16.7 8.1 0.3 1.3 0.3 1.9 96.5 167.6
17.1 7.6 0.3 1.3 0.4 1.7 95.7 168.5
140.6 66.4 3.1 4.5 1.7
116.2 62.0 3.1 4.7 1.3
116.3 63.3 4.4 4.3 1.6
124.1 65.2 3.5 5.1 1.8
116.8 65.3 3.1 5.4 2.1
3.3 8.6 12.8 15.9 15.9 2.6 1.6
3.1 8.9 13.3 5.0 11.5 1.4 7.1
2.8 7.5 11.0 8.2 8.2 1.4 2.4
2.9 7.8 12.2 8.1 8.1 1.3 2.5
2.8 7.2 11.4 6.9 6.9 1.1 2.9
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Cebu Air
A yield-driven earnings recovery
We maintain our Outperform rating on Cebu Pacific Air
(Cebu) with a revised price target of PHP 97.00. We expect Cebu to enjoy strong earnings growth, driven by stabilisation of the Philippines aviation yield environment due to better alignment of supply and demand. The ongoing PAL Group rationalisation programme and the integration of Zest Air into Philippines AirAsia should further reduce competition and support yields. We base our new price target on 9.3x 2013-14E EV/EBITDA, in line with Cebus historical average forward EV/EBITDA. Cebu to experience yield recovery. We forecast a 2013-15 domestic passenger demand CAGR of 13% in the Philippines, while we expect a total domestic seat capacity CAGR of 12%. Better fleet discipline, resulting in demand catching up with supply, should be supportive of yields.
OUTPERFORM
(unchanged)
PRICE TARGET
PHP 80.00
Bloomberg code
PHP 97.00
Reuters code
CEB PM
Market cap
CEB.PS
12-month range
PHP 48,476mn (USD 1,177mn)

EPS adj. est. change 2013E nm
PHP 52.40 - 84.80

2014E nm
Competition will ease. The PAL Group is implementing a rationalisation programme to avoid overlaps between its fullservice product and its LCC subsidiary, PAL Express. This is pulling a competitor off of several trunk routes, and, in some cases, leaving Cebu as the lone LCC offering. Zest Air, recently acquired by Philippines Air Asia (PAA), will go through a period of integration as the two sides decide how to effectively reallocate and deploy their combined resources. Long-haul operations to fuel growth. Cebu will target the substantial number of Overseas Filipino Workers (OFWs) by serving international routes with its new long-haul, high-density A330s. It will target destinations with the highest known number of OFWs served by the fewest LCC seats, maximising the potential for stimulating new demand with low fares to fuel future growth. We expect the new long-haul operations to increase ancillary yields significantly. Valuations. We base our new price target of PHP 97.00 on 9.3x 2013-14E EV/EBITDA, which is in line with Cebus historical average forward EV/EBITDA. The current PBR of 2.0x 2013E is below the historical average of 2.1x. Cebu de-rated in 2011-12 as intensifying competition brought its yield, margin and ROE down from the 2010 peak. However, we believe the share price is likely to re-rate given the better competitive environment, improving yield and recovering ROE.
Year-end: December Sales (PHP mn) EBITDA (PHP mn) EBIT (PHP mn) Pre-tax profit (PHP mn) Net profit adj. (PHP mn) FCF (PHP mn) EPS adj. (PHP) DPS (PHP) Book value/share (PHP) EPS growth adj. (%) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Div. payout (%) Net gearing (%) ROE (%) ROCE (%) EV/sales (x) EV/EBITDA (x) PBR (x) PER adj. (x) Dividend yield (%)
2012 37,904 5,427 2,660 3,867 2,100 1,654 3.47 0.00 36.53 -34.7 -10.4 14.3 7.0 5.5 0.0 55.1 17.3 6.2 1.4 9.5 1.7 18.8 0.0
2013E 44,411 7,388 4,418 4,019 3,717 (3,363) 6.13 0.00 40.82 77.0 0.0 16.6 9.9 8.4 0.0 67.4 15.9 9.2 1.5 8.8 2.0 13.0 0.0
2014E 50,619 8,818 5,295 4,813 4,380 245 7.23 0.00 45.88 17.8 0.0 17.4 10.5 8.7 0.0 63.8 16.7 10.0 1.3 7.5 1.7 11.1 0.0
2015E 56,457 10,003 6,104 5,619 5,029 4,212 8.30 0.00 50.03 14.8 0.0 17.7 10.8 8.9 0.0 52.9 17.3 11.2 1.1 6.5 1.6 9.6 0.0

106 78
50 May-12
Aug-12
Cebu Air
Nov-12
Feb-13
May-13
PSEi - PHILIPPINE SE IDX (rebased)
-1 mth -3 mth -12 mth 3 21 19 -2 10 -21 JG Summit Holdings (66.2%) 27% 825,181
Claire Teng, CFA

l
CEB PM PHP 80.00 PHP 97.00
Michael Parry
l
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22 May 2013
Valuation
We maintain our Outperform rating with a revised PT of PHP 97.00 based on EV/EBITDA valuation We maintain our Outperform rating on Cebu Pacific Air (Cebu Air, Cebu) with a new price target of PHP 97.00. We base our price target on 9.3x 2013-14E EV/ EBITDA, which is in line with the historical average forward EV/EBITDA since listing. We think a re-rating is likely due to easing competition in the domestic market.
Price target drivers

Fig 172: Valuation (PHP mn)
Particulars 2013-14E EBITDA EV/EBITDA EV Less: Net debt Equity Total shares PT (PHP) 8,103 9.3 75,360 16,674 58,686 606 97.00 Net debt increase due to the rise in capex in 2013E Comments Earnings boosted by a better yield environment Average forward EV/EBITDA = 9.3x
EV/EBITDA
Cebu is cheap relative to its historical EV/EBITDA trading range Cebu trades at 8.8x 2013E EV/EBITDA. We believe the share price will start to re-rate given the likely material improvement in the domestic competitive structure, as Cebus largest competitor PAL Group is reducing capacity in the market and withdrawing its LCC presence entirely from some routes. The share price had de-rated in 2011 and 2012 from 13x forward EV/EBITDA to only 6x as the intensifying competition in the Philippine market had dragged yield and profitability. EBIT margin declined to 10% and 7% in 2011 and 2012, respectively, from 20% in 2010, although ROE was maintained by rising turnover driven by capacity expansion. Fig 173: 12M forward EV/EBITDA trading range
15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 12MF EV/ EBITDA Avg +1 SD -1 SD
PBR
Cebu trades at 2.0x 2013E PBR, slightly below its historical average forward PBR of 2.1x. Valuations do not appear particularly attractive, given an ROE of 16% in 2013E. However, Cebu is still in a high growth stage and we think book value will also grow quickly. We believe the stock certainly looks cheap at 1.7x 2014E PBR versus 2014E ROE of 17%. We believe ROE is trending upwards on improving yield, and view the present share price as a good entry point in the early stage of recovery.
l
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22 May 2013
Fig 174: 12M forward PBR bands

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Oct-10 x 12MF PBR (LHS) Avg +1 SD -1 SD
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Fig 175: 12M forward PBR trading range vs. 12M forward ROE
4.5 4.0 3.5 3.0 10% 2.5 2.0 1.5 1.0 Oct-10 0% Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 5% 15% 12MF PBR (LHS) 12MF ROE (RHS) 20%
PER
On a PER basis, Cebu trades slightly ahead of its global LCC peers Given Cebus low cyclicality, relatively stable margins and high growth, it may also be appropriate to check our price target using the PER metric. Cebu is trading at 13.0x 2013E PER, slightly above the global peer average of 12.7x. We think this is justified given the high growth potential in the Philippines aviation market. Fig 176: 2013E PER comparison
AirAsia 8.2 Cebu Air 13.0 Tiger Airways 95.3 easyJet* 14.9 JetBlue* 12.4 Average Ryanair* Southwest* Westjet* (ex-Tiger) 15.7 13.5 11.1 12.7
*Not covered. Above data as of 20 May 2013. Source: Bloomberg, Standard Chartered Research estimates
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22 May 2013
Higher pricing discipline by key competitors

We view San Miguels (SMC, SMC PM, OP, PT PHP 130.00) purchase of a 49% stake in the
PAL Group as a positive sign for the sector, as we expect SMC to impose greater management discipline and prevent a repeat of irrational price wars.
The PAL Groups rationalisation programme, which was initiated by SMC, has effectively
eliminated a competitor from many of the top 25 domestic trunk routes, as the group strategically avoids overlap between its full-service and LCC carriers.
We expect the rationalisation programme and AirAsias acquisition of Zest to lower head-to-
head competition on many routes, and reduce the competitive intensity in the market.
PAL-AirPhil Express rationalisation

The PAL Group is pursuing a strategy to avoid overlap between its FSC and LCC carriers In October 2012, the PAL Group decided that PAL and its LCC subsidiary, AirPhil Express (rebranded PAL Express in March 2013), would stop flying many of the same routes to minimise the potential for cannibalisation. Following the rationalisation, the PAL Groups capacity share f ell to 39% in November 2012 from 44% in April 2012. PAL or PAL Express has pulled out of 13 of the 25 busiest domestic routes, and of these 13, nine have seen a decline in the PAL Groups overall share of traffic. We believe Cebu is the largest beneficiary of this rationalisation. On several routes, it is the only competitor to PAL or PAL Express. PAA benefitted the least since the carrier did not operate out of Manilas NAIA, it did not serve many of the affected routes. Fig 177: PAL rationalisation on top 25 domestic routes
Rank by capacity Origin 1 2 3 6 8 10 12 14 15 16 21 24 25 Manila NAIA Manila NAIA Manila NAIA Manila NAIA Manila NAIA Manila NAIA Manila NAIA Manila NAIA Manila NAIA Manila NAIA Manila NAIA Manila NAIA Manila NAIA Weekly route capacity 77,012 49,242 34,304 33,030 22,030 14,308 11,256 10,890 9,968 9,280 6,000 4,984 4,810 Dropped by AirPhil AirPhil AirPhil PAL AirPhil AirPhil PAL AirPhil PAL PAL AirPhil PAL PAL PAL Group PAL Group share share pre-drop post-drop 48% 40% 39% 40% 54% 50% 37% 51% 65% 36% 68% 64% 45% 39% 38% 29% 36% 43% 52% 44% 44% 50% 27% 73% 50% 51% Capacity share by competitors Cebu (42%), Zest (8%), SEAir (11%) Cebu (41%), Zest (11%), SEAir (10%) Cebu (46%), Zest (19%), SEAir (6%) Cebu (32%), Zest (26%), SEAir (6%) Cebu (46%), SEAir (11%) Cebu (15%), Zest (33%) Cebu (56%) Cebu (56%) Cebu (50%) Cebu (73%) Cebu (27%) Cebu (50%) Cebu (49%)
Destination Cebu Mactan Davao Mati Iloilo Mandurriao Puerto Princesa Bacolod Tagbilaran Dumaguate General Santos Buayan Zamboanga Butuan Laoag Cotabato Awang Dipolog
As of October 2012. Source: CAPA, Standard Chartered Research
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Fig 178: Domestic capacity share pre-PAL rationalisation, April 2012
Fig 179: Domestic capacity share post-PAL rationalisation, November 2012

2%
1% 10% Cebu Pacific 24% 45% Philippine Airlines AirPhil Express SEAir Zest Air 20%
5%
9%
Cebu Pacific Philippine Airlines 46% AirPhil Express SEAir AirAsia Philippines
21%
18%
Zest Air
The removal of PAL or PAL Express from trunk routes benefits Cebu more than other LCCs
The rationalisation has reduced competition, and is therefore supportive of higher yields. We have seen successful full-service carriers and their low-cost subsidiaries coexist on busy international and domestic trunk routes with minimal cannibalisation. This has been achieved through careful targeting of the value proposition in the different segments (Qantas/Jetstar and Garuda/Citilink being two such examples). We believe PAL (and its parent, SMC) will not reverse the strategy in the medium term, as it also plans to extend the strategy to its international operations.
SMC is a rational investor

SMC paid USD 500mn for its 49% stake in PAL Holdings, the holding company of PAL, receiving 40% effective control of PAL and a 49% stake in PAL Express, with much of the invested capital committed for fleet renewal. As part of the deal, SMC was granted management of the struggling national carrier. SMC is a large and well-managed diversified conglomerate, with a focus on F&B and packaging and infrastructure. We believe SMC had three key reasons for investing in the PAL Group: (1) it expects synergies between the airline business and its infrastructure investments, particularly in airports and toll roads, and its 68% holding in Petron, the largest oil refinery in the Philippines, through jet fuel purchases; (2) SMCs owner has an aviation background and believes he will turn the PAL Group to profitability in two years; and (3) the deal has enhanced SMCs re lationship with the Lucio Tan Group, the major owner of PALs holding company, Trustmark and Zuma Holdings, for possible cooperation between their beer businesses. We think PAL will try to follow Garudas turnaround strategy We think SMC will probably try to follow Garudas successful turnaround strategy. Garuda has revitalised and reoriented itself as a premium carrier, shedding its reputation for poor service and accidents. Garudas 2011-15 business plan calls for the airline improve its premium offering on its core brand Garuda through fleet renewal and cabin product enhancements. Moreover, it invested in expanding Citilink, its budget subsidiary, a formula we think SMC is likely to replicate with PAL and its LCC subsidiary, PAL Express. Such a strategy should result in PAL seeking to better align revenue with costs, and prevent a repeat of the recent price war that hurt Philippine carriers profit margins.
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Fig 180: PAL revenue vs. cost per passenger

10,000 PhP PAL Rev/pax PAL Cost/pax
Fig 181: Cebu revenue vs. cost per passenger

3,500 Cebu Rev/pax PhP Cebu Cost/pax
9,000 3,000 8,000 2,500 7,000
6,000 2010 2011 2012

Source: Company, Civil Aeronautics Board (Philippines), Standard Chartered Research
2,000 2010 2011 2012

Source: Company, Civil Aeronautics Board (Philippines), Standard Chartered Research
Market consolidation
The Philippines domestic market is currently shared by nine carriers and is very competitive. Although the PAL Group and Cebu Air control over 80% of the market, the overcapacity and irrational competition in 2011-12 badly hurt the smaller players. Cebu and PAL were not immune: Cebu saw its EBIT margin shrink to 7% in 2012 from 22% in 2011, while the PAL Group registered a loss of PHP 3.6bn in 2012 from a profit of PHP 2.5bn in 2011. The ramifications were serious PAL was forced to seek a new investor to save the company from insolvency, while smaller players without economies of scale and strong balance sheets considered leaving the business. Fig 182: Market share in the Philippines domestic market
Cebu 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12
Source: Cebu Air, Civil Aeronautics Board, Standard Chartered Research estimates
Air Phil Express 6.5 8.1 7.4
PAL 7.6
Zest Air
Seair
Others 7.0 10.0
3.4
7.6
6.5
5.8
11.3 12.1 10.3 12.0 12.1 10.6
28.3 25.6 23.7 24.4 18.4 21.0 21.1 22.1 19.9 44.4 40.4 40.9 38.6 36.0 32.9 31.3 3.7 3.1 1.9 2.4 5.2 10.3 11.7 17.0 19.5 18.6 20.2 20.8 20.7 22.0 22.9 21.6
47.3 47.9 49.5 51.7 50.6 47.3 48.9 46.3 42.6 44.6 44.7 48.7 46.0 45.4 44.8 46.1
PAAs acquisition of Zest gives it a foothold at NAIA and reduces completion, easing yield pressure
In March 2013, PAA announced that it had entered a strategic alliance with Zest Airways, in which PAA acquired 49% of the common stock of Zest, and Zests majority shareholder, Ambassador Alfredo Yao, acquired a 15% stake in PAA. We expect the consolidation to support the yield of the overall market. Zest Air started operations in 1995 and currently runs a fleet of 18 aircraft. We think the key advantages for PAA of acquiring Zest Air included gaining the remaining rights at NAIA, a tax break and a clean balance sheet. That said, integrating Zest Airs old fleet and system could be a short-term issue.
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Fig 183: Share of peak-hour aircraft movements* at Manilas NAIA, August 2012
Fig 184: Post-Philippines PAA-Zest alliance domestic capacity share, May 2013
5.7%
12% 9% 5% 18% 21% 35%
Cebu Pacific Philippine Airlines AirPhil Express SEAir Zest Air Others 15.0% 18.2% 12.0% 48.9% Cebu Pacific Philippine Airlines PAL Express AirAsia/Zest Tiger SEAir
*Peak hours defined as 6:00 to 9:00 and 16:30 to 19:30. Source: CAPA, Standard Chartered Research
Fig 185: Analysis of Philippine carriers following the PAA-Zest alliance

Airline Cebu Air Comment Cebu management was adamant that it would not acquire Zest at any cost, as it considered the price too high for an ageing fleet (average age >10 years). Zest was approached by Tiger, AirAsia and China Hainan Air. Cebu does not need additional airport slots, given its strong position at NAIA. AirAsias (PAAs) progress in the Philippines should be Cebus key concern after the deal. PAL is the national flag carrier, with the recent commitment and resources of the Philippines largest conglomera te on its side. Since it expects to absorb losses in the short term anyway, we believe it missed the opportunity to bring PAL Express near par with Cebu and turn the market into an effective duopoly when it decided not to acquire Zest. Given the divestiture of 60% of Tiger Australia to Virgin Australia, the Tiger Group has shown that it will not suffer losses indefinitely and will seek exits from loss-making affiliates. However, we think the possibility of Tiger exiting the Philippines or seeking a merger/acquisition is remote its third equity-raising in early March was for the explicit purpose of funding expansion in the Philippines and Indonesia and paying down debt. With the resources of the AirAsia Group behind it, we think PAA can afford years of losses before it establishes itself. However, it was the only domestic carrier relegated to Clark (the other four serve Manila out of NAIA), and connectivity had proved a competitive disadvantage. The group had appeared to adopt a strategy of containment by not growing this affiliate to minimise losses in a challenging market, but the Zest alliance resolves the Manilaconnectivity issue while bestowing instant scale. Given no international patrons of the SIA/AirAsia mould, sub-scale operations in a highly competitive market, inability to achieve pricing power in relation to fuel or aircraft procurement, and expensive operating leases, it is little wonder that Zest actively sought suitors.
PAL Group
SEAir / Tiger Philippines Philippines AirAsia (+ Zest)
Zest Air (PAA)
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Rational capacity expansion

We believe capacity expansion in the domestic market will be significantly more rational in
2013-14 than in 2011-12.

We forecast a 2013-15 domestic capacity CAGR of 12% and a domestic demand CAGR of 13%
over the same period.

The improved alignment of supply and demand should lead to better yield performance.
Similar fleet growth rate in 2012-14E

We forecast total narrow-body fleet capacity will continue to grow c.18% in 2013-14 We expect total narrow-body fleet capacity growth in 2013-14 to be in line with the 18% growth in 2012, based on guidance from the carriers. Although new orders are likely to increase growth in 2015 (our estimates are based on current known orders), we do not anticipate another excessive spurt, as seen in 2011. Fig 186: Total seat capacity forecast; Philippines narrow -body fleet
25,000 20,000 18% 15,000 10,000 10% 5,000 0 2009
F
Seats
Cebu (narrow-body) Zest AirAsia 25% 16% 18%
PAL Group (narrow-body) SEAir YoY 19% 18% 12%
30% 25% 20% 15%
5% 0% 2010 2011 2012 2013E 2014E 2015E
Since airlines must respond to market conditions and be flexible in utilising planes and selecting sectors to fly, true capacity growth in terms of ASK is difficult to forecast. As a proxy, we first forecast fleet growth using company guidance, and then forecast total available seating, including only turboprops and narrow-bodies from the B737/A320 families, as utilisation times and required maintenance days per year are more comparable than with a wide-bodied B777. Fig 187: Fleet expansion plans guided by Philippine carriers
Carrier Cebu Air Fleet expansion plan Cebu will take delivery of five A320s in both 2013 and 2014, and four A320s in 2015. However, it will return four leased A320s in 2014, leading to a net increase in narrowbody fleet of only one in 2014. We have assumed that the groups four ageing A319s, along with its five old B747s, will be retired in 2013, with the delivery of seven new A321s and four new B777-300ERs. We have also assumed an aggressive delivery schedule for the groups Airbus orders, using the most optimistic delivery projections we were able to find in media reports. Zest is committed to adding four A320s through operating leases in 2013. With the AirAsia alliance in place, we believe future aircraft additions will be through PAA.
PAL Group
Zest Air (acquired by PAA)
Philippines AirAsia We project AirAsia to aggressively scale up at a rate of four A320s per year in 2014 and 2015, now that it has access to NAIA in Manila. We do not project any fleet additions in 2013 as Zest will already be receiving four, and all AirAsias expected deliveries are committed to expanding the other affiliates, including India AirAsia. SEAir Tiger The Tiger Group is scheduled to receive 10 A320s in 2013 and 2014, and five in 2015. Assuming Australia allows the divestment of 60% of Tiger Australia to Virgin Australia, at least four of these will have to be allocated to Australia, towards the goal of 24 additions in five years. Assuming that Mandala and SEAir split the difference, we project SEAir to add three A320s per year.
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In 2011, a 25% spike in capacity growth led to depressed yields, irrational pricing and losses
In 2011, supply growth dramatically outpaced passenger demand in the crowded Philippine market, with narrow-body fleet capacity growing 25% and total domestic seats offered rising 18%, causing a capacity glut that the market has struggled to digest. As a result, airlines have cut fares drastically to cushion the fall in load factors. In a crowded market in which every player is fighting for market share, even Cebu Air, with its dominant (in excess of 45%) share of the domestic market, has become a price taker. Fig 189: putting downward pressure on yields
3% 2% 1% 0% -1% -2% -3% -4% Pax minus seat growth (LHS) Cebu yield (RHS) PhP 3.10 3.00 2.90 2.80 2.70 2.60 2.50 2.40 2.30 2008 2009 2010 2011 2012
Fig 188: Capacity drastically outgrew demand in 2011...

18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2006 2007 2008 2009 2010 2011 2012
Source: Civil Aeronautics Board (Philippines), CAPA, Standard Chartered Research
Pax YoY
Seats YoY
Source: Civil Aeronautics Board (Philippines), Company, Standard Chartered Research
Domestic capacity CAGR of 12% in 2013-15E

We forecast total capacity growth to grow at a more subdued 12% in 2013-15 Using the 0.8 average of the 2010-12 fleet capacity multiplier (aircraft number growth to seat capacity growth), we forecast a 2013-15 domestic seat capacity CAGR of 12%, compared with 18% in 2011 and 16% in 2012.
Fig 190: Narrow-body vs. total domestic capacity growth

30% 25% 20% 15% 10% 5% 0% 2009 2010 2011 2012 2013E 2014E 2015E
Source: Civil Aeronautics Board, CAPA, Standard Chartered Research estimates
Fig 191: GDP vs. domestic passenger growth

30% 25% 20% 15% 10% 5% 0% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2009 2010 2011 2012 2013E 2014E 2015E
Narrowbody fleet capacity growth (LHS) Domestic flight capacity growth (RHS)
GDP growth (LHS) Domestic pax growth (RHS)
30% 25% 20% 15% 10% 5% 0%
A better balance of supply and demand

We use the average of 2010-12 GDP growth-domestic passenger growth multiplier (2.2) and Standard Chartereds GDP growth forecasts for the Philippines (2013E, 2014E, 2015E: 5.8%, 6.1%, 5.5%) to arrive at our estimated 2013-15 domestic passenger demand CAGR of 13%. Supply and demand growth appears likely to be more balanced in 2013-14 than in 2011-12. This near alignment of supply and demand suggests support for yield stabilisation. That said, given the intense competition and carriers intentions to boost m arket share and load factor, achieving yield increases will be challenging. We therefore continue to expect a mild yield contraction in 2013. 98
We expect improved alignment of supply and demand to be supportive of yields
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Fig 192: Growth in domestic passengers and capacity (by seats)

Domestic pax (LHS) 45 40 35 30 25 20 15 10 5 0 2006
F
Domestic capacity (LHS) Domestic flight capacity growth (RHS) 30% 25% 20% 15% 10% 5% 0%
Domestic pax growth (RHS)
2007
2008
2009
2010
2011
2012
2013E
2014E
2015E
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Overseas potential
Cebu plans to target the substantial OFW population for its long-haul operations, due to begin
in mid-2013.
Cebu will initially target the Middle East, as several of the Philippines-Middle East routes are
chronically underserved and serviced exclusively by the expensive Gulf carriers, giving Cebu the best chance to achieve high load factors.
We expect substantially higher ancillary revenue from longer-haul flights, due to the longer
flights and difficulty of getting by without luggage, food and entertainment.
Significant market potential for international services

Cebu will target OFWs to drive growth of the international operations The Philippines has a substantial OFW population (11.5mn at end-2012, or 12% of the total population). OFWs are Filipinos who work and live overseas they seek higher paying jobs, mainly in the Middle East, North America and Asia. The number of OFW new hires and re-hires abroad grew at a 13% CAGR in 2007-12, rising to 1.75mn in 2012, or an average of nearly 4,800 OFW departures per day. Moreover, 42% of the OFWs were working in Asia in 2011. Fig 193: 2011 OFW
United States 2% 2% 2% 2% 3% 2% 4% 5% 6% 8% Total: 10,455,788
Source: Commission of Filipinos Overseas, Standard Chartered Research
Saudi Arabia United Arab Emirates Australia Japan Kuwait Singapore Others
2%
14% 33%
Canada Malaysia Qatar United Kingdom 15% Italy Hongkong
Popular routes are underserved

Limited choice, expensive current offerings, and infrequent flights give Cebu the best chance of filling its planes Limited direct flights The United Arab Emirates has the fourth-largest concentration of OFWs in the world (c.1.6mn in 2012). Despite the high concentration of Filipinos residing there, the direct route connecting these workers with the Philippines is currently served only by the expensive premium carrier, Emirates. On the Dubai-Manila route, the largest long-haul route from Manila by number of passengers, c.70% of travelers make the journey on one-stop services via the Middle East, Europe and Africa. While Dubai-Europe/Africa routes are usually taken by high- yield passengers, Dubai-Manila ticket prices are unlikely to be low enough for OFWs. Limited number of service providers Under the old UAE-Philippines bilateral agreement, the PAL Group controlled 75% of flight rights to the UAE, but PAL decided to drop services to the country several years ago. Most flight rights were transferred to Middle Eastern carriers, and UAE-Manila routes are now shared by Emirates and Etihad. The two countries extended the bilateral agreement in 2012, and Cebu will resume services to the UAE in October 2013. Low affordability A one-way Emirates ticket from Manila to Dubai on flights booked in advance for mid-October 2013 costs PHP 31,430, according to our online checks. Cebu will begin serving that route with a promotional fare of just PHP 888 for the first 3,000 tickets (or nearly seven flights). Moreover, management indicated it will offer normal flights at prices up to 40% below the competition. We believe lower fares will be able to stimulate demand and allow OFWs to visit their homeland more frequently. 100
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Fig 194: Manila-Dubai fare comparison*

40,000 PHP 31,429.66 30,000
Fig 195: Share of NAIA international routes, by seats*

Philippine Airlines Cebu Pacific 31.2% 27.7% Cathay Pacific Singapore Airlines Emirates Korean Air 16.3% 7.1% 4.3%
20,000
18,857.80
10,000 888.00 0 Emirates fare Cebu normal fare (est.) Cebu promo fare
2.9% 2.9% 3.4% 4.1%
Delta Airlines Etihad Airways Other
*Based on booking made for mid-October 2013. Source: Companies, Standard Chartered Research estimates
*As of May 2013. Source: CAPA, Standard Chartered Research estimates
Right strategies will support yield

We expect long-haul international operations to be highly supportive of ancillary yields Cebu will launch the first long-haul LCC route from Manila to Dubai in October 2013 followed by services to Abu Dhabi, Saudi Arabia and Kuwait in 2014. We believe the launch of long-haul services will support Cebus yield. We think management has adopted a very shrewd approach to the international market, serving routes with the highest known likely demand, the lowest LCC supply, and the greatest likelihood of stimulating new demand with lower fares. We also expect substantially higher potential ancillary revenue from longer-haul flights (Manila to Dubai has a flight time of nine hours). Moreover, given that the Philippines premium market is very small, Cebu has chose n to fly the A330 for the long-haul service. These will be configured in a high-density, 436-seater, singleclass configuration in a 3-3-3 layout, to cater strictly to this highly budget-conscious segment of the market.
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Key risks
We highlight the key risks to our positive view: 1) Post-rationalisation, PAL and its low-cost subsidiary, PAL Express, might decide to expand and compete on routes served by Cebu. PAA might decide on a fresh push of promotional (and loss-making) fares once it has integrated Zest Air, in a bid to gain market share from its new base at NAIA. Lion Air has outstanding narrow-body orders in excess of 500 planes, and ambitions to expand beyond its Indonesian home market. If Lion were to attempt to enter the Philippines, it would likely lead to overcapacity and self-destructive pricing in the market once again. Our bullish call on the Philippine peso is slightly more aggressive than consensus Bloomberg consensus forecasts are for USD:PHP rates of 40/39/38 in 2013E/2014E/2015E. Given minimal USD-denominated revenue, 100% USD-denominated debt and 46% USDdenominated expenses, Cebu is quite exposed to USD:PHP fluctuations, both on the upside and the downside. The slightest geopolitical flare-up in the always-volatile Middle East could see fuel prices rise sharply.
2)
3)
4)
5)
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Financials
We forecast adjusted profit growth of 77% in 2013, followed by 18% growth in 2014 and 15% in 2015. In 2012, Cebus EBIT declined 25% due to price competition and extremely weak demand during the flood season. However, the bottom line was helped by a foreign exchange gain of PHP 1.2bn. We have not factored in any forex contribution in 2013. We think the PAL Groups capacity rationalisation and demand recovery after the flooding in 3Q12 are likely to support passenger yields and traffic growth in 2013. We believe Cebu will continue to grow ancillary yields in 2013, albeit at a slower pace, due to lack of new services/products, but expect ancillary yield growth to accelerate again once the long haul services are introduced. Fig 196: Financial summary
Particulars (PHP mn) Revenue EBITDA EBIT Pre-tax profit/(loss) Normalised net profit 2011 33,935 6,160 3,528 3,747 3,241 2012 37,904 5,427 2,660 3,867 2,100 2013E 44,411 7,388 4,418 4,019 3,717 2014E 50,619 8,818 5,295 4,813 4,380 2015E 56,457 10,003 6,104 5,619 5,029
Revenue
We expect revenue to grow 17% in 2013E and 14% in 2014E We estimate revenue growth of 17%/14% in 2013/2014 as fleet additions become operational. In 2013, Cebu will add five A320s and two A330s. One A330 will come in only by the end of the year, and therefore will be placed in service in 2014. The much-anticipated long-haul service to Dubai will start from October 2013 via the first A330. As Cebu was unable to sell its ten older A319s (as it had originally planned), the number of aircraft operated in 2013 will be higher than managements original expectations. We believe aircraft utilisation rates will be lower and the company will monitor ASK growth more closely. We forecast a small decline in load factor to 80.5% in 2013 (from 81.4% in 2012) as Cebus capacity growth might outpace demand growth. However, passenger yield will be maintained, as competition has become more rational, in our view. We expect ancillary yields to grow 7% in 2013E/2014E, on higher contributions from international operations We forecast 7% growth in ancillary yields in both 2013 and 2014, decelerating from 20% in 2012. The impressive growth of ancillary revenue in 2011 was mainly due to the new luggage check-in service, which is a significant source of ancillary revenue for most LCCs around the globe. We therefore forecast slower but healthy growth for the next two years. In addition, ancillary yields tend to be much higher and easier to extract for long-haul flights, as meals, baggage and entertainment become more difficult to do without.
Operating expenses
We forecast operating expenses to increase 14% in 2013 and 13% in 2014. Management indicated that general and administrative expenses, in particular, will grow in advance of corresponding revenue, while Cebu builds its long-haul operations team. Based on our internal forecasts, oil price increases could be mild in 2013-14. Economies of scale should lead to a contraction in unit fuel cost.
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Fig 197: Operating expenses breakdown (2013E)

3% 5% 3% 0.4% Flying operations

40% 35% EBIT Margin EBITDAR Margin
Aircraft & traffic servicing 6% 7% 10% 10% 56% Repairs & maintenance Depreciation & amortization Aircraft & engine lease Reservation & sales General & administrative Passenger service Other expenses
30% 25% 20% 15% 10% 5% 0% 2008 2009 2010 2011 2012 2013E 2014E 2015E
We expect operating expenses to increase14% in FY13 and 13% in FY14
Fuel is (and will remain) the largest cost factor, at 49% of total operating expenses in 2013E, and Standard Chartereds view is that kerosene jet fuel prices will remain stable in 2013 and 2014, although obviously vulnerable to external shocks and macro events. We expect intense competition and capacity expansion across the Asia-Pacific LCC sector to place a premium on qualified pilots. We therefore forecast flight deck costs to be twice the fleet growth plus inflation rate. Aircraft insurance costs will grow in line with the size of the fleet plus inflation. As for aircraft and traffic servicing, we forecast airport charges to grow with ASK, whereas ground handling is linked to the number of passengers. We expect upward pressure on staff and R&M costs to be mitigated by PALs rationalisation plan, and forecast these to grow with the fleet plus inflation.
Based on company guidance, we forecast capex spending of c.USD 300mn in 2014
Capital expenditure
Cebu will receive seven aircraft in both 2013 and 2014, including two wide-body deliveries for both years. We forecast capex of c.USD 300mn for the next two years. Cebus balance sheet is healthy and net debt/equity has not exceeded 70% since 2009. We forecast net debt/equity ratios of 67% and 64% in 2013 and 2014, respectively.
Fig 199: Fleet expansion plans

60 50 41 40 ATR 72-500 - finance lease A320 - finance lease A330 - operating lease 47 A319 - owned A320 - operating lease 52
Fig 200: Net gearing versus capital expenditure

Capital expenditure (RHS) Net gearing (LHS)
2.5 51 2.0 1.5 x
14,000 12,000 10,000 PHP mn 8,000 6,000 4,000
30 20 10 0 2012 2013E 2014E 2015E

1.0 0.5 0.0 2009 2010 2011 2012 2013E 2014E 2015E
2,000 0
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Company snapshot
Cebu Pacific Airways
Cebu Air is a Philippines-based LCC and the largest airline in the Philippines by flown seat capacity and fleet size. The company is the third-largest LCC in ASEAN after the AirAsia Group and Lion Air, and its main bases are Manila and Cebu. Cebu Air has a fleet of eight ATR-72-500 turboprops and 33 A319/320 narrow bodies Established in 1988, it was acquired by JG Summit Holdings in 1995 before beginning full-service domestic operations in 1996. It subsequently reinvented itself as an LCC in 2005. JG Summit Holdings is one of the largest conglomerates in the Philippines and Cebus largest shareholder, at c.66% (via wholly-owned CPAir Holdings). The company successfully listed 30.4% of its shares on the Philippine Stock Exchange in October 2010. Fig 201: Major shareholders
Shareholder CPAir Holdings, Inc. PCD Nominee Corporation (non-Filipino) PCD Nominee Corporation (Filipino) JG Summit Holdings, Inc.
Holdings (%) 66.15% 22.51% 10.04% 1.09%
Fig 202: Shareholding structure as of end-2012
Fig 203: Revenue composition, 2012
CPAir Holdings 22.51% JG Summit Holdings 10.04% 66.15% 1.09% Public Foreign Investors Public Filipino Investors 6%
16% Passenger Cargo Total ancillary revenue 78%
*CPAir Holdings is wholly owned by JG Summit Holdings. Source: Company
Source: Standard Chartered Research estimates
Fig 204: Monthly passenger traffic

1,400,000 1,200,000 1,000,000 800,000 10% 600,000 400,000 200,000 0 -10% 0% 20% Passengers (LHS) YoY change (RHS) 30%
Jul-10
Jul-11
Jan-10
Jan-11
Jan-12
Jul-12
Nov-10
Nov-11
Sep-10
Sep-11
Sep-12
Nov-12
Mar-12
Mar-10
Mar-11
Jan-13
May-10
May-11
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Fig 205: International route map, highlighting destinations from Manila
Source: Company
Cebu Air has the largest network among domesticallyfocused Asian LCCs
Fig 206: Domestic route map, highlighting destinations from Manila and Cebu
Source: Company
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Fig 207: Organisation

Name Board of Directors Ricardo J. Romulo Chairman since December 1995, Mr Romulo is also a director of JG Summit Holdings, Inc. and a Senior Partner in Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles. He is also Chairman of Federal Phoenix Assurance Company, Inc., InterPhil Laboratories, Inc., and Manchester International Holdings Unlimited Corporation. He received his Bachelor of Law degree from Georgetown University and Doctor of Law degree from Harvard Law School. Director since December 1995, Mr Gokongwei is the Chairman Emeritus and a member of the Board of Directors of JG Summit Holdings, Inc. and several of its subsidiaries. He received a Master of Business Administration from De La Salle University and attended the Advanced Management Program at Harvard Business School. Director since May 2002, Mr Go is the Chairman and Chief Executive Officer of JG Summit Holdings, Inc. and, as such, heads the Executive Committee of JG Summit Holdings, Inc. He received his Bachelor and Master of Science degrees in Chemical Engineering from the Massachusetts Institute of Technology. Director, President and Chief Executive Officer since 1997, Mr Gokongwei is also the President and Chief Operating Officer of JG Summit Holdings, Inc., Universal Robina Corporation and JG Summit Petrochemical Corporation, and the Vice Chairman and Deputy Chief Executive Officer of Robinsons Land Corporation. He received his Bachelor of Science degrees in Finance and Applied Science from the University of Pennsylvania. Director since December 1995, Mr Buenaventura is a Senior Partner in Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles. He received his Bachelor of Law degree from the Ateneo de Manila University School of Law and his Master of Law Degree from Georgetown University Law Centre, Washington D.C. He was admitted to the Philippine Bar in 1959. Role
John L. Gokongwei, Jr.
James L. Go
Lance Y. Gokongwei
Jose F. Buenaventura
Robina Y. Gokongwei-Pe Director since August 2007, Mrs Gokongwei-Pe is currently a director of JG Summit Holdings, Inc., Robinsons Land Corporation, Robinsons Bank and JG Summit Capital Markets Corporation, as well as President and Chief Operating Officer of the Robinsons Retail Group. She obtained her Bachelor of Arts degree in Journalism from New York University. Frederick D. Go Director since August 2007, Mr Go is currently the President and Chief Operating Officer of Robinsons Land Corporation and Robinsons Recreation Corporation. He received a Bachelor of Science degree in Management Engineering from the Ateneo De Manila University. Independent Director since December 2007, Mr Go also currently serves as Director and President of Equitable Computer Services, Inc., and is Chairman of Equicom Savings Bank. He graduated from Youngstown University with a Bachelor of Science degree in Business Administration. He attended the International Advanced Management program at the International Management Institute, Geneva, Switzerland as well as the Financial Planning/Control program at the ABA National School of Bankcard Management, Northwestern University. Independent Director since January 2008, he is the founder and managing director of Sobono Energy Private Limited. He graduated with honours from the University of Manchester Institute of Science and Technology with a Bachelor of Science degree in Mechanical Engineering. He obtained his Master's degree in Business Administration from the National University of Singapore.
Antonio L. Go
Oh Wee Khoon
Key management Bach Johann M. Sebastian Senior Vice President Chief Strategist since May 2007, Mr Sebastian is also the Senior Vice President and Director of Corporate Planning of JG Summit, URC and RLC. He received a Bachelor of Arts degree in Economics from the University of the Philippines and a Masters degree in Business Management from the Asian Institute of Management. Chief Financial Officer since January 2012, Mr Cabangis was the former Chief Financial Officer and Corporate Center Unit Head of Digitel Telecommunications, Inc, and Digitel Mobile Philippines, Inc. He is a certified public accountant and was a partner at SGV and Co., where he worked for 21 years.
Jaime I. Cabangis
Source: Company
Equity Research
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22 May 2013
Income statement (PHP mn)

Year-end: Dec Sales Gross profit SG&A Other income Other expenses EBIT Net interest Associates Other non-operational Exceptional items Pre-tax profit Taxation Minority interests Net profit Net profit adj. EBITDA EPS (PHP) EPS adj. (PHP) DPS (PHP) Avg fully diluted shares (mn) 2011 33,935 5,829 (2,301) 3,528 (207) 42 384 3,747 (123) 0 3,624 3,241 6,160 5.93 5.31 0.00 611 2012 37,904 5,240 (2,580) 2,660 (317) 54 1,469 3,867 (297) 0 3,569 2,100 5,427 5.89 3.47 0.00 606 2013E 44,411 7,446 (3,027) 4,418 (454) 54 0 4,019 (301) 0 3,717 3,717 7,388 6.13 6.13 0.00 606 2014E 50,619 8,745 (3,450) 5,295 (536) 54 0 4,813 (433) 0 4,380 4,380 8,818 7.23 7.23 0.00 606 2015E 56,457 9,896 (3,792) 6,104 (539) 54 0 5,619 (590) 0 5,029 5,029 10,003 8.30 8.30 0.00 606
Cash flow statement (PHP mn)

Year-end: Dec EBIT Depreciation & amortisation Net interest Tax paid Changes in working capital Others Cash flow from operations Capex Acquisitions Disposals Others Cash flow from investing Dividends Issue of shares Change in debt Other financing cash flow Cash flow from financing Change in cash Exchange rate effect Free cash flow 2011 3,528 2,632 (46) (123) 1,744 260 7,995 (4,232) 3 (61) (4,291) (1,834) 0 (2,141) (529) (4,504) (800) (6) 3,763 2012 2,660 2,768 (179) (297) 1,019 190 6,160 2013E 4,418 2,969 (454) (301) 1,832 0 8,464 2014E 5,295 3,523 (536) (433) 1,925 0 9,774 (9,529) 0 0 (9,529) (1,314) 0 0 0 (1,314) (1,069) 0 245 2015E 6,104 3,899 (539) (590) 1,813 0 10,687 (6,475) 0 0 (6,475) (2,515) 0 (2,000) 0 (4,515) (303) 0 4,212
(4,506) (11,827) 110 0 3,382 0 (1,014) (11,827) (606) 0 (2,508) 0 (3,114) 2,032 (262) 1,654 (1,115) 0 3,845 0 2,730 (633) 0 (3,363)
Balance sheet (PHP mn)

Year-end: Dec Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets PP&E Intangible assets Associates and JVs Other long-term assets Total long-term assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible bonds Deferred tax Other long-term liabilities Total long-term liabilities Total liabilities Shareholders funds Minority interests Total equity Total liabilities and equity Net debt (cash) Year-end shares (mn) 2011 8,958 3,261 837 398 279 13,732 41,038 409 502 41,949 55,681 2,467 6,711 5,351 14,529 18,404 0 222 3,360 21,986 36,515 19,166 0 19,166 55,681 11,914 606 2012 10,728 103 989 417 883 13,120 47,484 512 221 48,217 61,336 2,769 7,769 6,027 16,565 20,155 0 492 1,990 22,637 39,202 22,135 0 22,135 61,336 12,196 606 2013E 10,096 103 1,158 489 883 12,728 56,341 566 221 57,128 69,857 2,769 8,815 7,054 18,638 24,000 0 492 1,990 26,482 45,120 24,737 0 24,737 69,857 16,674 606 2014E 9,027 103 1,320 557 883 11,890 62,347 621 221 63,188 75,078 2,769 9,990 8,033 20,793 24,000 0 492 1,990 26,482 47,275 27,803 0 27,803 75,078 17,742 606 2015E 8,724 103 1,472 622 883 11,804 64,923 675 221 65,819 77,622 2,769 11,099 8,955 22,823 22,000 0 492 1,990 24,482 47,305 30,318 0 30,318 77,622 16,045 606

Year-end: Dec Operating ratios Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Effective tax rate (%) Sales growth (%) Net income growth (%) EPS growth (%) EPS growth adj. (%) DPS growth (%) Efficiency ratios ROE (%) ROCE (%) Asset turnover (x) Op. cash/EBIT (x) Depreciation/capex (x) Inventory days Accounts receivable days Accounts payable days Leverage ratios Net gearing (%) Debt/capital (%) Interest cover (x) Debt/EBITDA (x) Current ratio (x) Valuation EV/sales (x) EV/EBITDA (x) EV/EBIT (x) PER (x) PER adj. (x) PBR (x) Dividend yield (%) 2011 17.2 18.2 10.4 9.5 3.3 16.7 -47.6 -49.6 -45.9 nm 2012 13.8 14.3 7.0 5.5 7.7 11.7 -1.5 -0.7 -34.7 -10.4 2013E 16.8 16.6 9.9 8.4 7.5 17.2 4.2 4.2 77.0 0.0 2014E 17.3 17.4 10.5 8.7 9.0 14.0 17.8 17.8 17.8 0.0 2015E 17.5 17.7 10.8 8.9 10.5 11.5 14.8 14.8 14.8 0.0
19.6 9.0 0.6 2.3 0.6 5.0 9.1 79.9
17.3 6.2 0.6 2.3 0.6 4.6 8.8 80.9
15.9 9.2 0.7 1.9 0.3 4.5 8.8 81.9
16.7 10.0 0.7 1.8 0.4 4.6 8.9 82.0
17.3 11.2 0.7 1.8 0.6 4.6 9.0 82.7
62.2 50.7 4.1 3.2 0.9
55.1 51.2 3.6 4.0 0.8
67.4 52.3 4.7 3.4 0.7
63.8 49.3 5.3 3.0 0.6
52.9 45.2 6.2 2.6 0.5
1.8 9.9 17.3 14.0 15.6 2.0 0.0
1.4 9.5 19.4 11.1 18.8 1.7 0.0
1.5 8.8 14.7 13.0 13.0 2.0 0.0
1.3 7.5 12.5 11.1 11.1 1.7 0.0
1.1 6.5 10.6 9.6 9.6 1.6 0.0
Equity Research
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22 May 2013

Crouching Tiger, hidden recovery
We maintain our In-Line rating on Tiger Airways, but raise
our price target to SGD 0.66. We expect Tiger Singapore to be the lone positive earnings driver due to its improved operating performance and a more balanced supply/demand environment, which should support yields. We believe Tigers affiliates in Australia, Indonesia and the Philippines will be hard-pressed to break even in FY14-16 given the carriers weak positioning. At 1.3x FY14E PBR and normalised ROE of 1.7%, valuation does not appear attractive. Tiger Singapore to generate positive earnings. Slowing capacity growth in Singapore as competitors focus their expansion in larger growth markets in the region has allowed demand to catch up with supply, resulting in a more supportive environment for yields. With continued improvement in operating performance, we expect Tiger Singapore to be the lone positive earnings driver for Tiger Airways.
IN-LINE
SGD 0.66
(unchanged)
PRICE TARGET
SGD 0.66
Reuters code
Bloomberg code
TGR SP
Market cap
TAHL.SI
12-month range
SGD 542mn (USD 431mn)

EPS adj. est. change 2014E nm
SGD 0.58 - 0.74

2015E nm
Profitability from affiliates nowhere in sight. We do not believe Tigers affiliates in Australia, Indonesia or the Philippines will achieve profitability in FY14-16, as the company remains under-scale in all three markets. Despite strong growth prospects, Indonesia and the Philippines are brutally competitive environments with dominant incumbent leaders, and the already-mature and high-cost Australian market may already be suffering from overcapacity. Rights issue to shore up finances. Years of cumulative losses have left Tiger with high gearing and a weak balance sheet, though the rights issue in January 2013 will go some way to addressing this. However, the share issue was dilutive and the funding raised for capex might not generate good returns for shareholders in the medium term. Valuation. We maintain our In-Line rating given the likely slow turnaround in Australia, Indonesia, and the Philippines. We base our new price target of SGD 0.66 on 7.23x FY14E EV/EBITDA. The multiple is based on a 50% discount to Tigers historical average forward EV/EBITDA of 14.45x (excluding FY11-12 when earnings were distorted by the Australia grounding). We do not consider valuation attractive at 1.3x FY14E PBR versus normalised ROE of 1.7%.
Year-end: March Sales (SGD mn) EBITDA (SGD mn) EBIT (SGD mn) Pre-tax profit (SGD mn) Net profit adj. (SGD mn) FCF (SGD mn) EPS adj. (SGD) DPS (SGD) Book value/share (SGD) EPS growth adj. (%) DPS growth (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Div. payout (%) Net gearing (%) ROE (%) ROCE (%) EV/sales (x) EV/EBITDA (x) PBR (x) PER adj. (x) Dividend yield (%)
2013 866 41 7 (35) (44) (440) (0.05) 0.00 0.24 nm 4.8 0.8 -5.1 0.0 200.0 -20.3 1.1 1.1 23.3 2.8 nm 0.0
2014E 805 101 68 127 7 127 0.01 0.00 0.51 nm 12.6 8.5 0.9 0.0 -3.4 29.9 9.4 0.8 6.4 1.3 95.3 0.0
2015E 878 116 84 31 29 77 0.02 0.00 0.54 252.3 13.2 9.6 3.3 0.0 -15.3 4.6 10.0 0.8 5.9 1.2 27.1 0.0
2016E 891 111 80 51 49 83 0.04 0.00 0.58 67.1 12.4 9.0 5.4 0.0 -26.2 7.3 9.1 0.7 5.5 1.1 16.2 0.0

1.58
0.58 May-12
Aug-12
Nov-12
Feb-13
May-13
STRAITS TIMES INDEX (rebased)
-1 mth -3 mth -12 mth 3 -6 9 -2 -10 -12 Singapore Airlines Ltd (32.7%) 60% 1,314,575
Claire Teng, CFA

l
TGR SP SGD 0.66 SGD 0.66
Michael Parry
l
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22 May 2013
Valuation
We maintain our In-Line rating on Tiger Airways (Tiger) with a revised price target of SGD 0.66 (previously SGD 0.58). We believe significant uncertainty remains about when Tiger will experience a significant earnings recovery, particularly in Australia.
EV/EBITDA
Maintain In-Line rating, with a new price target of SGD 0.66 based on EV/EBITDA valuation We apply a more subjective valuation on Tiger than its peers. We think the market believes Tiger has the potential to normalise operations and grow its earnings, but we think great uncertainties remain on the scale and timing of potential earnings recovery, particularly in Australia. We use an earnings-based EV/EBITDA valuation for LCC carriers given their secular growth potential. (We apply an asset-based PBR valuation for full-service carriers given the cyclical nature of the business.) We therefore prefer to use a similar valuation methodology for Tiger to make comparisons easier. However, Tigers historical EV/EBITDA multiples were distorted by the negative earnings after the Australian grounding and we consider them too volatile and unreliable. Furthermore, multiples are also exaggerated in the first year of listing for almost all listed LCCs given the hyper growth created in the early stage of LCC penetrations. We therefore subjectively apply a 50% discount to Tigers historical average forward EV/EBITDA of 14.45x (excluding FY11-12 when earnings were distorted by the Australia grounding) to reflect more reasonable growth in the future and the uncertainties on recovery.
We apply a 50% discount to Tigers historical EV/EBITDA to reach our valuation multiple
Fig 208: Valuation (SGD mn)

Items EBITDA FY14E Average multiple EV Net debt Value of associates 101 7.23 731 -21 29 Net gearing declined significantly after the divestment of Tiger Australia and the share placement. Tiger sold 60% of Tiger Australia at AUD 35mn (SGD 44mn, based on the SGD: AUD exchange rate of 1.2638 on the date of the announcement). We use this divestment value to value the 40% stake in Tiger Australia still owned by Tiger. We calculate shares outstanding on a fully diluted basis Comments Without the earnings drag from Tiger Australia, we believe Tiger Singapore is likely to continue to grow earnings. We apply a 50% discount to Tigers historical EV/EBITDA of 14.45x (excluding FY11-12 when earnings were distorted by the Australia grounding).
Market cap Target price (SGD)
781 0.66
Fig 209: EV/EBITDA trading range

12MF EV/ EBITDA 50 45 40 35 30 25 20 15 10 5 0 Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Source: Company, Bloomberg, Standard Chartered Research
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22 May 2013
PBR
Tiger is trading at 1.3x FY14E PBR (on a fully diluted basis.) We think the valuation appears expensive versus our forecast ROE of 1.7% in FY14E. However, the LCC industry is highly operationally leveraged and ROE could improve sharply if earnings return, although we believe this is not likely to happen soon for Tiger. Despite the Australia grounding in July 2011, a sharp earnings decline in FY11-12, and the rights issue at SGD 0.47 in January 2013, Tigers share price has never dropped below 1x forward PBR. We believe this shows the markets confidence in the LCC business model and management from Singapore Airlines (SIA, SIA SP, UP, SGD10.5.) Although we think Tiger will not turn around its Australia business soon, 1x PBR is likely to be Tigers bottom valuation in the medium term. Fig 210: PBR trading range
7 6 5 4 3 2 1 0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 x 12MF PBR Avg +1 SD -1 SD
Source: Company, Bloomberg, Standard Chartered Research
Although we forecast an improving ROE, rising from -20% in FY13 to ROE of 7.3% in FY16E, we think valuation appears expensive at 1.3x FY14E PBR. Fig 211: 12-month fwd PBR trading range vs. 12-month fwd ROE
9 8 7 x 6 5 4 3 2 1 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 12MF PBR 12MF ROE 30% 20% 10% 0% -10% -20% -30% -40% -50%
Source: Company information, Bloomberg, Standard Chartered Research
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22 May 2013
Tiger Singapore: A saturated market

We expect Tiger Singapore to be the lone positive earnings generator for Tiger Airways for the
duration of our forecast horizon.

We forecast only incremental capacity growth as regional carriers concentrate their expansion
in less-mature, higher-growth markets, allowing passenger growth to catch up with seats.

Despite Singapore being a highly competitive market without barriers to entry, we expect
yields to remain stable with better alignment between supply and demand.
We expect the partnership with Scoot to boost feeder traffic and raise load factors without
compromising yields.
Tiger Singapores fleet capacity grew 43% in FY12
With the surge in additional capacity to Tiger Singapore as planes were redeployed following the grounding of Tiger Australia by Australian regulators in July 2011, Tiger Singapores fleet capacity grew 43% in FY12 after rising 40% in FY11. With the majori ty of the groups capacity allocated to Singapore, yield and profitability suffered in FY11 and most of FY12. With Tiger Australia resuming operations with planes redeployed from Tiger Singapore, incumbent LCCs in Singapore expanding capacity cautiously and regional carriers contemplating expansion reserving their resources for higher growth countries with lower structural cost bases, capacity competition in Singapore has been partially alleviated from FY13. Fig 212: Tiger EBIT margin vs. Tiger Singapore capacity, 3Q FY09-4Q FY13
EBIT/ Operating profit (LHS) 30 20 SGD mn 10 0 -10 -20 -30 -40 -50 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13
Tiger Singapore capacity (RHS) 25 20 15 10 5 0
A320s
A well-served market
Singapores LCC penetration stands at 30% Singapore has a highly liberalised aviation market in which LCCs have competed since 2004. As of end-2012, LCCs controlled 30% of market share (measured by seat capacity at Changi Airport), up from 6% in 2007. On short-haul routes from Singapore to ASEAN countries, LCCs had a 55% market share by seat capacity. We believe incumbent LCCs will add new capacity in Singapore only incrementally in the medium term, particularly after the market struggled to absorb Tigers sudden rise in capacity in 2011.
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22 May 2013
Fig 213: LCC penetration in Singapore

35% 30% 25% 20%
Fig 214: Singapore-Southeast Asia market share (% of seats,) May 2013

Singapore Airlines SilkAir 22% 19% Tiger Airways AirAsia Jetstar Asia 3% 11% Indonesia AirAsia Lion Air 11% 6% 9% 9% Garuda Indonesia Thai Airways Malaysia Airlines 4% 4% 4%
15% 10% 5% 0% 2007 2008 2009 2010 2011 2012
Others
Source: CAPA, Standard Chartered Research,
Source: Singapore Tourism Board, Standard Chartered Research estimates
Most routes from Singapore to major Asian cities are already served by three to four carriers
Singapore is a well-served aviation market. Changi airport is connected to nearly 120 international airports. The traditional LCC market of flights under five hours is well served, with numerous flights from Singapore to major cities in Asia. According to CAAC data, most major routes from Singapore to Asian capitals and popular tourist spots are flown by at least three to four carriers (see Figure 217). We think LCCs could be hard pressed to find new destinations to fly to from Singapore in the traditional short-haul market. Routes that remain underserved are few in number and limited to those to Macau, Bangalore, northern Thailand, and a handful of Chinese cities. While full-service carriers struggle to compete with LCCs in the market for short-haul, nontransferred leisure travellers, we believe they will be able to maintain their grip on the business travel market, including routes between Singapore and other first-tier cities such as Kuala Lumpur, Hong Kong, Mumbai, Delhi, and Jakarta, as Singapore remains one of the pre-eminent business centres in Asia.
Airfares likely to stabilise but unlikely to increase

We expect airfares to remain stable We expect airfares to stabilise rather than trend upwards as Singapore remains the most competitive and fragmented air travel market in Asia, reflecting its liberal aviation policy, lack of a defensible domestic hinterland for incumbents, and ample airport capacity. As a result, there are effectively no barriers to new entrants. In 2012, Changi Airport served 52mn passengers, versus its designed capacity of 67mn (after removing the capacity of 7mn passenger from the LCC terminal when it closed in September 2012). This implies a utilisation rate of 78%. Changi Airport Group will start to build Terminal 4 from 2013 and will complete it in 2017, boosting capacity by 12mn passengers. Assuming a passenger CAGR of 10%, Changi will not suffer from capacity constraints before 2015, suggesting plenty of room for airlines to add services if they believe the market can profitably support them. Singapores premium segment is dominated by SIA (which holds 33% of Tiger Airways), which is widely perceived as one of the finest airlines in the world and whose service is celebrated by business passengers. However, SIA has barely been able to boost yields since 2009 as fierce competition with Qantas, Emirates and Cathay Pacific in the long-haul market has pressured profitability. We think growth opportunities are more likely to emerge in the medium-haul market where travel time is between five and nine hours, the limits of flying time at which LCCs can be reliably profitable. Scoot and Jetstars wide-body operations from Singapore fit into this category and could further boost LCCs market share in Singapore, albeit at a slower pace.
l
Growth opportunities likely in the low-cost, medium- to long-haul segment
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22 May 2013
Fig 215: Utilisation rates at Changi airport

90 80 Passengers, mn 70 60 50 40 30 20 10 0 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Source: Changi Airport, Standard Chartered Research estimates
Capacity (LHS)
Passenger movements (LHS)
Utilisation (RHS)
140% 120% 100% 80% 60% 40% 20% 0%
Scoot partnership
Tigers partnership with Scoot should provide feeder traffic Tiger Airways began a partnership with Scoot (wholly owned by SIA) in October 2012, with interline agreements allowing joint-itinerary tickets and effectively expanding Scoots network to include Tigers. Unfortunately, while it is possible to book Tiger -Scoot connecting flights using the Scoot website, it is not possible to do the same on the Tiger website, and customers are redirected to Scoots website. Despite this inconvenience, the additional network traffic from the Scoot/Tiger inter-line product should provide another source of growth and boost load factors without reducing yields.
Margin recovery
Flat capacity growth has allowed demand to catch up with supply Tiger returned to profitability in 3Q FY13, largely due to the improving performance of Tiger Singapore. Passenger yield increased 5% YoY to SG 7.88/RPK, only 5% off its peak yield (in 3Q FY11) before the capacity surge in Singapore after the Tiger Australia grounding. We attribute the improvement to a better alignment of supply and demand with the cessation of capacity additions, which allowed sales to catch up with capacity. Fig 216: Tiger Singapore: Yield and operating margin
8.5 8.0 7.5 7.0 SG 6.5 6.0 5.5 5.0 4.5 4.0 1Q13 2Q13 3Q13 4Q13
Yield (LHS)
OP Margin (RHS)
Yield YoY (RHS)
20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
We forecast yield to improve only incrementally
Although more aggressive capacity expansion in FY14 could hurt passenger yield, we believe Tiger Singapore will continue to improve ancillary yield. We forecast revenue yield to continue to incrementally improve to SG 8.31/RPK in FY16, assuming nearly flat capacity growth for Tiger in FY15-16 and improved network traffic facilitated by Scoot and Tigers affiliates in Australia, Indonesia and the Philippines.
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22 May 2013
Fig 217: Capacity share for the main LCC routes from Singapore (flights under five hours)
Country Bangladesh Cambodia Cambodia Cambodia China China China China China India India India India India India Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Malaysia Malaysia Malaysia Malaysia Malaysia Myanmar Philippines Philippines Philippines Sri Lanka Taiwan Thailand Thailand Thailand Thailand Thailand Thailand Vietnam Vietnam Vietnam Destination Dhaka Phnom Penh Siem Reap Phnom Penh Guangzhou Haikou (Sanya) Shenzhen Hong Kong Macau Bangalore Chennai Hyderabad Kochi Tiruchirapalli Balikipapan Bandung Bali Lombok Manado Medan Palembang Pekanbaru Solo Surabya Jakarta Kota Kinabalu Langkawi Kuala Lumpur Kuching Penang Yangon Davao Cebu Manila Colombo Taipei Chang Mai Koh Samui Bangkok Hat Yai Krabi Phuket Danang Hanoi Ho Chi Minh City Capacity share SIA (47%), Biman (23%), Tiger (30%) Jetstar (24%), Silkair (76%) Jetstar (39%), Silkair (61%) Silkair (46%), Jetstar (20%), Tiger (34%) China Southern (43%), SIA (20%), Jetstar (12%), Tiger (25%) Jetstar (28%), Hainan Air (25%), Tiger (47%) Shenzhen Airlines (43%), Silkair (23%), Tiger (34%) Cathay (38%), SIA (37%), Jetstar (8%), United (6%), Tiger (11%) Tiger (100%) SIA (52%), Silkair (18%), Tiger (30%) Air India (34%), SIA (23%), Jet Air (14%), Silkair (6%), Tiger (23%) Silkair (60%), Tiger (40%) Silkair (65%), Tiger (35%) Air India Express (65%), Tiger (35%) Garuda (31%), Silkair (69%) AirAsia (46%), Lion (23%), Batavia (16%), Silkair (15%) SIA (31%), AirAsia (28%), KLM (16%), Qatar (7%) Mandala Tiger (7%), Garuda (6%), Valuair/ Jetstar (5%) Silkair (100%) Silkair (100%) Tiger (28%), Jetstar (24%), Silkair (48%) Silkair (100%) Silkair (100%) Silkair (100%) CI (32%), Lion (22%), Jetstar (16%), Silkair (30%) SIA (32%), Lion (18%), Garuda (18%), AirAsia (16%), Jetstar (8%), Sriwijaya (2%), PAL (1%), Tiger (5%) AirAsia (58%), Silkair (42%) AirAsia (70%), Silkair (30%) AirAsia (32%), Jetstar (19%), MAS (15%), Silkair (13%), SIA (10%), Tiger (11%) AirAsia (37%), MAS (28%), Silkair (5%), Tiger (30%) AirAsia (36%), Silkair (33%), Jetstar (20%), Tiger (11%) Myanmar Airways (44%), Jetstar (13%), Silkair (43%) Silkair (100%) Cebu (49%), Silkair (29%), Tiger (21%) SIA (30%), Cebu (23%), PAL (22%), Jetstar (14%), AirPhil Express (5%), Tiger (7%) Emirates (27%), Sri Lankan (27%), SIA (21%), Cathay (17%), Tiger (8%) CI (22%), SIA (21%), Scoot (15%), Jetstar (13%), EVA (12%), TransAsia (11%), Tiger (7%) Silkair (100%) Bangkok Airways (52%), Tiger (48%) Thai (28%), SIA (25%), Jetstar (11%), Scoot (7%), Cathay (7%), Myanmar (3%), Tiger (18%) Tiger 100% Tiger 100% Silkair (39%), Jetstar (28%), Thai AirAsia (11%), Tiger (22%) Silkair (100%) Vietnam (39%), SIA (36%), Silkair (9%), Tiger (17%) Jetstar (25%), SIA (25%), Vietnam (17%), Lion (10%), Tiger (24%)
Thiruvananthapuram Silkair (53%), Tiger (47%)
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22 May 2013
Tiger Australia: Post-divestment synergies await

Tiger Australias divestment to Virgin Australia was approved in April 2013. We expect Tiger to
benefit from synergies including management expertise and materials sourcing.

We have serious concerns as to whether the mature Australian market can absorb the
planned capacity expansions of both Jetstar and Tiger Australia without severe yield compression.
Tiger Australias unit costs remain significantly higher than its competitors, and could prove a
serious impediment to its ability to compete if they cannot be brought down sharply.
We estimate Tiger Australia will cut its losses almost in half in FY16, but believe it will remain
a loss-making affiliate in FY14-16.
Virgin partnership to compete with the dominant player

The partnership with Virgin Australia should help Tiger on capacity, network, expansion and rebuilding its brand In October 2012, Tiger Airways announced that it would sell 60% of Tiger Australia to Virgin Australia (VBA AU, NR) for an upfront fee of AUD 35mn, a deferred payment of AUD 5mn subject to performance targets, and an agreement to continue using the Tiger brand for 20 years. We believe the deal will benefit Tiger Australia in three ways:
Scale: Virgin Australia has agreed to jointly fund the exp ansion of Tiger Australias fleet from
the current 11 A320s to 35 in 2017. Economies of scale are necessary for Tiger to return its Australian business to profitability. Of the AUD 62.5mn to be invested to fund the expansion, the first AUD 20mn will be contributed by Tiger Airways, followed by AUD 30mn from Virgin Australia, with the remaining AUD 12.5mn split proportionally between the two parties (60%/40% Virgin/Tiger).
Image: After resuming services following the grounding in July-August 2011, Tiger Australia
has tried to improve its brand image by improving its on-time performance, products and services, and investing in advertising and marketing. The partnership with Virgin and Virgins heritage of strong marketing will further bolster the Tiger brand.
Network: We believe Tiger Australia will eventually be the low-cost representative of Virgin
Australia Group as Virgin Australia (previously LCC Virgin Blue) has moved upmarket to compete with Qantas in the lucrative government and business travel market. Although Tiger Australia will remain operationally independent of Virgin Australia, with its own Air Operator Certificate and management team and without code-sharing, we believe Tiger Australia should be able to leverage Virgins experience and resources in the country to gain market share. Fig 218: Australia domestic market share (by seats)
4.3% 3.0% 2.4% 41.6% 19.0% Qantas Virgin Australia Jetstar Tiger Australia Regional Express Others
Fig 219: Virgins Australian network
29.7%
Data as of October 2012. Source: CAPA, Standard Chartered Research
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22 May 2013
Tiger Australia would find it hard to compete with Qantas and achieve profitability without the tie-up with Virgin
The Australian aviation market is dominated by the Qantas Group. After introducing a clear market segmentation strategy and executing well since 2001, Qantas has expanded its market share via its LCC subsidiary Jetstar to over 60% of the domestic market, from 50% in the 90s. Given Qantas dominance and Tiger Australias sliver of the market, we believe Tiger Australia would struggle to raise yields or achieve profitability without the tie-up with Virgin.
More capacity in a mature market

Given the return of Tiger Australia and aggressive capacity expansion from Jetstar in the domestic Australia market, we are concerned that price competition will continue to hurt yields in this mature market. Tiger Australia aims to add 24 aircraft by 2017, implying a 2013-17E ASK CAGR of roughly 30%. Jetstar plans to add 15 aircraft a year. However, Australia domestic traffic (by RPK) increased at a CAGR of just 7.4% in 2003-12.
Excessive fleet expansion in Australia will result in supply outrunning demand
Fig 220: Australia domestic capacity growth

100 80 60 40 20 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E
Note: Calendar years. Source: BITRE, Standard Chartered Research estimates
ASK (bn, LHS)
YoY (RHS)
20% 15% 10% 5% 0% -5%
Excess supply will exert downward pressure on yields as the only way to fill planes
In calendar year 2013, we forecast domestic ASK will grow 10% in Australia, which will likely exceed demand growth. We doubt the excess capacity can be absorbed in a country with a population of only 20mn, even though lower yields should stimulate leisure travel demand. Fig 222: LCC expansion: Jetstar and Tiger Australia (by average aircraft number)
20.0% 15.0% 10.0% 5.0% 0.0% -5.0% 2013E 120 100 A319/320s 80 60 40 20 0 2013E 2014E 2015E 2006 2007 2008 2009 2010 2011 2012 Jetstar Fleet Tiger Fleet
Fig 221: Jetstar domestic capacity growth

20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 2009 ASK (m, LHS) YoY (RHS)
2010
2011
2012
Source: Jetstar, Standard Chartered Research estimates
Note: Calendar years. Source: Companies, Standard Chartered Research
Australian domestic airfares in the discount market segment (primarily LCCs) have been less volatile than the fares in business and full service economy segments, though prices in the discount segment trended up in 2H11 as competition eased after Tigers g rounding. We believe LCC airfares in 2013 will likely return to the low end of their 2009-12 historical range (see figure below).
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Fig 223: Australia domestic air fares (best discount) index

Domestic Air Fares (Best Discount) 120 110 Real best discount rate 13 moving average
Index (July 2003 =100)
100
90 80
70
60 50
May-09
May-11
May-08
May-10
May-12
40
Feb-08
Aug-08
Nov-08
Aug-09
Feb-10
Aug-10
Nov-10
Aug-11
Feb-12
Nov-12
Feb-09
Nov-09
Feb-11
Nov-11
Aug-12
Month
Source: BITRE, Standard Chartered Research
Yield under pressure; loss sustained

Tiger Australia unlikely to become profitable without attaining economies of scale In order to gain market share, we think Tiger Australia will cut fares to fill its planes and support load factors. However, it is unlikely to become profitable without first achieving sufficient economies of scale in an operating environment with relatively stable fares, in our view. We forecast losses through FY14-16. After resuming operations, Tiger Australia has gradually re-built economies of scale and reduced unit costs, and by the end of 3Q FY13, capacity had returned to levels before the grounding. However, unit costs (CASK) remain higher (at SG 8.98 in 3Q FY13 and SG 9.60 in 4Q FY13); we attribute this to enhanced marketing efforts and route planning after the grounding. Fig 224: Qantas average yield
14 12 10 8 6 4.32 4 2 0 1H08 FY08 1H09 FY09 1H10 FY10 1H11 FY11 1H12 FY12 1H13
Note: Years ending in June. Source: Company, Standard Charted Research
Yield (SGD cents) Yield (AUD cents) 10.79 9.26 9.09 10.11 8.37 8.29 8.57 8.23
CASK (SGD cents) CASK (AUD cents)
8.32
8.42
8.15
4.47
5.27
5.39
4.64
4.45
4.58
4.25
4.05
4.11
3.94
Tiger Australias unit costs remain significantly higher than competitors
Tiger Australias unit costs remain much higher than its competitors. Qantas average CASK was around SG 3.94 in 1H FY13, and we suspect Jetstar Australias unit costs are even lower. In FY12, Virgin Australias unit costs were also lower at SG 5.09, despite being positioned as a full service carrier. Tiger Australia will find it extremely challenging to compete with other carriers on pricing and costs.
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Fig 225: Virgin Australias domestic yield

14 12 10 9.93 8 6 4 2 0 FY08 FY09 FY10 FY11 FY12
Note: Years ending in June. Source: Company, Standard Charted Research
Yield (SGD cents) Yield (AUD cents)
CASK (SGD cents) CASK (AUD cents)
8.90
8.11
7.74
8.53
5.29
5.98
4.98
4.95
5.09
We expect Tiger Australia to halve its losses in FY15
Tiger Australia reported a loss of SGD 69mn in FY13. Given the brand rebuilding and better route planning, yield has gradually recovered. Operating margin also improved from -50% in 1Q FY13 to -21% in 4Q FY13. We believe further margin expansion will rely on substantial cost reductions. Assuming Tiger Australia will gradually cut ticket prices in FY14-16 and price tickets at a 2-3% discount to current market prices based on the yield reported by Qantas and Virgin, and sustainably reduce unit costs by coordinating with Virgin Australia and operating more aircraft, we forecast a loss of SGD 61mn in FY14, of which 49% will be attributable to Tigers associate contributions. We expect Tiger Australia to at least halve its losses in FY16 from the FY13 level. Fig 227: Tiger Australia: Unit cost and ASK
90% 85% 80% 25 20 SG 15 10 70% 5 0 1Q13 2Q13 3Q13 4Q13
Fig 226: Tiger Australia: Yield and load factors

10 9 SG 8 75% 7 6 5 1Q13 2Q13 3Q13 4Q13
Yield (LHS)
Load factor (RHS)
Unit cost (LHS)
ASK (RHS)
1,200 1,000 800 '000
9.53
9.35
8.98
9.60
600 400 200 0
65% 60%
The major downside risk to our forecast is passenger yield. We are concerned that the significant capacity to be added will not be absorbed by new demand. This could increase pressure on air fares. Price competition is highly likely, as Jetstar Australia could take advantage of its lower unit costs and cut prices deeply to try to squeeze Tiger Australia out of the market.
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Mandala and SEAir: Economies of scale required

Though both are based in strong growth markets, we do not expect Mandala or SEAir (Lion
Airs affiliates in Indonesia and the Philippines, respectively) to achieve profitability in our forecast horizon.
Indonesia and the Philippines are both saddled with inadequate infrastructure (making nimble
expansion difficult) and fierce competition (more than four LCC competitors in each market, including Lion Air in Indonesia and Cebu Pacific in the Philippines, each controlling c.50% of their respective markets).
Since both affiliates are accounted for using the equity method, Tiger cannot recognise
earnings from either company before the accumulated earnings turn to profit; we do not forecast any positive contributions from affiliates in FY14-16, and instead expect SEAirs losses to remain fairly consistent until they exceed Tigers total investment.
Mandala (Indonesia)
Mandala (Tiger Indonesia) is 33% owned by Tiger Airways In January 2011, when it was grounded due to debt problems and filed for bankruptcy protection, PT Mandala Airlines was Indonesias fifth largest airline, with a fleet of 11 A320s and 25 more on order. After negotiations, Tiger was able to purchase 33% of Mandala Airlines in January 2012, with Saratoga Investama, an Indonesian strategic investment company, purchasing 51% and the remaining equity issued to the bankrupt airlines creditors in a debt -to-equity conversion. In April 2012, Tiger reactivated Mandalas AOC and re-launched its operations, with three A320s, as an LCC operationally identical to Tiger Airways. Indonesian market has enormous potential With a population of 244.5mn in 2012, Indonesia is the worlds fourth most populous country, having 40% of the population of the ASEAN region. Coming from a low base of flight penetration and bolstered by a fast-growing middle-class, domestic air passengers increased at a 2006-12 CAGR of 13.6%, to 72.5mn. We use the average of the 2010-12 GDP growth-domestic passenger growth multiplier (3.1x) and our house GDP growth forecasts of 6.5% (2013), 6.8% (2014), and 6.7% (2015) to forecast a 2013-15 domestic passenger CAGR of 20.5%. Fig 228: Indonesia domestic air passengers
140 120 Passengers, mn 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 0% 0% 2012 Jan 2013 Jan
We forecast a 2013-15 domestic air passenger CAGR of 20.5%
Fig 229: Indonesia domestic market share

45% 100% 3% 5% 6% 8% 25% 3% 2% 3% 11% 6% 26% 1% 4% Lion Air (+ Wings Air) Garuda (+Citilink) Batavia Sriwijaya Indonesia AirAsia 15% 40% 50% 47% Merpati Mandala Others
Domestic passengers (LHS) YoY growth (RHS)
80% 30% 60%
20%
Source: CAPA, IMF, Standard Chartered Research estimates
Mandala will struggle to become profitable while under-scale in a competitive environment

l
Key challenges Despite the growth potential in Indonesia, we think Mandala may find it hard to breakeven in two to three years without first achieving economies of scale. As a latecomer, Mandala will have to sacrifice yield and cash flow for market share, while we expect scaled competitors with lower unit costs to use highly competitive fares to protect their market share. 120
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However, the January 2013 bankruptcy of Batavia provided Mandala with an opportunity to pick up more slots at Jakarta, which should materially change its competitiveness picture, though uncertainties remain about how these slots will be shared by other carriers. We identify the following key challenges for Mandala:
Airport slot constraints: 16 of Indonesias 20 largest airports are operating well above
design capacity, and slots are scarce and precious. Although the government has accelerated several expansion projects, traffic is likely to grow faster than capacity, and Mand alas growth will be constrained by its lack of access to key airport slots. It currently has only four domestic frequencies from Jakarta, departing either very early in the morning or late at night, leading to lower passenger load factors.
Regulatory protectionism: The Indonesia National Air Carriers Association, led by flag-
carrier Garuda and LCC champion Lion Air, is a powerful lobbying group with a strong protectionist bias and great influence with regulators in Indonesia. We believe gaining new slots or approval to fly additional routes could be an opaque and drawn-out process for foreign-controlled airlines. This has contributed to a slow re-launch for Mandala.
Fierce competition: Mandala is the smallest of the seven LCCs in Indonesia. In January
2013, it flew six A320s on six domestic and eight international routes, which translates to just 1% of capacity in Indonesias vast domestic market, according to CAPA. Given fierce competition from scaled competitors Lion Air, Garuda and the AirAsia group (with respective domestic shares of 47%, 26% and 4%), Mandala could continue to struggle in the local market but should grow faster in international markets by connecting Indonesia with Tiger Singapores network and Scoot.
SEAir (Philippines)
SEAir (Tiger Philippines) is 40% owned by Tiger Airways SEAir was established in 1995. Formerly a full-service carrier operating a mixed fleet of turboprops and a B737, in 2006 it formed an alliance with Tiger Airways, leasing and operating Tiger planes as a Tiger-branded product. However, after protests and lobbying by other domestic carriers, the partnership was not launched until 2010. In February 2011, Tiger purchased a 32.5% stake in SEAir, which it increased to 40% in August 2012. The Philippines also has strong growth potential Though not as large as Indonesia, the Philippines population of 97.7mn makes it the second most populous country in ASEAN (with 16% of ASEANs total population). The Philippines boasts greater flight penetration than Indonesia (0.53 se ats per capita to Indonesias 0.45) despite lower per-capita GDP (USD 2,462 to Indonesias USD 3,660); but coming from a higher base, domestic air passengers still increased at a 2006-12 CAGR of 15.9% to 20.1mn. Fig 230: Philippines domestic air passengers
35 30 Passengers, mn 25 20 15% 15 10 5 0 10% 5% 0% Domestic passengers (LHS) YoY growth (RHS) 30% 25% 20%
Fig 231: Philippines domestic market share

100% 90% 80% 70% 60% 50% 40% 30% 20% 45% 46% 10% 0% 2012 Apr 2013 Mar 20% 10% 1% 24% 21% Philippine Airlines 18% PAL Express SEAir Zest Air AirAsia/Zest 11% 5% Cebu Pacific
2006
2007
2008
2009
2010
2011
2012
2013E
2014E
Source: CAPA, IMF, Standard Chartered Research estimates
2015E
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We forecast a 2013-15 domestic air passenger demand CAGR of 12.7%
Using the average of the 2010-12 GDP growth-domestic passenger growth multiplier (2.2x) and our house GDP growth forecast for the Philippines (2013/2014/2015: 5.8%/6.2%/5.5%), we forecast a 2013-15 domestic passenger demand growth CAGR of 12.7%. Key challenges Some of the challenges Mandala faces are equally applicable to SEAir, including under-scale operations in a fiercely competitive and even more highly penetrated market, some degree of regulatory protectionism, and airport slot constraints (especially at Manilas Ninoy Aquino International Airport) that restrict opportunities for expansion. However, we believe the operating environment in the Philippines should become more benign after irrational and self-destructive pricing and competition in 2011-12.
Market consolidation: The recent alliance of the Philippines AirAsia with Zest Air has
reduced the number of competitors in the market from six to five (with just four LCCs). The PAL Groups rationalisation strategy has reduced its net capacity and pulled a competitor off the routes they previously shared, since PAL has decided not to risk cannibalisation between full-service PAL and LCC subsidiary PAL Express.
Demand to outpace supply: After our detailed supply/demand study of the Filipino narrow-
body market, we forecast a domestic passenger demand CAGR of 13% in 2013-15. We forecast a domestic seat capacity CAGR of 12% over the same period, after a 25% surge in fleet capacity in 2012 resulted in domestic seat growth far outstripping passenger demand, severely pressuring yields. This closer alignment of projected supply and demand suggests support for yield stabilisation in the near term.
More sensible pricing: The fact that the San Miguel Group (SMC), one of the most well-run
diversified conglomerates in Asia, bought a 49% stake in the PAL Group and has taken over management of the company suggests it is investing for returns rather than market share. Our belief is corroborated by SMCs rationalisation plan, which suggests it is trying to achieve the most profitable route deployment for PALs planes.
No contributions until at least 2015

Fig 232: Mandala losses
0 -2 -4 SGD mn -6 -8 -10 -12 -14 -16 -18 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13
Fig 233: SEAir losses

0 -5 SGD mn -10 -15 -20
Tiger's share
Actual losses -25 2QFY13
Tiger's share
Actual losses 4QFY13
3QFY13
We do not forecast any positive contributions from affiliates through FY16
While both Mandala and SEAir remain in the start-up phase, we expect them to continue to haemorrhage cash for some time. We forecast yearly losses of SGD 29m for SEAir in FY14-15. As Mandala is an associate under the equity method, Tiger cannot recognise its earnings before the accumulated earnings turn to profit from loss, or recognise the losses now. Indonesia AirAsia was loss making for five years before turning a profit in 2010 and it could be 2015 before AirAsia finally sees contributions from its Indonesian affiliate on its income statement. Despite the clear growth opportunities in both markets, we therefore do not expect Tiger to enjoy net income contributions from Mandala or SEAir in FY14-16.
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Key risks
We highlight a few potential risks to our view on the company: 1) The partnership agreement between Tiger and Scoot could increase feeder traffic and reduce costs on the margin to a greater extent than we expect. We think Scoot is likely to benefit from Tiger more than Tiger will benefit from Scoot. Ti ger Singapores load factors are already high (c.85%) and Singapore has a structurally higher cost base than the rest of ASEAN. LCCs in mature, developed markets traditionally outperform the most during recessions, when people become more price sensitive and cost conscious. With Singaporeans under increasing cost-of-living pressures, LCCs could see an above-trend surge in demand in coming years. Fuel prices could ease due to a weaker-than-expected recovery in the world economy; however, our house view is that crude oil prices will remain range bound and any risk is more likely to the downside as a result of elevated geopolitical tension in the Middle East. Tigers associates in Indonesia, the Philippines, and particularly Australia, could fare better than we expect after aggressive investment in fleet expansion improves economies of scale, though we consider this highly unlikely given the aggressive capacity expansion already planned by the entrenched market leaders, which is likely to rapidly erode yields.
2)
3)
4)
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Financials
If we exclude the disposal gain of SGD 120mn from the divestment of Tiger Australia to Virgin Australia, we forecast normalised profit of SGD 7.0mn in FY14. Strong profits from Tiger Singapore are likely to be offset by sustained losses from Tiger Australia and SEAir, in our view. The disposal of the Tiger Australia stake and the new share issue will materially improve Tigers balance sheet from FY14, allowing it to expand further by borrowing more. Fig 234: Financial summary
SGD mn Revenue EBITDA EBIT Pre-tax profit/(loss) Normalised net profit/(loss) FY12 618 (52) (83) (101) (93) FY13 866 41 7 (35) (44) FY14E 805 101 68 127 7 FY15E 878 116 84 31 29 FY16E 891 111 80 51 49
Income statement
We expect revenue to decline 9% in FY14 and grow 9% in FY15 Revenue We forecast a 9% YoY decline in top-line revenue in FY14 due to the divestment of Tiger Australia, followed by a healthy 9% rise in FY15. The small decline in revenue is due to managements aggressive capacity expansion guidance of roughly 25% YoY for Tiger Singapore in FY14. We believe the market should be able to absorb most of the additional capacity due in part to the additional connectivity afforded by the Scoot partnership, and therefore forecast load factors of 84% for FY14-16 for Tiger Singapore. Stage lengths have remained in a tight range close to 1,600km for four quarters and we expect that to continue. Aircraft productivity, which declined 23% following the grounding of Tiger Australia in FY12, should gradually recover. We forecast ASK expansion of 24% and 8% for Tiger Singapore in FY14 and FY15, respectively, due to an additional five aircraft in FY14 and rising aircraft productivity. We expect passenger yields to remain under pressure but auxiliary yields to compensate We expect passenger fare yields to remain under pressure as Singapore remains highly competitive. Singapore yield recovered 8% YoY in FY13 as capacity was adjusted after Tigers Australia operations resumed, and we forecast yield growth of 1.3%/1.1% in FY14/FY15, boosted by improving ancillary yield and relatively stable passenger fares. Consumers are less price sensitive to ancillary yields, which rarely factor heavily into purchasing decisions, and we therefore expect management to be successful in raising ancillary yield as a percentage of total passenger yield with the introduction of TigerPlus and other premium services. Operating expenses We expect operating expenses to decline 14.3% in FY14 with the divestment of the loss-making Tiger Australia. Thereafter, we expect Tiger management to keep costs under tight control to grow EBIT margin gradually, though it is worth noting that we do not believe Tiger will ever be able to achieve the margins of competitors like AirAsia as it has a structurally higher cost base than its competitors, being based in Singapore.
We expect operating expenses to decline 26.4% with the divestment of Tiger Australia
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Fig 235: Operating expenses breakdown (FY13E)

1% 4% 10% 3% 15% 4% Staff costs Depreciation Fuel costs Maintenance Marketing expense Aircraft rental Route charges Airport and handling Exchange loss/(gain), net Others

25% 20% 15% 10% 5% 0% -5% -10% -15% -20% FY10 FY11 FY12 FY13 FY14E FY15E FY16E EBIT margin EBITDA margin
9% 2% 10% 42%
The growth of LCCs in Asia will put upward pressure on wages and Singapore already has higher wage costs than its neighbours. The move to Changis Terminal 2 will undoubtedly increase airport and handling costs. As with any airline, fuel will remain the largest cost factor, and our house view is that kerosene jet fuel prices will remain stable in 2013 at least. Marketing costs rose sharply (124% YoY) in FY13. We consider this an exceptional event as new management seeks to revitalise Tigers brand equity. These costs should fall in FY14 but we expect them to remain significantly above the 2007-12 average of SGD 6.2mn as Tiger seeks to establish itself as a household Asian brand alongside AirAsia and Jetstar. We expect Tiger Airways to pass most of its leasing costs on to affiliates Aircraft rental costs will fall significantly in FY14 as Tiger Australias planes come off the books, and we assume Tiger will pass on the rental costs of its affiliate-operated planes to its affiliates via sub-leases. We therefore include only operating leases for Tiger Singapore-operated aircraft in our model and forecast a gradual rise in rental costs per aircraft. Airport and handling charges will certainly increase with Tigers September 2012 move from the (closed) LCC terminal to Changis Terminal 2. According to the Centre for Aviation, Changi currently levies SGD 28 (USD 22) in taxes and fees on each passenger departing the main terminals compared to only SGD 18 (USD 14) for Budget Terminal passengers. While Tiger has passed some of these costs on to passengers, airport and handling fees for FY13 were up 27% YoY. We forecast the fees will decline 16% due to the divestment of Tiger Australia in FY14.
Share of associates and JCEs

We forecast losses from associates to moderate but remain significant through FY15 We forecast Tiger Australia will make losses of SGD 73mn in FY13, SGD 61.3mn in FY14 and 49.7mn in FY15. The loss attributable to Tiger Airways will be only 49% of our forecasts in FY1416 after the stake divestment. Our forecasts for Tiger Australia are based on the following assumptions: Fig 237: Tiger Australia assumptions
FY14E ASK (grown with Australian fleet) Load factor Yield (SGD/RPK) Yield growth Operating profit margin
FY15E 6,132 82.5% 8.36 -3.0% -12%
FY16E 7,835 82.5% 8.11 -3.0% -6%
4,769 82.3% 8.62 -2.0% -18%
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Losses at Tigers affiliates in Indonesia and the Philippines are unlikely to abate any time soon given their infancy (both began in FY12). We forecast losses at both to remain more or less consistent with the losses in 2H FY13 in FY14-16. Since losses at Mandala have already exceeded the initial investment, only the losses incurred by SEAir are accounted for on Tigers income statement. We forecast losses of SGD 29mn in both FY14 and FY15 for SEAir.
Balance sheet
Rights issue On 5 March 2013, Tiger Airways Holdings announced a proposed rights issue of ordinary shares and a non-renounceable preferential offering of perpetual convertible capital securities (PCCS) to raise SGD 297mn (SGD 77mn from shares and SGD 220mn from PCCS). Both are value dilutive. The share issue was completed in April 2013. Proceeds will be used to repay existing loans (SGD 80-100mn), fund new or existing ventures (SGD 70- 90mn), and fund aircraft, parts, and pre-delivery payments (SGD 60-80mn) to expand the groups fleet. Fig 238: Tigers net gearing
240% 200% 200% 160% 120% 80% 40% 0% -40% FY2013 -3% FY 2014E
Source: Company, Standard Chartered Research forecasts
We expect Tiger to opt for operating leases over ownership of new aircraft
Capital expenditure Tiger has rather aggressive fleet expansion plans, but we expect most aircraft to be deployed at affiliates under operating leases, for which Tiger Holdings can pass the leasing costs on to its affiliates. We also assume that the five aircraft Tiger Singapore added in FY14 will be under operating leases. We thus forecast no significant capex in FY14-16. Net gearing Six consecutive quarters of operating losses have left Tiger with a weak balance sheet in FY13, but the Tiger Australia divestiture combined with the recent rights issue should substantially fortify the balance sheet. We forecast net gearing to fall from 2.0x in FY13 to a net cash position in FY14.
The rights issue will make a material positive impact on Tigers gearing
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Appendix: Tiger Group shareholding structure

Fig 239: Tiger Australia shareholders
Shareholder Virgin Australia Tiger Airways Group
% holding 60.0% 40.0%
Fig 240: Mandala shareholders

Shareholder Saratoga (an Indonesian investment group) Tiger Airways Group Mandalas original shareholders and creditors
% holding 51.3% 33.0% 15.7%
Fig 241: SEAir shareholders

Shareholder Local Filipino investors Tiger Airways Group
% holding 60.0% 40.0%
Fig 242: Tiger group route map
Source: Company
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Income statement (SGD mn)

Year-end: Mar Sales Gross profit SG&A Other income Other expenses EBIT Net interest Associates Other non-operational Exceptional items Pre-tax profit Taxation Minority interests Exceptional items after tax Net profit Net profit adj. EBITDA EPS (SGD) EPS adj. (SGD) DPS (SGD) Avg fully diluted shares (mn) 2012 618 (83) 0 0 0 (83) (8) 0 0 (10) (101) (4) 0 0 (104) (93) (52) (0.15) (0.13) 0.00 698 2013 866 7 0 0 0 7 (7) (27) 0 (8) (35) (10) 0 0 (45) (44) 41 (0.06) (0.05) 0.00 821 2014E 805 68 0 0 0 68 (2) (59) 0 120 127 (6) 0 0 121 7 101 0.12 0.01 0.00 1,006 2015E 878 84 0 0 0 84 (0) (53) 0 0 31 (2) 0 0 29 29 116 0.02 0.02 0.00 1,191 2016E 891 80 0 0 0 80 1 (31) 0 0 51 (3) 0 0 49 49 111 0.04 0.04 0.00 1,191
Cash flow statement (SGD mn)

Year-end: Mar EBIT Depreciation & amortisation Net interest Tax paid Changes in working capital Others Cash flow from operations Capex Acquisitions Disposals Others Cash flow from investing Dividends Issue of shares Change in debt Other financing cash flow Cash flow from financing Change in cash Exchange rate effect Free cash flow 2012 (83) 31 1 (1) (22) (19) (93) (468) 0 345 (6) (129) 0 155 43 (12) 186 (35) 0 (561) 2013 7 34 2 (3) 60 (9) 91 (531) 0 553 (75) (54) 0 0 (69) (11) (81) (43) 0 (440) 2014E 68 33 (2) (6) (27) 61 127 0 0 0 0 0 0 291 (348) 0 (57) 70 0 127 2015E 84 32 (0) (2) 16 (53) 77 0 0 0 0 0 0 0 0 0 0 77 0 77 2016E 80 30 1 (3) 4 (31) 83 0 0 0 0 0 0 0 0 0 0 83 0 83
Balance sheet (SGD mn)

Year-end: Mar Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets PP&E Intangible assets Associates and JVs Other long-term assets Total long-term assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible bonds Deferred tax Other long-term liabilities Total long-term liabilities Total liabilities Shareholders funds Minority interests Total equity Total liabilities and equity Net debt (cash) Year-end shares (mn) 2012 161 5 3 0 33 201 832 0 3 36 871 1,072 205 115 86 406 379 0 3 36 417 823 248 0 248 1,072 423 820 2013 117 1 4 0 52 174 782 0 50 43 874 1,049 148 154 129 431 366 0 14 39 419 850 199 0 199 1,049 397 821 2014E 187 1 4 0 50 242 749 0 50 43 841 1,083 0 132 122 253 166 0 14 39 219 473 611 0 611 1,083 (21) 1,191 2015E 264 1 4 0 53 321 717 0 50 43 810 1,131 0 142 130 272 166 0 14 39 219 491 640 0 640 1,131 (98) 1,191 2016E 347 1 4 0 53 405 687 0 50 43 779 1,184 0 145 132 276 166 0 14 39 219 496 688 0 688 1,184 (181) 1,191

Year-end: Mar Operating ratios Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin adj. (%) Effective tax rate (%) Sales growth (%) Net income growth (%) EPS growth (%) EPS growth adj. (%) DPS growth (%) Efficiency ratios ROE (%) ROCE (%) Asset turnover (x) Op. cash/EBIT (x) Depreciation/capex (x) Inventory days Accounts receivable days Accounts payable days Leverage ratios Net gearing (%) Debt/capital (%) Interest cover (x) Debt/EBITDA (x) Current ratio (x) Valuation EV/sales (x) EV/EBITDA (x) EV/EBIT (x) PER (x) PER adj. (x) PBR (x) Dividend yield (%) 2012 -13.5 -8.4 -13.5 -15.1 -3.6 -0.6 nm nm nm 2013 0.8 4.8 0.8 -5.1 -29.6 40.1 nm nm nm 2014E 8.5 12.6 8.5 0.9 5.0 -7.1 nm nm nm 2015E 9.6 13.2 9.6 3.3 5.0 9.1 -76.0 -79.7 252.3 2016E 9.0 12.4 9.0 5.4 5.0 1.5 67.1 67.1 67.1 -
-47.1 -13.1 0.6 1.1 0.1 0.1 1.8 58.4
-20.3 1.1 0.8 12.5 0.1 0.1 1.4 57.1
29.9 9.4 0.8 1.9 nm 0.1 1.8 70.7
4.6 10.0 0.8 0.9 nm 0.1 1.7 62.9
7.3 9.1 0.8 1.0 nm 0.1 1.7 64.6
170.3 87.7 -8.9 -10.8 0.5
200.0 83.2 0.8 13.3 0.4
-3.4 20.0 17.0 3.4 1.0
-15.3 19.3 23.0 1.4 1.2
-26.2 18.3 22.0 1.5 1.5
1.6 nm nm nm nm 2.4 0.0
1.1 23.3 132.3 nm nm 2.8 0.0
0.8 6.4 9.4 5.5 95.3 1.3 0.0
0.8 5.9 8.2 27.1 27.1 1.2 0.0
0.7 5.5 7.5 16.2 16.2 1.1 0.0
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Disclosures appendix
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, SCB) and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES. Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the date of the report, unless otherwise stated. SCB and/or its affiliates have received compensation for the provision of investment banking or financial advisory services within the past one year for the following companies: Tiger Airways Holdings Ltd.
SGD
2.15 1.82 1.49
Recommendation and price target history for Tiger Airways Holdings

1 2 3 4
1.16 0.83
5 7 8 9 10
0.50 Jun-10
Date 1 3 Dec 10 2 31 Jan 11 4 24 Jun 11
Sep-10 Dec-10
Recommendation OUTPERFORM OUTPERFORM OUTPERFORM
Mar-11
Jun-11
Date 2.15 1.98 1.63 1.29
Sep-11 Dec-11
Recommendation UNDERPERFORM UNDERPERFORM IN-LINE
Mar-12
Jun-12
0.52 0.50
Sep-12 Dec-12
Date
Mar-13
Jun-13
Price target 0.66 0.77 0.77
Price target
Price target
Recommendation OUTPERFORM
5 4 Jul 11 6 8 Aug 11 7 1 Sep 11
8 15 Nov 11 IN-LINE 9 2 Feb 12
3 20 May 11 OUTPERFORM
0.77 10 13 Feb 12 IN-LINE
Source: FactSet prices, SCB recommendations and price targets
MYR
4.20
Recommendation and price target history for AirAsia

2 4 3
3.58 2.96
2.35 1.73 1.11 Jun-10

Date 1 3 Dec 10 2 24 Jun 11
Sep-10 Dec-10
Recommendation OUTPERFORM OUTPERFORM
Mar-11
Jun-11
Date 3.30 3.60
Sep-11 Dec-11
Recommendation
Mar-12
Jun-12
4.00
Sep-12 Dec-12
Date
Mar-13
Jun-13
Price target 4.20
Price target
Price target
Recommendation
3 25 Aug 11 OUTPERFORM
PHP
133.00 116.89 100.78
Recommendation and price target history for Cebu Air
84.67 68.56 52.45 Nov-10

Date 1 24 Jun 11
Feb-11
May-11
Aug-11
122.00
Nov-11
Date
Feb-12
May-12
Aug-12
Date 112.00
Nov-12
Feb-13
May-13
Price target
Recommendation OUTPERFORM
Price target
Recommendation
Price target
Recommendation
Equity Research
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Recommendation Distribution and Investment Banking Relationships % of companies assigned this rating with which SCB has provided investment banking services over the past 12 months 13.6% 12.4% 12.3%
% of covered companies currently assigned this rating OUTPERFORM IN-LINE UNDERPERFORM As of 31 March 2013 Research Recommendation Terminology 56.0% 33.2% 10.7%
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Asia's Low-Cost Carriers A Comprehensive Study of Regulation, Competition and Growth Potential 21-05-13!18!30

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Equity Research l Asia Pacific I Airlines l

Asias low-cost carriers

Claire Teng, CFA

Important disclosures can be found in the Disclosures Appendix

Asias low-cost carriers

Asias low-cost carriers

Our LCC country book

The most hospitable bases for LCCs

Asias low-cost carriers

The best-positioned LCCs

Asias low-cost carriers

Thai AirAsia (TAA) 45% owned

Indonesia AirAsia (IAA) 48.9% owned

AirAsia Philippines (AAP) 39.9% owned

AirAsia Japan (AAJ) 49% owned

AirAsia India (AAI) 49% owned

Source: Company, Standard Chartered Research

Asias low-cost carriers

Tiger Airways (In-Line, PT SGD 0.66)

Tiger Singapore 100% owned

Tiger Australia 40% owned

SEAir (Tiger Philippines) 40% owned

Mandala Airlines (Tiger Indonesia) 33% owned

Source: Company, Standard Chartered Research

Asias low-cost carriers

PHP 80.00 PHP 97.00

9.2% 12.5% 12.1%

Guangzhou Baiyun Int'l Airport NR

8.8 12.5% 13.1% 14.7%

Asias low-cost carriers

Scorecard: The most hospitable bases for LCCs

World 21% 22% 16% 23% 18%

26% 24% 24% 19%

19% 14% 11% 9% 4% 2% 6% 15% 17% 12%

Eight criteria for 10 countries

Asias low-cost carriers

Fig 7: Our criteria for evaluating LCC industry growth potential

Strength of the flag carrier

Asias low-cost carriers

Fig 9: Population and GDP per capita

Source: IMF, Standard Chartered Research estimates

Disposable income is highly correlated with flights per capita

Fig 11: GDP per capita, 2012 (USD)

Source: IMF, Standard Chartered Research

Source: IMF, country data, Standard Chartered Research

Asias low-cost carriers

Source: CAPA, Standard Chartered Research estimates

Fig 14: LCC penetration rates, 2012 (LCC seats/total population)

Source: CAPA, Standard Chartered Research estimates

Many international routes remain underserved

Asias low-cost carriers

Fig 15: International destinations already served*

Fig 16: International LCC penetration (% of seats)*

*April 2013. Source: CAPA, Standard Chartered Research

*April 2013. Source: CAPA, Standard Chartered Research

Asias low-cost carriers

Fig 17: Competitive advantages of the incumbent full-service carriers in Asia

Flag carrier Comments

Source: Standard Chartered Research

Asias low-cost carriers

Airport congestion is a serious impediment to LCC growth in many places

15% 36% 14% 20% 40% 60% 65% 67%