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Asia300

Malaysia's AirAsia to launch China budget carrier unit

Roughly $100m deal is aimed at tapping world's largest outbound tourist market

KUALA LUMPUR -- Malaysian budget carrier AirAsia has signed an estimated $100 million agreement to build a hub in central China, a deal the company described on Sunday as the "final piece of the puzzle" in its regional expansion.

The group signed a memorandum of understanding to establish AirAsia China with Everbright Financial Investment Holding, a unit of the state-owned Everbright Group, and the Henan provincial government. The agreement includes the construction of a dedicated hub at Zhengzhou Xinzheng International Airport, the gateway to Henan's provincial capital of Zhengzhou. Also included are plans to establish an airline crew training center, as well as maintenance, repair and overhaul facilities.

Shares in AirAsia opened 1.4% higher at 3.53 ringgit in Monday trade.

MIDF Research raised its target price for the stock by 18% to 4.06 ringgit, citing AirAsia plans to enter the world's largest outbound tourist market.

AirAsia serves about 19 cities in greater China -- which includes Taiwan, Hong Kong and Macau -- the most of any budget carrier. With connections linking second-tier cities in China to Southeast Asia, the carrier offers discount services to a growing outbound tourism market. Although Chinese cities account for only about 15% of AirAsia's destinations, China contributes to about 40% of sales across the group, which owns associate airlines in Thailand, Indonesia, the Philippines, India and Japan.

"We chose Zhengzhou as our base due to its strategic location and importance as a logistics hub," said Tony Fernandes, AirAsia's group chief executive.

Zhengzhou is located in the center of China, making it an ideal hub for AirAsia's short-haul model focusing on flights of four hours or less. The city also has excellent highway and railway links to the country's central and western regions.

Surrounding the Zhengzhou airport is the 415-sq.-km Zhengzhou Airport Economic Zone, home to smartphone manufacturers, including the iPhone-assembly facilities of the Taiwanese-owned Hon Hai Precision Industry, also known as Foxconn.

AirAsia likely sees a prime growth opportunity in China. While budget carriers have a 53% penetration rate in Southeast Asia, the rate is only about 11% for the world's second-largest economy, according to the Sydney-based Centre of Aviation. The growth potential is huge, with the International Air Transport Association predicting that China will overtake the U.S. as the world's largest passenger market by 2024.

"AirAsia gets a joint-venture airline, but China gets a wealth of experience and low-cost carrier best practices," said Will Horton, senior analyst at CAPA.

But AirAsia may face "teething problems" there due to strong competition and a lack of slots at major airports, said Macquarie Research in a note to clients. The domestic market is dominated by Shanghai-based Spring Airlines and other local budget carriers.

Malaysian Prime Minister Najib Razak, third from left, joins Chinese and AirAsia officials at a signing ceremony in Beijing on May 14.

The agreement with Everbright Group, which has business interests in the financial and industrial sectors, follows partnerships with other Chinese companies in online payments, aircraft leasing and financing, AirAsia said.

The deal is part of $7.22 billion worth of agreements signed in conjunction with Malaysian Prime Minister Najib Razak's visit to China, which started Friday. Other deals include the development of a methanol plant in Sarawak, Malaysia, by a Chinese consortium and the Melaka Gateway, a project to build a port on reclaimed land in the Strait of Malacca.

Najib, who attended the Belt and Road Forum of International Cooperation in Beijing during his visit, also met with Wang Jianlin, founder and chairman of property developer Dalian Wanda Group to discuss investment in Bandar Malaysia township, a massive real estate project connected with the planned Kuala Lumpur-Singapore high-speed railway. Wang told reporters at the time that he has "confidence in the investment environment of Malaysia," but did not elaborate further.

Malaysia recently canceled a 7.41 billion ringgit ($1.7 billion) deal awarded to a consortium led by a unit of China Railway Group to develop the township, citing payment defaults.

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