Asia Aviation

Asia Aviation Plc (AAV) is the holding company of Thailand’s largest LCC, Thai AirAsia (TAA). After eight years, TAA’s operations are now entering a highly cash-generative stage. It plans to double its fleet over the next five years and, in the process, dominate the Thai LCC space. We initiate coverage with an Outperform as TAA is the most cost-efficient airline in Thailand. Key share price catalysts include cost savings from the move to Don Muang and aggressive capacity expansion. Our target price is based on 2013 P/E of 11x, 20% above the LCC sector average as TAA can capitalise on the Thai aviation market’s strong growth. 
Rapid growth in Thailand
We expect the size of the Thai aviation market to double over 10 years. Our inhouse economists expect Thailand to grow its GDP by at least 5.5-6% over the next two years, one of the highest growth rates in Asia and putting discretionary income in the hands of Thai travellers. Tourist
arrivals have risen 13-20% p.a. in the past two years to record numbers and Thailand remains an attractive travel destination sitting in the middle of two giant economies, China and India.
If the Myanmar reforms take off, the Bangkok hub will be best-positioned to serve the boom in air traffic.

Competitive advantages

TAA has the youngest fleet in Asiaand a competitive cost structure. Links to the AirAsia family provide it with global brand recognition, a strong corporate culture, access to a large A320 orderbook and financing, and other operating advantages such as Internet ticketing systems, training and recruitment, and economies of scale from fuel hedging, maintenance and critical IT systems. TAA’s business has now reached a highly cash-generative phase that will enable it to fund aircraft purchases and expand capacity to gain market share,
which could entrench its dominant position in the Thai LCC space.
Key risks
High oil prices are a perennial worry for any airline, although TAA has one of the lowest sensitivities to fuel prices among Asian airlines. The Thai Airways group is not sitting still, with
Thai Smile taking off in mid-2012, and Nok Air looking to renew its aged fleet. Furthermore, Thai Airways is considering starting a new LCC to compete with TAA. The airport operator AOT is putting forward a proposal to raise passenger service charges. TAA’s future depends on
how it manages these risks.
TAA has the youngest fleet in Asia and a competitive cost structure.