Thai Airways International

 

 

 

 

 

 

In a surprise development, Thai Airways has decided not to pursue plans to start a new LCC with Nok Air. Instead, Nok Air will be expanding internationally by itself from 1Q13. This should be positive for incumbent Thai airlines as excessive competition can be avoided.

 

The key winner from this development should be Thai AirAsia (TAA), as it can continue to enjoy the current benign competitive environment in Thailand. We are Overweight on Thai aviation, with Outperform ratings for our top picks of AAV (TP: THB4.25) and AOT (TP: THB74), while remaining Neutral on Thai Airways (TP: THB26). 

 

What Happened

On the heels of our report yesterday about the potential for Thai Airways to rope in Indonesia’s Lion Air to start a new LCC JV with Nok Air, CAPA reported today that Thai Airways has shelved this plan after completing a feasibility study, and will instead allow Nok Air to pursue international expansion from 1Q13.  

The source of this information is apparently Nok Air’s CEO, Patee Sarasin. Currently, Nok Air only flies on domestic routes with four B737-800s, four B737-400s and two ATR72s. Four B734s will be returned, while four more B738s will be delivered, by end-2012. The plan is to lease eight more B738s, taking its jet fleet to 16 by end-2013.

 

What We Think

The impact of Nok Air’s expansion will likely not be disruptive, as: 1) Nok Air will configure its B738s for overseas routes with two classes, so unit costs will be higher than for pure LCCs operating a single class; and 2) with Thai Airways holding 49% of Nok Air, it will be careful not to cannibalise existing mainline operations. Lion Air had failed to secure a footing in Thailand likely due to competing interests with Nok Air. Until Thai Airways resurrects its LCC plan, TAA will remain the dominant LCC in Thailand.

 

What You Should Do

Accumulate AAV and AOT.