Air Transportation

Air Transportation 

 

- International flight ban not likely 

The International Civil Aviation Organization (ICAO), the regulator of aviation worldwide, flagged that the operation of the Department of Civil Aviation (DCA), the aviation authority of Thailand, does not meet the ICAO's safety standard. As a result, adding of new charter flights and new destination of flights from Thailand was banned in some countries e.g. Japan, South Korea, and China. The ban has raised concern about the worst-case scenario that every country might prohibit flights from Thai airlines, which would depress earnings of air transportation companies. However, this worst-case scenario is not likely to happen. The government is expected to deal with this problem as soon as possible (Thai air operations are expected to improve and meet the ICAO's standard in two months and all problems would be completely solved within eight months). After a recent direct negotiation between the government and Japan on this issue, Japan is currently considering whether to halt Thai charter flights in April

and May.

- AAV, AOT's prices overly absorb bad news  

The current situation has affected many airlines, e.g. NOKScoot's (NOK holding 24% stake), AirAsia X, THAI, and Asia Atlantic Airline. However, AAV would face a limited negative effect since AirAsia X that has flights to Japan and South Korea is only related to AAV but not as shareholders, but ban may still affect new flights to China though. Still, if the government can solve the problem quickly, AAV's new flights would be launched within 4Q15, so we maintain AAV's earnings forecast. The ban would have adverse effects on airlines, thus weakening AOT, Thailand's sole airport operator. However, according to the Minister of Transportation, the ban would lower AOT's flight volume by only 400 (down 0.06%) and weaken its and passenger volume by only 0.1 million or 0.1% from the forecast. Under our projection that all charter flights (less than 5% of AOT's total flight) were banned, AOT's net profit would be depressed by 15% from our initial forecast and its fair value would drop by 7.8% to B295. 

- Not good entry point for AOT, but AAV is attractive 

As a result of the negative factor on the air transportation industry, we reiterate NEUTRAL. Given that the situation does not worsen, although the share price has already absorbed the bad news and shown a limited downside, there is also a limited upside since the new flights would been cancelled. We recommend holding AOT for speculation. For AAV(FV@B6), this is a good entry point.