Air Transportation

Air Transportation 

 

- Negative sentiment from ICAO's red flag, MERS 

Yesterday, two negative factors depressing the air transportation sector: 1) The International Civil Aviation Organization (ICAO) officially gave Thailand a red flag, showing that the Department of Civil Aviation (DCA) failed to meet the global aviation safety standard (regardless of safety standard each Thai airline). Other countries will be deciding which sanctions to be implemented on Thai airlines. We project that flights from Thailand would not be completely prohibited (this issue has been known worldwide for three or four months; only Japan, China, and South Korea have actually banned adding of new destination of flights from Thailand, while other countries have inspected flights from Thailand more strictly).  

 

2) Thailand has confirmed the first case of MERS. 

- Adversely affecting sentiment more than earnings 

We believe that every Thai airline would be operating as usual. Three countries banning adding of new destination of flights from Thailand would have only a slight adverse effect on AAV and BA; although their plans to expand their destinations in China is delayed, they can still add new destinations in other countries e.g. India. Similarly, THAI has no plan to expand its destinations, and AOT would only be affected by weaker growth from Thai airlines. The red flag would only have negative sentiment on the air transportation sector. For the worst-case scenario that flights from Thailand are completely prohibited, this would have only short-term adverse effects on major airlines since it would take time for each country to directly inspect whether Thai airlines meet global aviation standard. 

The MERS outbreak would have more limited adverse effect than the 2009 flu pandemic, probably adversely affecting sentiment more than earnings. During the 2009 flu outbreak (worst-case scenario) which lasted three or four months, passenger volume decreased by 15% (or 4-5%/year). Under our study (worst-case scenario), every 5% decline in passenger volume would weaken AOT, AAV, BA, and THAI's fair values to B295, B4.3, B17.0, and B11.6, respectively, having downsides from the current prices; we recommend avoiding these stocks for the short term. 

- Avoid for short term 

Although these adverse effects would last for only the short term and air transportation companies' earnings are unlikely to be affected significantly, the share prices have dropped, absorbing the bad news. We recommend avoiding these stocks for the short term. When the prices drops considerably, we recommend buying stocks with solid fundamental factors and upsides: AAV(FV@B6) and BA([email protected]).