Thai Airways

Thai Airways International Plc (THAI):

Traffic tumbles. 4Q is normally the peak travel season, but because of the floods, we expect weak operations. It would take 2-3 months to return to normal, but this is expected to come with heavy sales promotions, which will pressure yields. Traffic has been dropping since Oct11, when the floods started and 32 countries subsequently issued travel warnings for Bangkok. Oct11 passenger cabin factor plunged to 65.7% vs 74.3% in Oct10. But the situation has worsened since, and even with reduced capacity in Nov-Dec11, cabin factor in the first two weeks of Nov11 had dropped further to 58.3% vs 71.8% in Nov10, and pre-bookings for the remaining of Nov and the month of Dec11 has only recovered mildly to 60.8% and 59.8%, respectively. Hence, 4Q11F cabin factor may be only 63%, down 11ppt from 73.8% in 4Q10.    Still plenty of uncertainties. The flooding will be resolved soon, but THAI would still have to contend with a competitive airline industry, especially with the aggressive expansion of Middle Eastern and low cost carriers, which are likely to continue pressure traffic and yields. THAI’s products are also inferior compared to peers, making it tough for THAI to compete. However, this disadvantage should ease as THAI improves its services with new aircraft and fleet modernisation going forward, albeit it would take time.   Reiterate HOLD and Bt20.50/share TP pegged to 0.7x FY12F PBV. Although THAI is trading at only 0.6x FY12F PBV, (-1SD of its 7-year mean), we would wait for more concrete signs of recovery before increasing exposure in THAI. THAI continues to be plagued by a fragile global economy, competitive industry, high fuel price, and weak sentiment towards travel to Thailand.