Asia Aviation

Asia Aviation Plc (AAV)

Company guidance

- Cabin factor was 82-83% in July 2013, flat YoY and QoQ. 3Q13 will be the lowest quarter in the year from seasonality.
- After adding two planes in 1H13, AAV maintains its plan to add six more planes in 2013F (two in 3Q13 and four in 4Q13), giving it 35 planes at end-2013. 
- It will focus its route network on Southern China, Indochina, and Thailand in the short to medium term. It will increase flight frequencies to Chongqing (3Q13), Kuala Lumpur (3Q13), Singapore (3Q13), Chiang Mai (3Q13) and Krabi (4Q13). It will open new routes: BKK-Siem Reap and Naypyidaw (Oct 2013) and add new cities in China and in the domestic market late 2013. Longer term, it is looking for route expansion to Bhutan, Indonesia, and the Philippines. 
- In 2013, it targets 10mn passengers (+20% YoY), load factor of 82%, and average fare at 2012’s level despite strong capacity growth.
- It will reintroduce Chiang Mai as a hub in Dec 2013 to cater to growth.

- In 2013, AAV maintains its target for ancillary income to end close to 2011’s level of Bt383/pax (vs. Bt346/pax in 1H13) or 16% of revenue (vs. 15% of revenue in 1H13). It has raised some baggage and processing fees in 3Q13, with full effects to be seen in 4Q13. It will also launch new products: EMS super-speed (4Q13) and Fly-Thru (Oct 2013). 
- The use of Don Muang reduces costs: 10-30% on landing and parking fees in 2013-15 and 1-2% on jet fuel usage from shorter taxi time and flight time.
- Air Asia X (Thailand) (low-cost, long-haul segment) has been set up and is in the process of requesting an AOC (Air Operating Certificate). AAV will have no stake in this company. It will become operational on 1 Jan 2014, beginning with two planes and adding 2-3 aircraft/year. AAV roughly estimates 3-5% of its passengers will be feed-through from Air Asia X (Thailand)’s passengers in its initial stages.

Earnings revision. We cut its core earnings by 10% in 2013-14 to reflect: 1) a change in FX assumptions to Bt30.5-31/US$ from Bt30/US$; 2) a cut in ancillary income/pax;
3) an increase in effective tax rate in 2013; 4) conservatively adding in some passenger feed from Air Asia X (Thailand) from 2014 onwards. Our sensitivity analysis suggests that a 1% depreciation in the THB/US$ will erode AAV’s earnings by 3%.
Maintain BUY. Our earnings revision and rolling over PT to mid-2014 gives a new PT of Bt6.5 (from Bt7.8), based on 20x PE with 3-year EPS growth of 30% (+1SD on 7-year PE for Air Asia Berhad vs. average EPS growth of 20%). We like AAV for its solid LT earnings growth, backed by company specific factors – mainly fleet expansion and partly also the startup of Air Asia X (Thailand) – and industry factors – LCC growth potential.