Thai Airways International

Thai Airways International Plc (THAI)

Investment thesis
The key messages at the analyst meeting yesterday reaffirmed a weak top-line outlook—the political chaos has discouraged both arrivals to Thailand and domestic air travel. Furthermore, THAI’s high cost structure will make for a poor bottom-line and an uninspiring share price performance. Moreover, tourism will enter low season in 2Q14, so we don’t see any scope for a price catalyst in the short-term. However, the market has already priced in such concerns, we believe. THAI currently trades at a YE14 PBV of 0.6x—deep discounts to both its long-term average of 0.8x and to the regional mean of 0.9x. Downside risk to the share price appears limited.   
Renewed pessimism over 1Q14 numbers
We are now more pessimistic over THAI’s 1Q14 operational outlook, as passenger yield is likely to be weaker than we previously envisaged. Air travel demand to and within Thailand remains weak. The cabin factor was 71.5% for Jan (against 78.8% for Jan 2013) and 70% for Feb (against 80.4% for Feb 2013), while bookings are 59% for March and 53% for April. We, therefore, expect 1Q14 cabin factor to drop to 70% from 79.8% in 1Q13. Moreover, the passenger yield for Jan declined by 5% YoY and 3% MoM to Bt2.70/RPK and is assumed to have slipped further in Feb on seasonality and aggressive promotional fares. As such, we now expect a deeper QoQ core loss for 1Q14 (against a core profit in 1Q13).     
FY14 bottom-line exposed to weak demand & further impairment
Weak demand and passenger yield, brought about by the political chaos, poses a threat to THAI’s FY14 core number. Our sensitivity analysis suggests that for every Bt0.01/RPK that passenger yield falls short of our assumption (of Bt2.64/RPK), the firm’s FY14 core loss would deepen by 15% from our current forecast. Also, possible further impairments on aircraft present another downside risk to THAI’s FY14 bottom-line. Based on management guidance, we preliminarily estimate an additional impairment on aircraft of about Bt1bn (against Bt5bn in FY13).
Flight adjustments & fuel hedging to mitigate downside risk
The firm has implemented a flight adjustment strategy aimed at improving the cabin factor and passenger yield. Furthermore, THAI maintains extensive jet fuel hedging—it currently has hedging contracts for 1Q14 covering 68% of its forecast fuel consumption needs for the quarter. The firm is also buying hedging contracts for the remaining three quarters; the contracts currently cover 54% of its expected jet fuel consumption for each quarter. We think that the flight adjustment and fuel hedging strategies should mitigate downside risk to the FY14 bottom-line.