Air Transportation

Benefiting from declining oil price OVERWEIGHT

Air Transportation

- Declining oil price benefits airlines companies with low hedging

Dubai oil made the five-year low at US$63.27/barrel yesterday (December 10,

2014), likely to decline further as a result of an oil oversupply. This would benefit

every airline company because jet fuel cost accounts for 30-40% of their total

expense. However, benefit from declining jet fuel cost depends on their hedging.

For example, AAV and NOK (with 30-40% hedging) are likely to benefit more than

peers, while THAI (with over 70% hedging) would gain a limited advantage.

- Air transportation sector's earnings revised up mainly from two companies

Our global crude oil price assumption is revised down from US$90/barrel to

US$75/barrel (jet fuel cost assumption is lowered from US$115/barrel to

US$100/barrel) to reflect declining oil price. Thus, air transportation sector's

(including AOT, AAV, and THAI; we have not worked on NOK's earnings forecast)

FY2015-2016 earnings is estimated by 9.5% on average, mainly from the

following two companies: 1) AAV is projected to benefit most. Its earnings are

estimated to rise by 37% on average to B1.45bn (up 3.2 times) in 2015 and jump

by 32%yoy in 2016, boosting its fair value by 21.2% (FY2015-2016 load factor

assumption is maintained at 81%). 2) THAI's earnings are expected to grow by

78% on average, reviving from net loss to B2.6bn net profit in 2015 and jumping

by 2.1 times in 2016 (FY2015-2016 load factor assumption is maintained at

72%). Oil price is projected to decline remarkably in 2015, relieving concern

about weak earnings growth of air transportation sector, especially risk from

fierce competition between airline companies.

- Upgrade recommendation to OVERWEIGHT

We upgrade our recommendation to OVERWEIGHT as the sector is projected to

make a turnaround, reviving from net loss to strong net profit in 2015 (versus the

market average return estimated at 16%). We upgrade our recommendation from

HOLD to BUY for AAV([email protected]) and select it as the sector's top pick; its new fair

value (with 20x P/E ratio) implies 29% upside. For AOT(FV@B320), we reiterate

BUY. THAI's fair value is revised up from B15.1 to B16.5, but it still implies a

limited upside; we reiterate HOLD.