Asia Aviation

Asia Aviation Plc (AAV) 

Event: AAV held a meeting to update on the government’s and its own strategy in response to the International Civil Aviation Organization (ICAO) letter notifying Thailand’s Department of Civil Aviation (DCA) of “significant safety concerns” (SSC). Below is a summary of its main points. 

 

- SSC to be resolved by mid-July. AAV, via Thai AirAsia, is one of the Thai-flagged airlines involved in the government’s corrective action to get the SSC lifted. The ICAO noted more than 500 points of concern and 33 of these are urgent problems of SSC, categorized into: 1) regulations on transporting hazardous items – to be cleared in May and 2) procedures for certification of aircraft and operations – to be resolved by mid-July. This latter issue needs closest monitoring since it requires the training of more inspectors. In the worst case, AAV believes compliance and resolution of the SSC will take place this year. The Prime Minister's Office will present its action plan and progress to the ICAO every 15 days to show its sincerity. Remaining points of ICAO concern deal with documentation and the DCA’s role. 

 

- Strong action with discernible progress lowers possibility of downgrade. With the resolution not expected until mid-July, the market is concerned that Thailand will miss the ICAO’s deadline and 90-day grace period, ending June 2. The ICAO plans to release its reassessment of DCA on June 18. AAV reports that at this time, some items on the SSC have been corrected and the government believes the ICAO will be satisfied and accept the action plan if progress has reached over 80% in June, and then will lift the SSC despite the one-month miss.  

 

- Airline to do individual audit by destination for route expansion. A downgrade of the DCA will step up inspections or trigger restrictions on Thai-registered airlines by some ICAO members (e.g. Europe, the U.S., Japan and South Korea). However, from the standpoint of an airline, AAV views that Thai-registered airlines will be able to add new routes to those destinations if their qualifications and safety standards pass inspection by the countries themselves.  

 

- China has never blocked airlines from countries that fail ICAO audit. A question from the floor asked about China’s actions regarding ICAO concerns as China is AAV’s key market providing ~20% of total revenues. AAV said that China has never blocked airlines from countries that fail ICAO audit, though it has in the past restrict individual airlines in response to concerns over their operations.  

 

- AAV sees limited impact, keeps 2015 targets unchanged. So far, the ICAO issue has had no impact on AAV and it is keeping its ambitious 2015 targets of 14.5mn passengers (up 19% YoY) and 83% load factor (up from 80% in 2014). In the worst case that AAV is not able to add new routes to new cities in China by the end of this year, it believes 2016 operations will not be materially impacted, as it plans to explore other potential markets such as India, Cambodia and Vietnam. 

 

BUY maintained. We feel positive toward the update on the resolution of the SSC and the limited impact this is having on AAV’s operations. The 17% fall in share price from peak in late March implies the ICAO issue has been priced in. The silver lining is the catalyst expected from record-high earnings in 1Q15 from strong tourist numbers and the windfall from low jet fuel price. Maintain BUY on AAV with TP of Bt7.5/share.