• Short-term impact
• Affects Singapore-based airlines
• Maintain UNDERWEIGHT

Safety concerns over Thai aviation – what’s going on?

The recently surfaced safety concerns over Thailand’s aviation industry resulted from issues found through the audit conducted by UN’s International Civil Aviation Organisation (ICAO). ICAO first commenced the audit in Jan-15, raised safety concerns and rejected Thai Department of Civil Aviation’s (DCA) one-year plan sent to ICAO in early Mar-15 in a bid to address those problems. The latest demand from ICAO requires DCA to adjust the plan by 2-Jun for ICAO’s review. The unsatisfactory audit result and rejection of DCA’s initial rectification plan triggered China, South Korea, and Japan to put restrictions and bans on approving all Thairegistered carriers’ applications for new charter flights while Singapore and Australia have both increased number of ramp inspections and scrutiny over any additional flight requests by Thai-registered carriers. However, Japan has agreed to give temporary reprieve to allow Thairegistered charter flights to operate into Japan from 11-Apr to 31-May but not permitted to change aircraft types or routes.

Short-term impact on Singapore-based airlines

We believe the impact on Singapore-based carriers from the safety concerns raised by ICAO is likely to be short-term especially since Thailand’s government has shown commitment and took initiatives with the target to resolve all the issues by end of the year. For SIA, it will feel the negative impact through its JV, NokScoot, with charter flights to Japan either cancelled or rescheduled onto Scoot’s flights. With an initial launch date in May-15, NokScoot also had to suspend ticket sales to South Korea since operating permit is unlikely to be approved on time. This meant that NokScoot’s launch date is delayed indefinitely until Thailand resolve its safety problems and restrictions/bans are lifted. Separately, while the foreign-registered carriers stand to benefit from the current situation, we think the impact will be limited for Tiger Airways (Tigerair) because the only outbound direct flight destination from Thailand is Singapore. Hence, we believe it is unlikely to see affected passengers flying to China, South Korea and Japan shifting to Tigerair’s flights that currently require one or more stopovers to these destinations.

Maintain UNDERWEIGHT on Aviation Sector

As we believe from the onset that NokScoot’s first scheduled flight launch date is uncertain until approval is officially granted by South Korea, we were right not to include any contributions from NokScoot in our current SIA model. Hence, we keep our forecasts unchanged and maintain HOLD on SIA with a FV estimate of S$11.59. For Tigerair, the uncertain and limited impact arising from the bans does not justify changes to our forecasts and we think the recent share price run-up is overdone. Moreover, as we are still cautious over Tigerair’s near-term outlook, maintain SELL with an unchanged FV estimate of S$0.29. Keeping our view on depressed yields arising from overcapacity and lower air travel demand on slowing economic growth, we maintain UNDERWEIGHT on aviation sector.

Source: OCBC Research - 13 Apr 2015