• MERS affecting South Korea
• Impact still localized for now
• Maintain UNDERWEIGHT

MERS and the affected countries

Severe Acute Respiratory Syndrome (SARS) gave global aviation industry a huge blow back in 2003. Today, Middle East Respiratory Syndrome (MERS), which is caused by a coronavirus from the same family as SARS, and first identified in 2012, is threatening to deal yet another blow to the aviation industry. There is currently no cure or vaccine for MERS, which has a fatality rate of around 35%, according to World Health Organization (WHO).

Just this morning, South Korea reported four new cases of MERS, taking the total to 126 cases (with ten fatalities), and is also the country facing the largest outbreak outside of Saudi Arabia. Thousands are still in quarantine while the number of schools in South Korea closing rose to more than 2000, including 22 universities. Closer to home, Hong Kong also yesterday reported four suspected cases of MERS at clinics after it issued a “red alert” advisory (defined as significant threat) on 9 Jun against non-essential travel to South Korea. Within the Asia-Pacific region, other countries have only recommended travelers to take precautionary measures.

Impact mostly on South Korea

We believe MERS will certainly affect the aviation industry, especially the airline businesses, given that MERS is both deadly and contagious. However, at the present moment, we think that the impact will still be very much localized at South Korea. Also, WHO has yet to recommend any curbs on travel or trade as a result of the MERS outbreak in South Korea.

According to an article by The Wall Street Journal, the South Korea government stated that about 54,400 foreign tourists (~7% of total foreign visitors over an equivalent period last year) had canceled their trips to South Korea as of 8 Jun, since MERS was first confirmed. Even the CEO of Cathay Pacific Airways Ltd made remarks stating a drop in bookings from Hong Kong to cities of South Korea in light of the outbreak.

Back home, Singapore Airlines (SIA) announced 10 Jun that it will waive cancellation fees and administration fees for refunds, rebooking and rerouting for customers holding tickets on SIA’s flights to or from Seoul’s international airport. SIA’s fully owned Scoot will also allow passengers to rebook travel dates or reroute to other destinations free of charge, subject to payment of fare differences.

Maintain UNDERWEIGHT on Aviation Sector

In view of various responses from both public authorities and commercial businesses, we believe the impact from the outbreak is likely to be short-term in nature and contained at South Korea. On these reasons, we opt to keep our forecast unchanged for both SIA [HOLD; FV: S$11.59] and Tigerair [SELL; FV: S$0.30] for now. However, in view of weaker global economic growth as World Bank on 10 Jun cuts its forecast for 2015 from 3.0% to 2.8% as well as persistent overcapacity reasons, maintain UNDERWEIGHT on aviation sector.

Source: OCBC Research - 12 Jun 2015