Thai Airways International

2013 strategies unveiled

Thai Airways International Plc (THAI)



Meeting with president. Yesterday, we hosted a meeting between local fund

managers and Dr. Sorajak Kasemsuwan, the first time he has meet with funds since

being appointed as THAI president in October 2012. The meeting helped to clarify

THAI's strategies and business adjustments to cope with another challenging year for

the airline industry. Key points obtained from the meeting:

Revenue enhancement. THAI expects passenger revenue growth of ~11% in

2013, backed by: 1) an increase in fleet capacity of +8.9% ASK - available seatkilometers

- net of the delivery of 17 new planes minus the retirement of 16; 2)

adjusting its route network by switching from some loss-making routes to more

profitable routes in Asia, notably to Japan, China, Russia and India, via adding to

flight frequencies and new routes; 3) yield improvement from a better ticket

selling system (i.e. boost internet sales from currently 8% of sales) and product

improvement (delivery of new planes and completion of retrofit program).

Cost management. On the non-fuel cost side, THAI plans to keep 2013 operating

cost/unit stable from last year via cutting unprofitable routes, increasing fleet

utilization, improving the procurement process and using more outsourcing. It

aims to manage jet fuel cost via more timely fuel surcharge adjustments and

maintain its 2013 fuel hedging position at close to last year's 85%. To date, THAI

has hedged 68% of its 1Q13 fuel needs and 65% of needs in 2Q13-4Q13.

Strategies to cope with competition. Middle East airlines are coming on strong

and coping with them may lie in boosting its level of collaboration with airlines in

the Star Alliance grouping and focusing on THAI's competitive advantage in shorthaul

routes in Asia. It will handle the competition from the low cost carriers (LCCs)

by use of THAI Smile, a light premium airline, entirely held by THAI, and Nok Air, a

low cost airline, in which THAI holds 49%.

Fleet rejuvenation. THAI plans to cut average fleet age from 10.3 years in 2012 to

8.0 years by 2017. The number of aircraft will rise from 97 at the end of 2012 to 106

in 2017 via replacing 42 old planes with 51 new. It has also engaged in a retrofit

program on 20 planes that will be completed by mid-2014.

Maintain BUY. We maintain BUY with a new 12-month PT of Bt30 (from Bt26), based

on 0.9x PBV (-0.5 SD vs. its 10-year historical PBV at 1.1x). THAI is the most laggard play

in the tourism-related industry: In the past 12 months, THAI's share price was

unchanged, compared to air transport players (AOT +122% and AAV +80%), hotel

operators (CENTEL +193%, ERW +140%, MINT +118%) and the SET (+34%). Against

regional airline peers, THAI is one of the cheapest airlines, trading at 10x 13PE vs. peers

at 13.6x, 0.8x 13PBV vs. peers at 1.1x, and 5.5x 13EV/EBITDA vs. peers at 6.3x. Shortterm

positive catalysts include high season in 1Q13F and the listing of Nok Air.