Global headlines shake confidence. Recent global news headlines on Europe's lingering debt crisis, a weakening US economy and the slowing manufacturing activities globally may have been cause for worry. Generally, things are worse than anticipated and central banks and policy makers globally are expected to do whatever it takes to spur growth.  As all eyes are now on Europe's debt crisis, the region's failure to support a bailout will negatively affect the global economy.

Passenger demand seems encouraging. Recent statistics from SIA and Thai Airways show that demand for air travel has been resilient across the board, including traffic from/to Europe. In the immediate term, we see passenger travel possibly picking up during the summer holidays as well as due to the on-going Euro football championship and upcoming Olympics. For instance, Thai Airways' advance bookings indicate that as much as 75% of its seats may be filled in June, well above last year's 65.7% and 72% in May 2012, while AirAsia's advance bookings are 3ppt higher than last year's load factor, suggesting that demand is very encouraging. Furthermore, a weaker Euro will draw long haul travellers to the European region. As such, we think that in the immediate to medium term, air travel demand will remain encouraging and continue to see growth. However, due to intense competition, notably from carriers from the Middle East, the upside on yields may be somewhat limited. All in, given the sharp drop in jet fuel price, we expect breakeven load factors across the airline industry to improve. 

But cargo may disappoint. The weaker than expected global manufacturing data is a source of worry for the air freight market. A recovery can only be expected as towards end-2012, provided that the European debt crisis is contained. SIA has the highest exposure in the cargo segment among the airlines we cover. Despite these concerns, yesterday's announcement that SIA will commence joint freighter services with China Cargo Airlines between Shanghai and Singapore from 26 June 2012 will stimulate tonnage carried and load factor. These two cities will essentially function as hubs for SIA's vast global network.  

OVERWEIGHT. We are of the view that the prices of the airline stocks under our coverage are currently at attractive levels. As such, this is an opportune time to accumulate as these counters are trading below their mid-cycle valuations. However, investors should take heed of the cautious global outlook as all eyes are now on how Europe will tackle its debt crisis. We have BUY calls on the stocks across our coverage, with AirAsia being our top pick at a FV of RM4.57, followed by THAI Airways, at a FV of THB35.40.

Source: OSK