THY Report

We revise our PT to TL7.80 to reflect higher traffic growth post THY’s new fleet order. THY’s growth story appeals, and if it can deliver successfully on its strategy, the stock could double. Near term, with just ~5% upside to our PT and low visibility on operating trends, we stay EW.

 

History suggests yields to remain pressured: THY’s YTD traffic is up 30% YoY, and ongoing fleet expansion suggests little signs of a slowdown near term. As our analysis of EU LCC expansion trends over the last decade shows, negative yields in periods of high growth are not uncommon. We forecast flat EUR yields for THY in 2013-15e versus the 1-2% forecast for EU legacies.

 

Benchmarking points to limited cost cuts near term: THY’s focus on unit costs in FY12 added 400bps to EBIT margins. Our benchmarking vs. Emirates suggests THY has limited scope for efficiency improvements near term. Longer term, growth in stage length and network maturity could drive costs lower. We forecast a 0.7% average decline in ex fuel US$ unit costs in FY13-15e.

 

Fleet size of 330 by 2020e: THY’s latest aircraft order will grow the fleet from 202 (2012) to 330 by 2020e, driving a seat capacity CAGR of 8%, versus a 16% CAGR in 2007-12. We incorporate the new order into our estimates and forecast a traffic CAGR of 17.5% in 2012-15e vs. our previous assumption of 14%.

 

Equal weight for now; bull case of TL16.6: Outlook for air travel has improved, and capacity cuts by competitors could help THY gain market share, allowing for increased leverage from the longer-term positive demand trends. We are cautious near term given THY’s expansion, but high operating leverage could see the shares move towards our bull case (100%+ upside).