Singapore Airlines

PHILLIP SECURITIES RESEARCH on 7 March 2012

THE Singapore Airlines (SIA) Group comprises three main business segments: passenger, cargo, and aviation MRO (maintenance, repair, and operations) services. The parent company, SIA, operates more than 100 aircraft to a global network of destinations.

Tiger Airways announced plans to set up a second base in Sydney, with operations expected to commence from early July 2012.

Sector limits imposed by CASA would also be gradually lifted and Tiger Airways Australia (TAA) would be able to operate to a maximum of 64 (current: 38) sectors per day from October 2012. Previously, SIA also announced an increase in fuel surcharge of US$2-28 per sector for flights on SIA & SilkAir and SIA Cargo's freighter capacity would be reduced by 20 per cent in response to weaker demand.

The developments are positive for Tiger Airways. We also think that the establishment of a second base by TAA in Sydney could have strategic implications to SIA's new long-haul budget carrier, Scoot.

Scoot previously announced that they would fly to Gold Coast & Sydney from mid-2012. Hence, we believe that there is potential for development of a budget network for SIA and its affiliates, with Tiger Airways and Scoot collaborating for traffic feed into each other's network in Australia.

The codesharing scheme between SIA and Virgin Australia would provide the full service network alternative for the less budget conscious travellers.

The increase in fuel surcharge is a necessary move to combat the current high jet fuel prices (about US$135/bbl, +10.7 per cent year- to-date) and is the fifth round of increase since December 2010.

As the announced freighter capacity reduction of 20 per cent does not involve the bellyhold capacity in SIA's passenger fleet, we reckon that the effective cargo capacity reduction would probably be half.
Cargo yields could be protected with the capacity reduction. With the dynamic nature of the cargo business, we believe that a quick restoration of cargo capacity is possible, if demand unexpectedly strengthens.

We have little conviction in a near-term re-rating for SIA's stock price with the ongoing challenges facing the airline industry. However, we also see little downside for the stock price at such depressed valuations. Maintain accumulate.
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