Aviation Services

Kim Eng on 16 Jan 2013

Changi Airport as an aviation hub. Our overweight call on the aviation services sector is underpinned by Singapore’s growing reputation as an aviation hub, with aircraft movements at Changi Airport increasing at a CAGR of ~8% over the past five years. In addition, the airport crossed the 50 million passenger milestone in 2012, which is a laudable feat given that the airport only breached the 40 million barrier two years ago. Robust growth in the North-East Asian and South Asian travel segments drove passenger increases.

Changi expansion benefits gateway operators. Changi Airport is nevertheless not resting on its laurels, as it looks to expand its passenger-handling capacity to ~85 million passengers by 2017 when Terminal 4 is opened. It is also looking to raise its aircraft handling capacity by ~40% with measures to improve air-traffic management and increase runway availability. These measures will only serve to further enhance Singapore’s capabilities as the region’s top aviation hub and directly benefit gateway solutions operators like SATS.

Low-cost carriers (LCCs) driving capacity, MRO demand. LCCs have been a significant contributor to aviation capacity growth (Fig 1), contributing only 8% of total global capacity barely 10 years ago, and growing exponentially to now comprise 26% of total aviation seat capacity in 2012. While this capacity situation has impacted the competitive environment for airlines, in particular premium airlines like SIA and Cathay Pacific, it spells a relative boon for aviation engineering companies like SIA Engineering as aircrafts need to adhere to strict maintenance schedules to remain air-worthy.

Aviation MRO expenditure outlook healthy. Industry MRO forecasts are relatively bullish on a global scale (Fig 1), forecasting a ~4% CAGR growth in MRO expenditure over the next five years, contributed largely by further growth forecasted in global airlines’ capacity over the same period (~3 % CAGR). More importantly, Asia is seen to be the core driver of growth with 7% CAGR for the next five years (Fig 4), and SIE is naturally well-positioned to benefit from this through its Singapore MRO base and Asian JVs / Associates.

Aviation risks apply. Although aviation services companies tend to boast of earnings stability when compared to the airlines, they too cannot completely negate economic crises such as an unresolved US fiscal cliff. Natural disasters in the region are also a key risk to gateway operators such as SATS especially when their Japanese acquisition, TFK Corp had suffered from the Japanese disasters of March 2011.
SIA Engineering leads the pack, SATS close second. Our top and second picks in the aviation services sector are SIA Engineering and SATS respectively. We like SIA Engineering as its valuation remains relatively undemanding versus its regional peers like ST Engineering and HAECO, and the aviation MRO segment continues to look rosy. SATS will be a direct benefactor of Singapore’s continued growth in tourism and aircraft / passenger handling at Changi Airport.