Singapore Airlines

OCBC on 23 Aug 2012

Singapore Airlines’ (SIA) Jul 2012 operating statistics saw passenger capacity (ASK) growth outpacing passenger traffic (RPK), resulting in lower passenger load factors (PLF). Despite the slight YoY dip in PLF, the continued uptick in passenger carriage validates the success of its fare promotion strategy. With growth in passenger revenues keeping pace with this increase, we do not anticipate further downward pressures on passenger yields in the coming quarter (2Q13), and yields should remain stable at 1Q13 levels. Although rising jet fuel prices could emerge as a potential downside risk to SIA going forward, we deem the increases to be relatively manageable at current levels. Maintain our HOLD rating on SIA at an unchanged fair value estimate of S$10.85.

July 2012 operating statistics
Singapore Airlines’ (SIA) Jul 2012 operating statistics saw passenger capacity (ASK) growth outpacing passenger traffic (RPK), resulting in lower passenger load factors (PLF). The parent airline’s ASK rose 4.7% YoY while RPK gained 3.2% for a fall of 1.1ppt in PLF to 80.5%. Similarly, SilkAir’s PLF fell 0.3ppt to 75% after a 24.5% YoY and 24% growth in ASK and RPK respectively. SIA Cargo continued to experience weakness with a 0.1% YoY slide in freight capacity (AFTK) and 3% decline in freight traffic (FTK). As a result, freight load factor (FLF) continued to hover at the usual 63% level (65% in Jul 2011) as seen over the previous three months.

2Q13 passenger yields to remain stable
Despite the slight YoY dip in PLF, SIA’s willingness to trim fares to stimulate demand has seen a continued uptick in passenger carriage. Although it translates into a smaller increase in passenger revenue, we do not anticipate further QoQ downward pressures on passenger yields in the coming quarter (2Q13). Furthermore, cargo demand and yields have somewhat stabilized in Jul to extend the floor established over the past three months. Therefore, we remain encouraged by the recent data and expect yields to maintain at 1Q13 levels, which is a reasonable performance given the current challenging operating environment.

Jet fuel price a key risk
Fuel prices as measured by Bloomberg’s Jet Kerosene fob Spot Cargo Price index (JETKSIFC) have gained almost 9% since end-Jul. With the typical lag time of about a month, jet fuel costs could potentially inch higher towards the end of 2Q13. However, comparing average prices on QoQ basis, we note that S$-adjusted jet fuel prices have yet to reach S$154 in 1Q13 (currently ~S$152). When compared to 4Q11’s average price of S$167, this average level becomes relatively lower. Nonetheless, if jet fuel prices continue rising, we could see a greater impact in 2Q13 as compared to the previous quarter.