Singapore Airlines

DMG & Partners Research on 19 Sept 2012

SINGAPORE Airline's (SIA) operating statistics for the month of August were commendable for the passenger side. Revenue passenger kilometres (RPK) for the month of August is on track with our forecast. RPK grew by 8.7 per cent y-o-y and 8.1 per cent YTD, though numbers were seasonally weaker q-o-q by 2.6 per cent as the summer season draws to an end. Overall passenger loads came in higher by 1.7 pts to 78.3 per cent on promotional activities. A closer analysis however reveals that East Asia passenger loads dropped by 2.2 pts to 77.3 per cent due to the earlier Ramadhan this year. South West Pacific loads were also weaker as capacity growth outstripped demand. Load factors improved across other regions, thanks to the aggressive promotional activities. Silk Air continues to see robust growth with RPK growing by 21.9 per cent y-o-y and 24 per cent YTD, while its q-o-q numbers were marginally higher by only 0.8 per cent.

Cargo numbers remained weak as we had expected, with freight tonnage carried dropping by 4.3 per cent y-o-y and 4.8 per cent YTD. This marked its fifth consecutive contraction YTD. On a q-o-q basis, tonnage carried weakened for the first time in the year, by 5.7 per cent, owing to the weaker macro outlook.

Yields are expected to remain under pressure. We anticipate numbers to improve in H2 on the back of the seasonally higher demand for air travel and cargo shipments. However, management continues to highlight that yields (rev/RPK) will remain under pressure to stimulate demand amid a highly competitive landscape. This suggests further downside to our numbers. Our sensitivity analysis suggests that a 0.1 cent drop in yields will reduce earnings by as much as S$80.7 million, or 20 per cent reduction to our estimate, given its low earnings base. In our assumptions, we estimate that yields would drop by 0.12 cent, or one per cent.

Furthermore, oil prices are trending upwards, putting more pressure on earnings. Jet fuel costs account for 44.6 per cent of total costs and a US$1 increase would hurt earnings by as much as S$37.5 million, or 9 per cent of our current estimates.

With earnings unchanged for now, we maintain our "neutral" call on SIA and our target price of S$11.17, premised at one times price to book. Within our aviation coverage, we prefer AirAsia ("buy", TP RM3.91) and airport operator, MAHB ("buy", TP RM7.53).
NEUTRAL