We believe optimism over Singapore Airlines’s (SIA) Aug 2013 operating statistics is premature as the slight improvements are likely to be temporary in nature. Passenger demand growth should remain tepid in the coming quarters and the persistence of promotional activities will depress passenger yields. In addition, capacity additions from new routes have continued to outpace passenger growth and jet fuel price increases show little signs of abating, which will put further pressure on the carrier. As for its recent Indian JV announcement, we envision execution difficulties and the lack of adequate airport infrastructure. Maintain our SELL rating in SIA with an unchanged fair value estimate of S$9.50. Investors should take advantage of gains by the stock off recent lows and look to re-enter at price points nearer our valuation.
Initial optimism over operating stats overdone
Singapore Airlines’s (SIA) Aug 2013 operating statistics were fairly mixed. While the parent airline passenger load factor (PLF) improved 4.1ppt from a year ago to 82.4%, SilkAir’s PLF fell 1.8ppt to 71.7% due to increased capacity on new routes and SIA Cargo remained weak with cargo loads shedding 0.5ppt to 60.1%. Passenger demand growth was due to a boost from seasonal holiday traffic and continued promotional fare activity rather than an improvement in operating conditions.
Yields are likely to remain depressed
We do not expect an improvement in passenger yields in the coming quarters as the strategy of lowering fares to stimulate demand seems to be the only recourse for SIA at this juncture. In addition, capacity additions from new routes have continued to outpace passenger growth and jet fuel prices show little signs of abating, which together create upward pressures on passenger unit costs.
India JV carries execution risks
At face value, SIA’s decision to enter into a full-service airline joint venture with Tata Sons should help the group to expand its presence in India. However, the Indian aviation industry is a crowded space and together with the lack of adequate airport infrastructure, this makes execution inherently difficult. In addition, the process is likely to be hindered by opposition from industry insiders as with the Tata-AirAsia low-cost venture announced earlier.
Maintain SELL
The combination of tepid passenger demand and a lack of near-term catalysts have us to maintain our SELL rating on SIA with an unchanged fair value estimate of S$9.50. Investors should take advantage of gains by the stock off recent lows and look to re-enter at price points nearer our valuation.
Singapore Airlines’s (SIA) Aug 2013 operating statistics were fairly mixed. While the parent airline passenger load factor (PLF) improved 4.1ppt from a year ago to 82.4%, SilkAir’s PLF fell 1.8ppt to 71.7% due to increased capacity on new routes and SIA Cargo remained weak with cargo loads shedding 0.5ppt to 60.1%. Passenger demand growth was due to a boost from seasonal holiday traffic and continued promotional fare activity rather than an improvement in operating conditions.
Yields are likely to remain depressed
We do not expect an improvement in passenger yields in the coming quarters as the strategy of lowering fares to stimulate demand seems to be the only recourse for SIA at this juncture. In addition, capacity additions from new routes have continued to outpace passenger growth and jet fuel prices show little signs of abating, which together create upward pressures on passenger unit costs.
India JV carries execution risks
At face value, SIA’s decision to enter into a full-service airline joint venture with Tata Sons should help the group to expand its presence in India. However, the Indian aviation industry is a crowded space and together with the lack of adequate airport infrastructure, this makes execution inherently difficult. In addition, the process is likely to be hindered by opposition from industry insiders as with the Tata-AirAsia low-cost venture announced earlier.
Maintain SELL
The combination of tepid passenger demand and a lack of near-term catalysts have us to maintain our SELL rating on SIA with an unchanged fair value estimate of S$9.50. Investors should take advantage of gains by the stock off recent lows and look to re-enter at price points nearer our valuation.
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