Singapore Airlines

OCBC Investment Research, July 2

SINGAPORE Airlines (SIA) has been seeking new revenue through geographical expansion as well as ancillary sources, of which some will start contributing modestly in FY2015. We note that equity participations (through JVs) are in the home region, whereas codeshare partnerships are formed to improve connectivity in other regions.

First, NokScoot, a Thailand- based low-cost carrier (LCC) JV with Nok Airlines, is expected to start operating in H2 2014. Second, newswires have reported that Tata-SIA JV is expected to be issued an air operators' permit - its final regulatory hurdle - this month and commercial operations are likely to start in September.

We expect adverse operating environment for NokScoot due to: 1) political uncertainty ahead in Thailand, which could depress tourism traffic, and 2) newly established medium- to long-haul LCC Thai AirAsia X, a direct competitor, likely engaging in aggressive pricing and marketing that NokScoot will have to keep up with at the expense of profitability.

As for the Tata-SIA JV, we acknowledge it will enable SIA to tap into India's growing air-travel volume. However, we think the JV will have a rocky start, given that: 1) political inertia to change current regulations will prevent it from operating international flights until five years later; and 2) an additional player will only add on to the intense competition among current players; according to Capa, IndiGo is expected to be the only carrier in India to report profit for FY2014.

We think the initiatives' boost to profits in the current environment will be limited, if any at all. Easing of pressure, albeit an insignificant factor, will come from: 1) cessation of loss-making Tigerair Mandala operations, and 2) Changi Airport's GAIN programme, which will alleviate airlines' operating costs.

Maintain S$9.50 fair value estimate.

HOLD