Aviation – Singapore - Decline In Flight Movements Suggests Varying Fortunes For Airlines And Ground Handlers
- In February, Changi’s flights movements fell for the first time in 23 months while pax throughput rose. This suggests airlines are reducing frequencies while flying fuller loads.
- Going forward, we believe airlines could exercise greater capacity discipline as fuel prices rise, which could impact SATS.
- Meanwhile, signs of improving cargo yields suggest that SIA’s cargo losses could narrow in 4QFY17. We suggest investors trim their holdings on SATS as there is risk of earnings downgrade.
- Maintain MARKET WEIGHT on the sector.
- In February, Changi Airport’s (CAG) flights handled fell 1.7% yoy, the first decline in 23 months, while pax throughput rose by only 1.5%, substantially lower than in the last five months.
- We analyse the latest Changi data, industry airfreight data and impact on airlines and ground handlers as follows.
Flights handled at CAG fell yoy in February, while Jan-Feb 17 flight movements growth was sequentially lower than 3QFY17’s.
- The decline in flights handled in February came amid higher pax throughput, which suggests that airlines could be cutting flight frequencies and flying with fuller loads. While positive for airlines, this is negative for ground handlers such as SATS.
- Meanwhile, January-February’s flights handled rose only 1.6%, less than half of 3Q’s. This suggests that SATS’ gateway services revenue growth will likely be weaker qoq, as flights handled typically have greater value-add vs pax or cargo handled.
January-February’s cargo tonnage growth was also just half that of 3QFY17, but impact will be greater on SATS than SIA.
- SATS had previously indicated that much of 3Q’s profit was driven by greater volumes of cargo handled at Changi following Hanjin’s bankruptcy. This is unlikely to be repeated in 4Q, as cargo handled at Changi rose only 4% in January-February, less than half of 3Q’s.
- In contrast, SIA’s cargo earnings are more dependent on: a) cargo load factors, and b) cargo yields. SIA cargo loads rose 1.6ppt in Jan-Feb 17, greater than 3Q’s 0.9ppt improvement.
Signs of improving cargo yields suggest that SIA’s cargo losses could narrow in 4QFY17.
- According to Drewry East-West Air Freight Index, average airfreight rates improved yoy for 4 consecutive months, while February’s freight rates rose 4% yoy in US dollar terms.
- Similarly, cargo rates for Shanghai to New York also rose for four consecutive months. This has positive implications for SIA cargo’s yields. We had previously highlighted that cargo yields are likely to improve and the pace of SIA’s cargo losses are likely to narrow in the coming quarters.
Improving air freight rates bodes well for SIA’s cargo profitability.
- In 3QFY17, SIA reported its highest quarterly cargo profits in 9 years on the back of just a 0.9ppt improvement in cargo load factors, while cargo yields fell 5% yoy during the period.
- In Jan-Feb 17, cargo loads rose 1.6ppt yoy and we believe that the pace of cargo yield decline will likely narrow in 4QFY17 given improving average air freight rates. Along with higher loads, this should result in improved profitability in 4QFY17.
- We will provide an earnings preview post release of March’s operating stats.
Greater downside risk for SATS, especially if flight movements continue to weaken over the next few months.
- In 3QFY17, SATS posted 2.2% yoy growth in gateway services revenue on the back of a 8.4% and 3.7% rise in cargo handled and flights handled at Changi respectively. Both cargo and flights handled growth rates in Jan-Feb 17 were less than half of 3Q’s. If the trend persists, we believe there is downside risk to street earnings estimates.
- Notably, SIA, which has about a 32% share of Changi, has reduced capacity for two consecutive months.
- Going forward, we believe there is a possibility that airlines will exercise greater capacity discipline as fuel prices rise, and this could impact SATS. For FY18, we have assumed a 3.8% and 2.1% rise in Changi flight movements and gateway services revenue respectively, leading to a 1.8% rise in top-line at SATS.
- Meanwhile, consensus is looking at 3.3% revenue growth for FY18.
- Improving cargo yields and loads, higher flight movements.
- No change to our earnings estimates.