UOB Kay Hian Research 2015-07-16: SIA - Load Factors Continue To Weaken In June, With Europe Showing The Biggest Decline. Maintain HOLD.

Load Factors Continue To Weaken In June, With Europe Showing The Biggest Decline 

  • We had earlier highlighted that load factors are likely to decline in coming months as Qatar Airways adds capacity out of Singapore. June’s operating stats have showed just that. 
  • SIA will be releasing its results on 29 June. We will provide a preview shortly. 
  • For now, we maintain our HOLD recommendation with a target price of S$11.60. 
  • We prefer to be buyers near S$10.30, which is -1SD to long-term P/B. 


 SIA’s load factors to Europe fall for three consecutive months with Europe showing the largest yoy decline. 

  • Two weeks ago, we highlighted that SIA’s weak load factors are a concern and June’s operating stats add to that, as the decline in load factor accelerated to 1.6ppt decline. 
  • Overall pax load factors fell 1.4ppt for 1QFY16 (Mar-May 15), as pax traffic declined by a greater quantum than capacity. 
  • In fact, except for South West Pacific (primarily Australia), load factor fell across the board. Load factors to Europe declined by an average 5.2ppt. 

 Trouble from Qatar? 

  • In our previous note, we stated that Qatar Airways’ introduction of the new Airbus A350 aircraft in May along with planned capacity increase could impact SIA. 
  • June’s weak loads to Europe suggest that Qatar’s capacity increase could be a reason for the drop in loads to the region, although Greece’s problems could also have contributed to the drop. 
  • Europe is a key market for SIA, accounting for 28% of SIA’s (parent airline) capacity and is also a key market for business travel. 


 Yields could also be affected. 

  • We believe the market is aware of the risk of the lower yields but might not be aware of the cause. 
  • In addition, there is a real risk of yields deteriorating in coming months if loads to Europe remain weak. 

 Qatar Airways likely gunning for a share of the business class segment. 

  • Current promotional fares to five European cities are at least 30% cheaper than that of SIA. 
  • Qatar Airway’s ultimate goal appears to be a slice of SIA’s high-yielding business class as the increased capacity will add additional 448 weekly business class seats to Europe, via Doha. 
  • We estimate that the increase in business class capacity will approximate 11-14% of SIA’s business class capacity to Europe. 


 No change to our earnings. 

  • There is downside risk to our earnings estimate as we have assumed that load factors approximate 77.7% vs current ytd 76.3%. 


 Maintain HOLD and S$11.60 target price. 

  • We continue to value SIA’s core business at 0.85x. Core ROE, ex- SIAEC is estimated at 5.1%, due in part to S$3.6b in net cash. 


 Stock likely to range between -1SD to 0.9x P/B. 

  • No catalyst aside from the said trading range. 

(K Ajith) 

Source: http://research.uobkayhian.com/