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.
WHAT’S NEW
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.
STOCK IMPACT
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.
EARNINGS REVISION/RISK
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%.
VALUATION/RECOMMENDATION
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.
SHARE PRICE CATALYST
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/
