Singapore Airlines SIA - UOB Kay Hian 2015-09-16: Broad-based Improvement In SIA And SilkAir Load Factors.


Broad-based Improvement In SIA And SilkAir Load Factors 

  • SIA’s load factors improved in major markets Europe and US amidst fierce competition. 
  • SilkAir’s improved load factors for July and August should lead to higher profitability for 2QFY16. Cargo traffic surprised on the upside but loads remained weak. 
  • While SIA has expressed concern on yields, we believe that the market has priced in the risk at current levels. 
  • Upgrade to HOLD. Suggested entry price is S$9.60. Target price: S$10.70. 


 SIA’s load factors improved for two consecutive months. 

  • The 2.5ppt increase in August’s pax load factor was mainly due to a 2.1% capacity reduction. More encouraging was the fact that load factors improved for key long-haul sectors Europe (+1.6ppt) and the US (+0.6ppt). SIA attributed the improved load factors to “healthy summer travel demand and promotional activities”. 

 SilkAir’s August load was the highest for the year. 

  • The 4.7ppt increase came on the back of strong loads in East and West Asia. SilkAir also benefitted from strong loads in the Pacific, likely boosted by the new route to Cairns. 

 Cargo traffic was surprisingly flat and reversed from three consecutive months of decline. 

  • This comes even as IATA warned of slowing air cargo and weak trade figures out of China. However, loads weakened and both July’s and August’s loads were lower than the preceding quarter’s. As such, cargo operations are likely to remain in the red in the coming quarter. 

 Aside from reputation risk, we see limited impact to yields from the delayed rollout of premium economy seats. 

  • SIA announced that the installation of premium economy seats will be delayed on the A380 aircraft and the move had affected passengers travelling from Sep 15 to Mar 16. Premium economy seats however account for only 2.9% of total seat capacity, down by 1.5ppt from 4.4% previously. 


 The key question: Will the improved load factors be sufficient to offset the expected decline in yields? 

  • SIA indicated that “yields are expected to remain under pressure”. In 1QFY16, the parent airline had an operating loss of S$2m, after excluding slot compensation, even as pax loads averaged 76.3%. On a qoq basis, pax loads have improved by 8.8ppt, which holds scope for improved quarterly results. 

 Weaker S$ against US$ could positively impact 2QFY16’s earnings. 

  • The Singapore dollar has weakened 4.0% against the US dollar since 30 Jun 15. Every 1% decline in the Singapore dollar against the US dollar could result in about $28m of incremental earnings based on SIA’s FY15 earnings sensitivity. 


  • There is no change to our FY16 net profit estimates. 


 Upgrade to HOLD; maintain target price of S$10.70. 

  • We upgrade SIA to HOLD as we believe that the market has priced in the weaker yields for 2QFY16. At current levels, SIA is trading close to -1SD to the long-term mean or 0.73x FY16F book, ex-SIAEC. Ex-cash assets, this equates to just 0.55x book. A stronger US dollar would provide upside risk to our earnings estimates, which remain below consensus. 
  • Suggested entry price is S$9.60. 


  • Lower fuel hedges. 
  • Strengthening US dollar against the Singapore dollar.

K Ajith | Sophie Leong | http://research.uobkayhian.com/ UOB KH 2015-09-16
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