Singapore Airlines SIA - UOB Kay Hian 2016-04-18: Improved Load Factors And Low Fuel Costs Pave The Way For Strong 4QFY16 Earnings

Singapore Airlines SIA - UOB Kay Hian 2016-04-18: Improved Load Factors And Low Fuel Costs Pave The Way For Strong 4QFY16 Earnings SIA SINGAPORE AIRLINES LTD C6L.SI 

Singapore Airlines (SIA SP) - Improved Load Factors And Low Fuel Costs Pave The Way For Strong 4QFY16 Earnings 

  • All four airlines’ pax load factors improved in March and for 4QFY16. Coupled with low fuel prices, this should lead to improved profitability. 
  • Cargo operations are however expected to be a drag on earnings due to a decline in cargo load factors and weak yields. 
  • Maintain BUY. Target price: S$13.90. 


SIA’s pax load factor improved for the ninth consecutive month. 

  • Singapore Airlines’ (SIA) pax load factor improved 1.2ppt in March, aided by capacity reductions. The load factor improvement was led by higher loads in the East Asia, West Asia and Africa sectors. 
  • Overall, SIA’s pax loads rose 2.4ppt in 4QFY16 and 1.1ppt in FY16. 

Scoot’s pax traffic growth accelerated in March

  • Scoot’s pax traffic growth accelerated in March, rising 55% yoy, vs 46% and 48% in Jan 16 and Feb 16 respectively. This led to a 2.3ppt improvement in pax load factor. 
  • In addition, Scoot achieved pax load factor of 86.1% in 4QFY16, higher both yoy and qoq. 
  • Along with lower fuel costs, this should lead to higher operating profit qoq. 

SilkAir's load factor improved 2.5ppt in 4QFY16 on the back of a 14% yoy rise in pax traffic. 

  • 4QFY16's load factor at 71.6% matched that of 3QFY16's and taking into account the lower qoq fuel cost, SilkAir's operating profit is likely to double yoy in 4QFY16. 

Cargo load factors fell 3.8ppt in March and 2.5ppt in 4QFY16. 

  • While traffic grew modestly at 1%, capacity grew by a faster 7%, leading to a 3.8ppt decline in load factor in March. 
  • SIA indicated that part of the reason for the lower load factor was due to the absence of ad-hoc charters to the Americas in the current period vs Mar 15’s when there was port congestion in the US. 


 Strong operating performance continues in 4QFY16. 

  • In 4QFY16, all carriers’ load factors improved, highlighting SIA’s operational strength. 
  • SIA’s load factors rose by a substantial 2.4ppt yoy, while SilkAir’s and Scoot’s pax loads also improved yoy. 
  • In addition, the fact that: 
    1. SilkAir’s 4QFY16’s pax loads matched that of 3QFY16’s, and 
    2. Scoot’s was even stronger qoq, despite 3QFY16 typically being the peak period, indicates strong air travel demand and this is especially encouraging. 

 Improved load factors, coupled with lower fuel cost, to drive 4QFY16 earnings. 

  • We expect into-plane fuel cost to be 20-30% lower qoq, as well as lower fuel hedging losses as SIA has hedged 46.6% of its 4QFY16 fuel requirements at US$90/bbl (3QFY16: 54.6% at US$96). 
  • On balance, this will result in a significant reduction in SIA’s unit cost qoq, which along with stabilising yields, should lead to lower breakeven load factors and higher profits. 


  • No change to our earnings estimates. 


  • Maintain BUY and target price of S$13.90. We continue to value SIA at 1.0x FY17F core book value ex-SIAEC. 
  • We expect SIA’s FY17 earnings to improve on the back of lower fuel cost and increased profitability of SilkAir and Scoot. 


  • Higher-than-expected pax yields.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-04-18
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 13.90 Same 13.90