Singapore Airlines - UOB Kay Hian 2016-06-16: Lacklustre Operational Performance In May But Removal Of The 5/20 Rule Could Have Long-Term Positive Implications

SIA SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines (SIA SP) - Lacklustre Operational Performance In May But Removal Of The 5/20 Rule Could Have Long-Term Positive Implications

SIA’s pax loads fell 0.9ppt in May on the back of a decline in traffic while SIA’s load factors were flat in 2MFY17.
The bright spot is the strong traffic growth of subsidiaries Scoot and SilkAir.
Meanwhile, the removal of the 5/20 rule in India could have long-term positive implications for SIA as it would allow Vistara to commence international flights and SIA to use Delhi as a transit hub to Europe.

While May is a seasonally weaker month, Singapore Airlines’ (SIA) load factors would have declined by a greater quantum were it not for the reduction in capacity. With the exception of East Asia, loads declined across all regions.
Overall, SIA pax loads were flat in 2MFY17.
Meanwhile, Scoot continued to record strong pax traffic growth in May (+57% yoy) but registered lower load factors as the airline began utilising its 11th B787 Dreamliner in May. SilkAir's pax traffic also continued to rise at double-digit rates, leading to improved load factors in May and 2MFY17.

Previously, the 5/20 rule requires airlines to have five years of domestic operations in India and allocate the higher of 20 aircraft or 20% of total fleet to domestic operations before commencing international flights. The 5/20 rule will be replaced by a 0/20 rule, thus negating the requirement for five years of domestic operations.
Consequently, Vistara could scale up and commence international operations and this would allow SIA to use Delhi as a transit hub en route to Europe. This has positive long- term implications for SIA and could improve SIA’s competitiveness and potentially boost loads to Europe. Europe accounts for 28.5% of SIA’s total capacity in km-terms.

The financial impact would be minimal as the expected investment amount is S$271m, accounting for 2% of SIA’s equity. SIA is likely to maintain its stake in Virgin Australia, similar to Etihad’s 24% stake.

Cargo load factors improved 0.7ppt in May, led by stronger loads in East Asia, Americas and Europe regions. In 2MFY17, cargo load factors rose 0.9ppt yoy. However, we reckon cargo yields could likely remain weak.

SIA’s decline in pax loads in May stands in contrast with the strong operating performance in the previous months. At 72.7%, pax load factor is the lowest in five years.
SIA attributed the decline in loads to softer pax demand. This suggests SIA’s loads could have been affected by the soft global economy.
Along with potentially weaker yields, this should result in weaker pax revenue. Thus, lower fuel hedging losses would likely be the main earnings driver in 1QFY17.
The only bright spot is Scoot and SilkAir, which saw pax traffic continue to rise.
Meanwhile, the removal of the 5/20 rule is positive for SIA, but would likely only have an impact in the medium to long term.

Maintain HOLD and target price of S$11.60. We continue to value SIA at 0.9x FY17F core book value ex-SIAEC.

K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-06-16

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