Aviation Singapore - UOB Kay Hian 2016-09-16: Steep Decline In SIA’s Pax Traffic Leads To The Largest Drop In Load Factor

Aviation Singapore - UOB Kay Hian 2016-09-16: Steep Decline In SIA’s Pax Traffic Leads To The Largest Drop In Load Factor; Negative Implications For SATS And SIAEC SIA SINGAPORE AIRLINES LTD C6L.SI  SIA ENGINEERING CO LTD S59.SI  SATS LTD S58.SI  ST ENGINEERING SINGAPORE TECH ENGINEERING LTD S63.SI 

Aviation Singapore - Singapore Steep Decline In SIA’s Pax Traffic Leads To The Largest Drop In Load Factor; Negative Implications For SATS And SIAEC

  • SIA surprised with the steepest decline in pax load factor in over three years, which suggests weakening demand. We cut our FY17 pax traffic estimates from -0.5% to - 2.4%, FY17 net profit forecast by 22% and target price to S$10.00 (from S$10.20).
  • SIA’s weak performance also implies downside risk for SATS’ and SIAEC’s earnings should Changi traffic weaken. Maintain SELL on SIAEC and suggest investors top-slice their holdings on SATS. 
  • Maintain MARKET WEIGHT on the sector.


Surprises with a steep decline 6.8% decline in pax traffic and a 5.5% decline in pax carriage. 

  • These were the weakest August growth numbers in four years. Regional full service carrier SilkAir’s traffic also declined 2.0% yoy, suggesting a broad-based decline in demand. The decline was unlikely to be due to concerns over the Zika virus as infections only made headlines on 28 August. 
  • At this stage, it is unclear as to whether the weak demand was due to competitive factors or a general slowdown in traffic, arising from lower visitor arrivals or resident movements. 
  • Parent airline SIA’s market share out of Changi had remained stable at 32% for the past five months to July.

Broad-based decline in load factors. 

  • Overall pax load factor fell 5.6ppt, the steepest decline in more than three years, despite flat capacity growth. Load factors fell across all sectors with Europe showing the greatest decline of 8%, followed by South West Pacific.
  • SIA attributed the decline in loads to softer demand and noted that the competitive landscape remains challenging. 
  • SilkAir’s load factor similarly declined by 5.2ppt with East Asia and the Pacific showing greater declines. 
  • SIA’s ytd pax load factor amounted to 78% vs our initial estimate of 79.2%.


Potential turning point for SIA; we cut our FY17 net profit forecast by 22%. 

  • The steep decline in traffic and yields seem to suggest weakening demand dynamics, which could be due to: 
    1. increased competition out of Singapore, 
    2. demand destruction from a weaker economic environment, and 
    3. substantial capacity additions by Chinese carriers towards Australia which would thus impact Singapore’s transit/transfer traffic.
  • We have nonetheless cut our FY17 pax traffic growth assumptions from -0.5% to -2.4%, leading to a pax load factor of 78.2% vs ytd’s 78%. 
  • All other assumptions remain unchanged and we now expect SIA to report a net profit of S$485m for FY17. This is 42% lower than the street’s estimate of S$831m.

Possible negative implication for SATS. 

  • SIA reports its operating numbers ahead of Changi Airport Group and if SIA’s numbers are taken as a guide, this could imply that Changi Airport’s pax throughput could slow down from the 6% in July. Chances are that traffic could slow further in September and possibly November due to concerns over the Zika virus. More importantly, SIA’s weak loads on the European routes could lead to lower unit meals for SATS. This is a weighted measure, taking into account the higher value-added meals served on the front-end, which is likely to have declined in August.
  • For FY17, we have assumed a 7.0% yoy rise in pax throughput growth at Changi (vs 6% growth for April-July) and a 7.8% rise in unit meals. If Changi Airport growth numbers slow down as expected, we believe there will downside risk to our and consensus earnings estimates. We thus recommend clients top-slice part of their holdings on SATS and buy on weakness at near S$4.10-4.20.
  • SIA Engineering could similarly be impacted if flight movements to and from Changi slow down. SIAEC derives 66% of its revenue from SIA and line maintenance fetches the highest operating margin. If SIA cuts capacity in response to the weak loads, this could impact SIAEC’s line maintenance revenue.


  • Higher-than-expected earnings and yields.


  • For SIA, we have lowered our FY17 pax traffic assumptions from -0.5% to -2.4% and trimmed our capacity estimates marginally. Our revised pax traffic estimates imply a 2% decline in pax traffic for the rest of the year. Consequently, we lower our target price for SIA from S$10.20 to S$10.00. We continue to value SIA at 0.73x FY17 book value exSIAEC, 1SD below mean P/B. Suggested entry price is S$9.00.
  • No change to our earnings estimates for SATS and SIAEC.


K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2016-09-16
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