Singapore Airlines - CIMB Research 2016-12-05: Sliding towards another year of modest profits

Singapore Airlines - CIMB Research 2016-12-05: Sliding towards another year of modest profits SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Sliding towards another year of modest profits

  • SIA’s full service businesses continues to be under pressure from lower yields and falling load factors.
  • While its LCC businesses are doing better, they are still too small overall.
  • Maintain Hold with target price (S$10.47) based on trough CY17 P/BV of 0.9x.

Low level of earnings for past four years 

  • SIA group’s core net profit has been stuck at low levels for the past four years, suggesting a structural decline in the profitability of full service operations due to a myriad of factors, such as the emergence of aggressive FSC competitors like the Gulf carriers on European routes, North Asian carriers like EVA and ANA on transpacific routes, and the Chinese carriers on ANZ routes.

Premium travel in structural decline since May 2015

  • SIA mainline’s monthly yields have been in yoy decline since May 2015; this is the point from which premium travel demand has been contracting. P
  • remium travel in Singapore is traditionally driven by the finance and oil and gas sectors, both of which have not been doing well in recent years.

Even economy class is not spared

  • In 2015 and the early part of 2016, economy class demand was still robust and responded positively to SIA’s promotional fares. However, this may no longer be the case. 
  • SIA mainline’s load factors have been in yoy decline since May 2016, because the number of passengers has been falling despite running promotional fares and despite not growing seat capacity. This is most likely due to loss of market to LCCs.

SilkAir also showing emerging signs of weakness 

  • SilkAir had in the past performed better than SIA mainline, as it focused on shorthaul connections around the region that are less sensitive to the economy. This was the basis for its orders for 52 737-800 planes that would almost double its fleet size over the next five years. However, since June, SilkAir demand growth has not kept pace with its capacity increases, pressuring load factors, yields and profits lower.

LCCs doing better than the full service business

  • Both Scoot and Tigerair are doing better yoy in terms of earnings. Unfortunately, the absolute size of their profit contribution is small compared to SIA and SilkAir, and hence cannot offset the negative earnings momentum at the two FSC airlines. Scoot has delivered six consecutive quarters of improved earnings performance, despite strong capacity growth and falling yields, due to the use of new, fuel-efficient 787s.

Restructuring at Tigerair yielding benefits

  • Meanwhile, in earlier years, Tigerair had been restructured to cut off loss-making routes and to lease out its excess planes to third-party airlines like IndiGo. SIA has since announced that it will fold the Tigerair operations into Scoot and operate from a single operating licence and single brand from 2HCY17 onwards. The operational and legal merger may lift long- to short-haul connections for the LCC businesses.

SIA Cargo in the doldrums

  • The last time SIA Cargo made good profits was in 2010, since then, it has been a long slide down, and it has not been able to avoid a cold winter of losses, weak yields, and excess capacity, despite low oil prices.

One year outlook continues to be poor

  • It will be extremely difficult for the SIA group in the immediate future, and so we forecast a continuing period of weak profits and sub-optimal ROEs.

Raymond YAP CFA CIMB Research | http://research.itradecimb.com/ 2016-12-05
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 10.470 Same 10.470