Singapore Airlines - OCBC Investment 2017-06-23: Integrating LCC Operations

Singapore Airlines: - OCBC Investment 2017-06-23: Integrating LCC Operations SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines: - Integrating LCC Operations

  • Tigerair to be absorbed under Scoot branding.
  • Operating under a common license.
  • Pressure on yields unlikely to ease.

Adopting Scoot brand but retaining Tigerair’s license 

  • Singapore Airlines’ (SIA) wholly owned subsidiary, Budget Aviation Holdings (BAH), recently announced that Scoot and Tigerair will operate under Scoot brand from 25 Jul 17, as these two brands will merge to operate under a single air operator certificate (AOC). All flights and check-in counters will be branded Scoot while the repainting of Tigerair fleet is expected to complete by mid-CY18. 
  • However, SIA has opted to retain Tigerair’s AOC, which we believe is a logical choice given that Tigerair currently serves more countries than Scoot. This means BAH only needs to secure new foreign air carrier permits from four countries instead of eight countries if Scoot’s AOC was the one being retained. 
  • We note that securing new permits for some of these countries may not be easy. Hence, it does make sense for SIA to reduce such regulatory risks.

Integration may help improve capacity management 

  • According to CAPA Centre for Aviation (CAPA), Scoot and Tigerair Singapore currently operate a combined fleet of 37 aircraft flying to 60 destinations, with plans to expand to 40 aircraft and more than 60 destinations by end-FY18. By 25 Jul 17, the entire Scoot fleet would have been transferred over to Tigerair AOC, which allows BAH to change gauge more flexibly (change of aircraft while retaining same flight number) within their network. 
  • Not all countries allow slot transfers/trading between two airlines, which means if Scoot and Tigerair are operating under separate AOCs, changing to a bigger B787s (Scoot) or smaller A320s/A319s (Tigerair) to increase or decrease capacity on certain routes to optimise capacity management will not be possible. However, post-integration, with Scoot and Tigerair operating a single AOC, BAH will be able to optimise capacity with increased flexibility to change the type of aircraft used on different routes. 
  • Integration could also help in improving connectivity between the two brands, thereby increasing interlining traffic.

Maintain HOLD 

  • All said, yields are still under pressure on intensifying competition driven by expansions of the Gulf and Chinese carriers, which could erode any gains derived from the integration. 
  • Keeping our forecasts unchanged for now, maintain HOLD on SIA with Fair Value of S$10.03.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-06-23
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 10.030 Same 10.030