Singapore Airlines - OCBC Investment 2017-09-05: Headwinds Getting Stronger

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SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Headwinds Getting Stronger

• Qantas to shift some capacity to Singapore.
• Adds more pressure on yields 
• Maintain HOLD.

Capacity to increase for some of SIA’s key routes.

• Australia-listed Qantas Airways Ltd (Qantas) announced late last week the extension of its partnership with Emirates for another five years (subject to government and regulatory approval), while making certain changes to the collaboration. 
• Notably, there are two key changes from 25 Mar 18 onwards, which we believe will have an impact on Singapore Airlines (SIA):
  1. Qantas will re-route its daily Sydney-London A380 service via Singapore rather than Dubai, to replace one of the existing two daily Sydney-Singapore A330 services, and
  2. Qantas will upgrade one existing daily Melbourne-Singapore flight from an A330 to an A380, with the second three per week service increased to a daily A330 service. 
• In essence, there will be increased capacity on the Sydney-Singapore-London route as well as the Melbourne-Singapore route.

Competition just got tougher 

• In our view, we estimate the South West Pacific and Europe routes form close to 50% of SIA’s total capacity, and we believe London, Sydney and Melbourne are key cities that are material for SIA. That said, depending on the origin of sales and final destination, passengers may be indifferent whether the stop is Singapore or Dubai. 
• However, for SIA’s domestic market (i.e. Singapore), its customers now have an additional airline, Qantas, to choose from when flying between Singapore – London/Sydney/Melbourne, especially with the increased capacity. Hence, with Qantas’ injection of capacity on some of the key Kangaroo routes of SIA, we expect the most direct impact would be on the yields on these routes as SIA now has to compete with Qantas to fill up its aircraft, assuming demand does not grow at the same pace as capacity by 25 Mar 18.

Keeping forecasts unchanged for now 

• All considered, as it is too early to determine and quantify any impact, we keep our forecasts unchanged for now. 
• While SIA loads had been gaining strength in recent months, it remains to be seen if this will sustain and whether the demand growth will be able to offset the higher capacity by 4QFY18. Hence, maintain HOLD with FV of S$10.10.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-09-05

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 10.100 Same 10.100