Singapore Airlines - CIMB Research 2018-02-21: Higher Oil Prices Improve SIA’s Competitive Position

SINGAPORE AIRLINES LTD C6L.SI

Singapore Airlines - Higher Oil Prices Improve SIA’s Competitive Position

With up to 47% of its fuel needs hedged, Singapore Airlines (SIA) may benefit if its unhedged competitors are compelled to raise ticket prices to cover the rising cost of fuel.
Airfreight and premium travel demand continue to be strong into early-2018F.
Maintain ADD, with unchanged target price (S$12.05), based on 1x CY18F P/BV.

SIA held its regular post-results analyst meeting on 14 February, hosted by Senior VP of Finance, Stephen Barnes.
SIA noted that demand for airfreight and premium travel remained robust so far in 2018F, although higher oil prices ate into profits in the past two quarters. Full-service carrier (FSC) yields continued to fall y-o-y, although in the US and Europe, yields stabilised as airlines tried to pass on higher fuel costs.

In Asia, SIA noted that the keenly competitive environment has prevented the industry as a whole from passing on higher fuel prices, with transpacific yields still feeling the effects of capacity additions by Chinese and other North Asian carriers. However, in some markets, SIA has had better success at holding up its yields, i.e. on European and to Chinese and North Asian destinations.

On European routes, better premium travel demand has helped stabilise yields, also aided by more manageable capacity additions on the Kangaroo route by the Middle East Gulf (MEG) carriers.
Meanwhile, strong travel demand to China and other North Asian destinations has helped support industry yields.

As the MEG and Chinese carriers typically do not hedge their jet fuel costs, higher jet fuel prices in recent months should push these carriers in the direction of raising their ticket prices, in our view. If this materialises, SIA should be able to follow the industry pricing upwards, even as its fuel costs will be partially protected by its fuel hedges that cover up to 47% of its fuel requirements up to CY22F.

From 2HCY14 to CY16, SIA suffered S$2.1bn in fuel hedging losses, but had no choice but to match the reduced ticket prices of its unhedged MEG and Chinese competitors.
However, SIA accumulated significant quantities of Brent derivatives in late-CY16 and CY17, locking up 40-47% of its fuel needs up to 2022F at a strike price of US$53-59/bbl. This will help SIA improve its competitive position as oil prices rise.

SIA noted that its new revenue management system, introduced from CY17F, has sophisticated algorithms to help it maximise revenue by balancing the often opposing objectives of maximising loads and yields. The installation of premium economy seats since August 2015 is almost complete, with five more 777-300ERs to be retrofitted. These initiatives have helped slow the pace of SIA mainline’s yield declines.

SIA has benefitted from the return of its first 5 x A380 leases, which has helped to reduce maintenance costs over the past nine months. In its place, SIA will take delivery of five newer A380s with higher-density configuration that will help SIA reduce its unit costs.

The introduction of non-stop A350 services to San Francisco has been a success, as the schedule connects well to Indian services. SIA expects to take delivery of seven A350ULR planes in CY18F, with which it will launch more nonstop services to North America, including to New York, Los Angeles, and other cities. SIA does not intend to reduce its one-stop US services as it hopes to grow its transpacific market share.
The integration of Scoot and Tigerair, completed in July 2017, has resulted in better schedule coordination and cross-marketing. Connecting passengers between Scoot’s long-haul and short-haul networks has increased from below 5% to about 10% today.
Scoot will resume growth of its short-haul network in the next 18 months, as IndiGo returns its 12 leased A320 planes to Scoot. From Scoot’s current base of 23 x A319/320 planes, we project net growth of about 4-5 planes over the next 18 months. Meanwhile, 49%-owned NokScoot in Thailand expects to grow its 4- strong 777-200ER fleet by two planes p.a., including several narrow-body leases from third parties.

A key downside risk includes a potential future downward turn in demand for airfreight services, which had underwritten a significant chunk of the delta in SIA group’s earnings during 9MFY18F, and which is expected to continue growing in FY19F.
The proposal by Singapore to raise landing and parking fees by about 30% could reduce SIA’s FY19F core EPS by 11%. The proposal to raise airport tax by S$10-15/pax, also to fund the construction of Changi Terminal 5, may hurt demand for Scoot’s LCC services due to the price-sensitive customer base. We do not know whether or when these proposals will ultimately take effect.

Raymond YAP CFA CIMB Research | http://research.itradecimb.com/ 2018-02-21

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