Aviation – Singapore - UOB Kay Hian 2018-03-09: SIA And SATS Moving Up The Value Chain Via E-Commerce JV With DFAAS

Aviation – Singapore - UOB Kay Hian 2018-03-09: SIA And SATS Moving Up The Value Chain Via E-Commerce JV With DFAAS Singapore Aviation Sector Stocks SINGAPORE AIRLINES LTD SINGAPORE AIRLINES LTD C6L.SI SATS LTD. S58.SI

Aviation – Singapore - SIA And SATS Moving Up The Value Chain Via E-Commerce JV With DFAAS

  • WE applaud SIA’s attempt to boost ancillary revenue by teaming up with SATS and DFAAS. Given the latter’s attractive procurement cost, SIA will be able to offer better pricing on alcohol and fragrances compared with other retail outlets. 
  • If Krisflyer members choose to utilise their miles for such purchases, SIA will generate better margins than if they choose to redeem flights. 
  • SATS could benefit via expanded co-operation with DFAAS at other hubs. 
  • Maintain MARKET WEIGHT.


SIA to partner with SATS and DFASS to offer in flight duty-free and duty paid goods. 

  • SIA announced a partnership with SATS and Duty Free provider DFASS (Singapore) (DFASS also operates out of Changi T3) to provide travel related retail operations in Singapore under the KrisShop and Scootalogue brand names. SIA will acquire a 70% stake in DFASS SATS Pte Ltd (which is currently 50:50 owned by the two parties)
  • The JV will enter into a management contract with DFASS and SATS to leverage on the latter two companies’ expertise in terms of procurement and logistics support respectively.


SIA’s most tangible attempt yet to grow its ancillary revenue. 

  • In effect, SIA will be tapping into the rising trend of e-commerce retail sales and doing so by partnering with key players in the supply chain. SIA will be targeting its existing Krisflyer members as well as its 30m passenger base. 
  • Pricing for duty paid wine & spirits and cosmetics at KrisShop is more attractive than that at local retail stores, mainly due to DFASS’ relatively low bulk purchasing costs. This could attract non-airline shoppers as well. For alcohol, SIA offers free delivery in Singapore for items above S$100.00 but select cosmetics are only available for inflight collection.

Monetising its Krisflyer miles programme for better margins. 

  • SIA has approximately 3m Krisflyer members who generally opt to redeem flights. Krisflyer members also have the option to shop for various items, ranging from the latest iPhone, apparel, watches and liquor, using the Krisflyer miles in full or together with credit/debit cards or with Alipay. This could appeal to members whose points are about to expire or those with no immediate plans to utilise such points for travel. 
  • Most of the items are priced at 0.8 S cents per mile and margins could be as high as 30-40%, given that SIA will have very little associated costs aside from the procurement cost and logistics related cost. By teaming up with DFASS and SATS, SIA will boost its margins further by having a stake in the procurement supply chain. 
  • Now comparatively, if Krisflyer members opt to convert the miles to tickets, then SIA’s margins would be lower. As at 9MFY18, parent airline’s RASK (revenue per available seat km) and matched its cost per km.

Unbundling fares is yet another way to boost ancillary revenue. 

  • SIA had already announced plans to unbundle fares by offering advance seat selection, additional baggage charges, varying miles conversion under Lite, Standard and Flexi schemes, which came into effect in Jan 18. This should boost overall ancillary income and will flow directly to bottom-line. 
  • SATS will benefit via logistics support at Changi, Marina Bay Cruise Centre and could partner with DFAAS at its other Asian gateways. In addition, SATS’ 15% stake in the JV will give it a share of the profits. Both SATS and DFASS could subsequently partner other carriers at key gateways, Istanbul, Kuala Lumpur and Beijing.

SIA (SIA SP/BUY/Target: S$11.90). 

  • SIA’s stock price has weakened following plans by Changi Airport to raise levies. 
  • We believe the incremental fees (S$13.30) will not impede outbound travel or even inbound tourism. Airlines are likely to pass on the cost increase, although low-cost carrier, Scoot could be somewhat impacted. Even so, we believe that SIA’s attempt to raise ancillary income could boost group profits. 
  • A S$3 increase in ancillary income per pax from SIA alone will boost PBT by S$60m.

SATS (SATS SP/BUY/Target: S$5.90) 

  • SATS remains our top pick in the aviation sector. SATS' share price has corrected by 14% from recent peak, following marginally weaker-than-expected earnings contribution from associates (+7.9% y-o-y) in 3QFY18 and presumably on concerns that higher PSC/aviation levies could impact traffic volume. 
  • We do not think that the increase in PSC and levies will dampen travel or impact inbound tourism as the S$13.30 increase accounts for just 0.9% of average tourism spend per pax. 
  • Meanwhile, associate profits are expected to improve over the medium term, underpinned by:
    1. an MOU with Turkish Airlines to operate the world's largest inflight kitchen in late-18, and
    2. exposure at Beijing’s new Daxing Airport, where SATS’ 28%-owned associate is likely to serve hub airlines, China Southern Airline and China Eastern Airlines, both of which are also co-shareholders in the catering unit. 
  • We also believe that SATS will announce similar tie-ups with DFAAS with Turkish Airlines and the Chinese carriers, thus extending its reach into the e-commerce logistics supply chain.


  • Further JVs between SIA and SATS

K Ajith UOB Kay Hian | http://research.uobkayhian.com/ 2018-03-09
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 11.900 Same 11.900
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