Aviation Stocks – Singapore - UOB Kay Hian 2018-06-11: Higher Costs For Passengers Departing From Changi Could Reduce Profitability For Airlines

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Changi Airport Passenger Service Charges SINGAPORE AIRLINES LTD SGX: C6L SIA ENGINEERING CO LTD SGX: S59 SINGAPORE TECH ENGINEERING LTD SGX: S63 SATS LTD. SGX: S58

Aviation – Singapore - Higher Costs For Passengers Departing From Changi Could Reduce Profitability For Airlines

• An upcoming increase in Passenger Service Charges (PSC) will make Changi one of the costliest airports for passengers in Asia Pacific.
• Budget travellers, who currently account for 30% of throughput, could opt for other Asian cities instead of Singapore. Scoot’s profitability could be impacted but SIA’s newly-implemented seat selection and changes to frequent flyer programme could provide a buffer.
• MAINTAIN MARKET WEIGHT.

WHAT’S NEW

New PSC structure in July, will make Changi one of the costliest airports for passengers in Asia Pacific.

• Effective 1 Jul 18, Changi will be charging an airport development levy on departing passengers to fund the development of the third runway and Terminal 5. Overall, Passenger Service Charges (PSC) will thus rise by $13.30 for departing passengers, a 39% hike.
• Cost for transiting passengers will rise by S$3.00 per pax.
• In addition, PSC for departing passengers will rise by S$2.50 annually till 2024.
• Landing, Parking & Aerobridge (LPA) fees will also be raised by 1% annually till 2024.

ESSENTIALS

Looking out for potential weakness in throughput growth, assumed 5% (-1.7ppt) throughput growth for 2018.

• Several airlines have stated that they will not absorb the increase in PSC, and this will raise overall ticket prices for passengers. Low cost travelers, who account for 30% of Changi’s throughput, will be the most price sensitive. Visitor arrivals growth was strongest from China and Indonesia and low-cost carrier (LCC) seats account for 30% and 45% respectively, between Singapore and the two countries.
• We also note that Changi’s current ytd passenger throughput growth is already 1ppt lower than in 2017 and growth over the past three years has lagged other airports in the region. Potential decline in pax throughput at Changi may result in slower growth.
• We have assumed that pax throughput at Changi would grow by 5% in 2018.

INCREMENTAL PSC COSTS AS A PERCENTAGE OF FY18 AVG FARES

• Airlines’ profitability could also be impacted, especially for LCC passengers travelling on Scoot – Singapore’s largest LCC by seat capacity (42%) – which will see a 4.2% hike in overall fares due to increased PSC.
• Incremental PSC is 164% and 37% of Scoot’s and SIA’s operating profit per pax in FY18 respectively, indicating lower ability for Scoot to absorb additional costs without impacting profitability.

ESSENTIALS

SIA (Rating: BUY/ Target Price: S$12.60).

• While the increase in PSC may appear to be a relatively minor, it amounts to 1.5x the operating profit per pax in FY18 for both SilkAir and Scoot. If either carrier absorbs part of the increase in PSC, operating profits would be impacted. SilkAir and Scoot contributed 11.4% of total group operating profit in FY18. That said, we are not too concerned as we believe that SIA’s newly-implemented seat selection offering and changes to frequent flyer programme will at least partially offset the impact of any absorption of PSC.
• We have assumed that SIA’s, Silk Air’s and Scoot’s pax yields would rise by 2.8%, 0.9% and 1.5% in FY19 respectively.

SATS (Rating: BUY/ Target Price: S$5.70).

• Theoretically, SATS could be impacted by lower pax throughput as it could lead to lower inflight catering meals and pax handling revenue. However, we believe that SATS will still be able to wring out productivity gains from:
  1. increased automation from an expanded kitchen facility; and
  2. self-check-in kiosks at all terminals. 
• We have already assumed that throughput growth at Changi will be reduced from 6.1% to 5%.

SIA Engineering (Rating: BUY/ Target Price: S$3.80).

• A potential decline in pax throughput as a result of rising PSC is unlikely to impact aircraft movements. Hence, we do not expect any material impact on SIAEC’s earnings. FY19 net profit is forecasted to grow 3.8% y-o-y.
• At fair value, it will be trading at 19.3x FY19F PE, 2.4x P/B and dividend yield of 4.7%.

CATALYSTS

• Strong cargo throughput and decline in fuel prices.

K Ajith UOB Kay Hian | https://research.uobkayhian.com/ 2018-06-11

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