Singapore Airlines - UOB Kay Hian 2018-07-31: Analyst Briefing Takeaways ~ Stalled By Fuel Cost Escalation

Singapore Airlines - UOB Kay Hian Research 2018-07-31: Analyst Briefing Takeaways ~ Stalled By Fuel Cost Escalation SINGAPORE AIRLINES LTD SGX:C6L

Singapore Airlines - Analyst Briefing Takeaways ~ Stalled By Fuel Cost Escalation

  • SIA adopted a strategy of growing revenue at the expense of yields and this included aggressive promotional fares. While this grew revenue by 5.1% in 1QFY19, the 39% increase in fuel cost meant that the incremental revenue growth was not accretive, even with SIA’s fuel hedges. This poses significant challenges for SIA, given that fleet delivery and seat capacity are expected to rise by about 11% and 7.6% respectively.
  • We lower our fair value to S$11.10. Maintain HOLD. Entry price: S$9.80.


Passenger flown revenue improved 5.1% despite a 2.9% decline in pax yields across all airlines…

  • Pax yield declined by 1% for the parent airline and was attributed to:
    1. weak back-end pricing (economy class), which led to lower currency yield,
    2. unfavourable forex movement from a stronger SGD, and
    3. utilisation of new B787 aircrafts on Australian routes in a low season period.
  • This led to pax yields declining by 4% in May, offsetting the flat pax yields in April and June.
  • Weaker pax yields were partially offset by stronger front-end pricing, especially for the first class and premium economy. That said, revenue has improved due to higher volume (RPK across airlines +8.3% y-o-y). We believe that the street has been too focused on the deterioration in pax yields, and will be better off looking at RASK, given the trade-off between volume growth and ASP growth.
  • RASK has improved by 1.2% for the parent airline. We estimate RASK and pax yield to decline by 2.5% and 2.7% respectively in FY19, taking into account a decline in load factors for upcoming quarters.

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...but profitability declined mainly due to higher fuel costs.

  • 1QFY18 earnings are restated to adjust for changes in D&A. Ex-EI, operating profits declined by S$37m or 16.1% y-o-y and can be attributed to:
    1. higher net fuel costs (+S$154m),
    2. higher maintenance costs (+S$17m),
    3. other ex-fuel costs (+S$21m), and
    4. lower line maintenance and air frame maintenance revenue from SIA Engineering.

In a bid to improve profitability, SIA plans to:

  1. reduce SilkAir’s capacity;
  2. transfer routes from SilkAir to Scoot, and
  3. potentially increase their fuel hedging position from the current 42.2% of fuel requirements to 50%.
  • SIA notes that competition remains tough in SEA, due to overcapacity brought about by the proliferation of low-cost carriers (LCC). Subsequently, yields have been suppressed as SIA consistently rolls out promotional fares in a bid to boost loads.

SIA Cargo is expected to remain profitable in upcoming quarters, potentially driven by:

  1. the transfer of Scoot’s bellyhold which boosted yields in 1QFY19 (short-haul flights tend to have higher yields),
  2. two out of SIA cargo’s seven freighters were under maintenance in 1QFY19 and are expected to return to service in 2QFY19, boosting traffic growth, and
  3. the imposition of cargo fuel surcharges.


Capacity additions hurting yield and profit recovery.

  • Airlines, including SIA, are taking on new aircraft and this is affecting profitability and cash flow in an environment of rising fuel prices. SIA also has been aggressive in launching promotional fares in advance and there appears to be a mismatch between the advance bookings and the associated costs, particularly with fuel costs remaining, where it is. 
  • Until airlines are able to park older aircraft and reduce capacity, yields are unlikely to recover.

To require greater-than-expected debt due to weak cash flow.

  • We estimate SIA would require $10.4b in debt over the next three years, unless it chooses to sell newer aircraft. Thus, financing cost will amount to 17% and 30% of FY19 and FY20 EBIT respectively.


  • We reduce our FY19 net profit estimate by 7.6% (S$61m) as we factor in lower pax yields, as well as higher fuel costs. 
  • We have also reduced our dividend payout ratio from 50% to 40%. FY19 shareholder equity is raised by 6.4% as we have factored in higher fair value gains due to fuel hedging.


  • We lower our target price from S$11.90 to S$11.10 as we reduce P/B from 0.9x to 0.8x since SIA is only expected to generate ROE of only 5.5%.


  • Capacity cuts across the industry and higher yields.

K Ajith UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-07-31
SGX Stock Analyst Report HOLD Maintain HOLD 11.10 Down 11.900