Singapore Airlines - OCBC Investment 2019-08-05: Improved Passenger Traffic Growth


Singapore Airlines - Improved Passenger Traffic Growth

  • Improved passenger flown revenue.
  • Weaker demand for cargo.
  • Record PLF of 83.2% for SIA parent airline.

Higher estimated losses from Virgin Australia

  • SINGAPORE AIRLINES LTD (SIA, SGX:C6L)’s 1QFY20 net profit fell 20.7% y-o-y, or S$29m to S$111m, which was below ours and the street’s estimates. The decline was primarily due to a higher share of losses from associated companies which reported a loss of S$31m, with higher estimated losses from Virgin Australia, and higher finance charges (-S$26m).
  • SIA’s 1QFY20 revenue grew 6.7% y-o-y, or S$258m to S$4.1b, on the back of higher flown revenue (+6.3% y-o-y, or S$226m). Passenger flown revenue improved 8.8% y-o-y on the back of higher traffic growth (+8.1% y-o-y) and capacity (+6.6% y-o-y), while cargo flown revenue dropped S$45m or 8.4% y-o-y.
  • We expect the uncertainties over the US-China trade dispute and economic slowdown could continue to weigh on cargo demand.

Expenditure increased on expansion

  • SIA's 1QFY20 expenditure increased by 6.9% y-o-y, or S$251m to S$3.9b, mainly from the expansion of its operations. Ex-fuel costs rose S$157m or 6.1% y-o-y, largely driven by higher staff cost (+13.7% y-o-y), in-line with the capacity increase. Net fuel-cost was up 8.7% y-o-y, or S$94m, due to higher volume uplifted on capacity expansion and a stronger US dollar.
  • Despite of the higher expenditure, SIA’s 1QFY20 operating profit came in at S$200m, a 3.6% or S$7m increase compared to 1QFY19 due to higher revenue.

Higher passenger traffic growth

  • SIA reported higher passenger traffic growth across all airlines as measured by revenue passenger-kilometres (+9.0% for SIA parent airline, +2.4% for SilkAir and 6.5% for Scoot). SIA parent airline’s operating profit grew strong at 28% y-o-y or $51 million to $232 million in 1QFY20.
  • In terms of passenger load factor (PLF), SIA parent airline posted a record PLF of 83.2% (+1.2 percentage points), the highest on record for the first quarter.
  • For SilkAir, measures have been taken to mitigate the grounding impact of the 737 Boeing Max 8 aircraft and it managed to contain the reduction in capacity to 1.6%. Despite the grounding impact, SilkAir’s PLF and unit revenue (RASK) rose 3.1 percentage points and 1.3% y-o-y respectively.
  • Separately, to improve the operational resilience, Scoot proactively reduced aircraft utilisation and kept some spare aircrafts to make sure it adheres to time schedules in case of technical issues. As a result, Scoot’s capacity growth was restrained to 6.5% and PLF remained unchanged at 86.1% in 1QFY20.

Transformation on track

  • Looking ahead, passenger bookings in the forward months are tracking against the capacity growth, supported by strong premium cabin traffic to key markets. Fuel price volatility is expected to continue in the near term, but SIA could continue to benefit from its strong hedge position.
  • Despite the headwinds, we see that SIA is on track in its transformation, with improvement in overall RASK (+1.3% y-o-y), PLF (+1.1 percentage points y-o-y) and passenger traffic (+8.1% y-o-y) in 1QFY20.
  • We maintain BUY with unchanged fair value estimate of S$11.02.

Chu Peng OCBC Investment Research | https://www.iocbc.com/ 2019-08-05
SGX Stock Analyst Report BUY MAINTAIN BUY 11.020 SAME 11.020