Singapore Airlines - UOB Kay Hian 2019-09-19: Double-digit Decline In Cargo Traffic Is A Key Negative, Even As Pax Traffic Remains Robust For Now


Singapore Airlines - Double-digit Decline In Cargo Traffic Is A Key Negative, Even As Pax Traffic Remains Robust For Now

  • In August, cargo traffic declined by 10.2% y-o-y, registering its steepest decline since Mar 19. Despite August’s strong pax traffic growth and load factors, we remain neutral on SINGAPORE AIRLINES (SGX:C6L) as yields could weaken if the economic environment deteriorates further.
  • Maintain HOLD. Target price: S$9.50. Suggested entry price: S$8.70-8.80.


August’s cargo traffic registered the steepest decline since Mar 19, with cargo load factor falling 6ppt y-o-y.

  • Ytd FY20, cargo traffic has declined 5.9% y-o-y, which was marginally higher than our full-year estimate of -5.5% y-o-y. The decline in cargo traffic underscores heightened risk for the parent airline at the operating level. In general, we expect yield for air cargo to remain weak in the months ahead, as IATA report showed that 41% of surveyed airlines’ heads of cargo were expecting deteriorating cargo volume and yields in the next 12 months.
  • Ytd FY20, load factor was 58.2%, which is marginally lower than 1QFY20’s 58.7%. This bodes ill for Singapore Airlines’s cargo business in 2QFY20 as cargo revenue fell by S$44.6m in 1QFY20.

Underlying demand for pax traffic remains strong, but could be at the expense of yields.

  • Parent airline’s pax load factor improved by 1.5ppt y-o-y in August 19 as pax traffic increased 8.1% y-o-y, outpacing capacity growth.
  • Ytd FY20, pax traffic has risen by 8.5% y-o-y with pax load factor (PLF) rising by 1.2ppt. The improvement in PLF was broad-based across all route regions except for East Asia and the Americas. The key uncertainty is whether this was achieved on the back of weaker pax yields.
  • In 1QFY20, pax yields rose 1% y-o-y and we have estimated a 1.1% y-o-y increase in FY20.

SilkAir’s higher PLF of 81.2% in August could lower losses in 2QFY20.

  • In 1QFY20, SilkAir incurred a S$16m loss with a 78.1% load factor while its breakeven load factor was 85.3%. Ytd 2QFY20, SilkAir has achieved an 80.6% load factor.

Scoot’s PLF improved for three consecutive months to 88.6%, the highest since May 19.

  • Load factors improved for West Asia and Rest of World, while East Asia declined as demand growth fell short of capacity expansion. In 1QFY20, Scoot reported a net loss of S$37m with a breakeven load factor of 96%.


Increased geo-political tensions in the Middle East have raised fuel price volatility and risks for SIA and its associates.

  • Singapore Airlines had effectively hedged 73% of its fuel requirements (70% on jet fuel; 5% on Brent) for the remaining nine months of FY20. Ytd FY20, jet fuel has averaged US$78/bbl, which is below our estimated average of US$83/bbl.
  • We estimate that every US$1/bbl increase in fuel price from our base assumption would lower Singapore Airlines’s PBT by S$12.8m, net of fuel hedging. Our jet fuel price assumptions are maintained at US$83.4/bbl for FY20.
  • A greater concern is the impact of higher jet fuel prices on Singapore Airlines’s airline associates, Vistara and Virgin Australia, which are struggling with profitability. We believe earnings for both will be negatively impacted if fuel prices remain elevated.

Remain neutral on SIA in an uncertain yield environment.

  • OECD business confidence has been declining since 2018, while the CASS freight index has been declining for nine consecutive months. The data appears to suggest that the global economic environment could be slowing down. This could impact discretionary travel and yields as well as business travel.
  • Similarly, the prospect of a near-term Brexit poses risks to Singapore Airlines’s profitability as demand for business class travel could be affected as a result of companies shifting operations out of UK and potentially lesser connecting flights from UK to other parts of Europe post-Brexit. London Heathrow-Singapore was Singapore Airlines’s most profitable route in FY19 according to industry authority, OAG.


  • No change to our earnings estimates.


  • We maintain our HOLD recommendation with our unchanged fair value of S$9.50. We continue to value Singapore Airlines on an SOTP basis, with the airline operations valued at 0.75x book value and SIA Engineering (SGX:S59) valued at S$2.55.
  • We lower our suggested entry price to $8.70- 8.80, which approximates an 8.6% total return to our target price.


  • Higher-than-expected cargo traffic and load factor.

K Ajith UOB Kay Hian Research | David Lee Gao Peng UOB Kay Hian | https://research.uobkayhian.com/ 2019-09-19
SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.500 SAME 9.500