Singapore Airlines (SIA) - CGS-CIMB Research 2020-03-05: Responding At Multiple Levels To Covid-19


Singapore Airlines (SIA) - Responding At Multiple Levels To Covid-19

  • Singapore Airlines said at today’s special briefing on Covid-19 that forward bookings continue to fall, with no bottom in sight yet, as the virus spreads globally.
  • We reiterate our HOLD call, with an unchanged target price of S$8.46, based on 0.86x CY20F P/BV (1 s.d. below mean since 2011).

Impact of Covid-19 felt on pax volume, forward bookings, yields

  • Singapore Airlines (SIA, SGX:C6L) said that at the very peak during SARS, there was a 45-50% drop in demand. Right now, the Singapore Airlines group has not yet seen this quantum of decline yet, but the drop in passenger volumes has still been substantial, concentrated on leisure and discretionary travel, and slightly less for business-related travel. The response has been to cut capacity. Even so, passenger loads and yields are still lower y-o-y, forward bookings continue to fall, and have not yet seen bottom, in SIA’s view.
  • The SIA group’s first wave of capacity cuts were related to Chinese routes in early Feb, with cuts implemented for Scoot, SIA and SilkAir. Scoot, in particular, cancelled all of its flights to China, although the full-service carriers (FSCs) still maintain their core flights to the key cities where there are large populations of Singaporeans.
  • The second wave of network adjustments concentrated on NE Asia and SE Asia routes, with services maintained in all those cities at lower frequencies. The third wave of cuts was to the US, Europe, SW Pacific and SE Asia, as Covid-19 spread globally.

Capacity cuts spread across all route regions to limit downside

  • The Mar 2020 ASK capacity for SIA and SilkAir combined has been reduced 12% y-o-y and 15-16% lower against the original planned schedule. For the Mar-May 2020 period, ASK is down 6.1% y-o-y and 10.3% lower than the original schedule. Scoot’s ASK capacity has been cut 35-40% against its original plan (as China flights made up 25-26% of total capacity, plus with negative secondary impacts on SE Asian demand to travel to China and NE Asia).
  • By route region, flights to NE Asia and SE Asia have been reduced by at least 20%, while capacity elsewhere has been cut in the low to high single-digits percentage over the Mar-May period. The Kangaroo route between Europe and SW Pacific was heavily cut for May as it is seasonally weak anyway.
  • The decision to cut flights depends on which flights cover variable costs and depending on the volume of passengers and load factors. Variable cost breakeven load factor ranges between 40% at the low end, and 60-65% at the high end. The variable cost breakeven load factors vary depending on route yields, aircraft types, route distance, flight operating costs, etc. SIA is concerned about the flights that have variable cost breakeven load factors at the 60-65% level.
  • SIA has to be mindful about its capacity cuts as the EU is not waiving airlines’ obligation to fly at least 80% of its slots to keep their rights to use the same slots in the next Northern Winter or Northern Summer season. Thankfully, China has waived this obligation temporarily.

SIA is in cash-preservation mode

  • SIA is working on securing more lines of credit to support near-term liquidity requirements of the business during the Covid-19 crisis. Currently, SIA has S$1.5bn- 2bn of available credit lines to draw on. SIA is not concerned about raising longer-duration funding for capex requirements. Banks have been supportive of SIA to date.
  • SIA is discussing with suppliers on getting rate discounts and price concessions, although this remains work-in-progress. SIA is working with aircraft OEM suppliers to reschedule or defer aircraft pre-delivery payment schedules, as well as working to defer non-essential non-aircraft capex in consultation with suppliers.
  • Staff costs will be reduced as the CEO and senior management staff have taken a pay cut, ranging from 5-15%. A voluntary no-pay leave scheme will be offered to staff, including cabin crew and pilots. The S$112m assistance package announced by the government of Singapore is spread over six months across a number of stakeholders, hence will not be material to the SIA group.
  • See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.

Raymond YAP CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-05
SGX Stock Analyst Report HOLD MAINTAIN HOLD 8.460 SAME 8.460