Singapore Airlines - DBS Research 2020-03-19: SIA's Toughest Challenge Yet


Singapore Airlines - SIA's Toughest Challenge Yet

  • Singapore Airlines (SGX:C6L) has cut capacity to 50% of its original schedule up to end April, as more border controls were imposed.
  • We now project a 47%/26% y-o-y decline in capacity for 1Q/2Q FY21 as COVID-19 takes longer to play out.
  • We project Singapore Airlines to post a loss in FY21F of S$1.3bn on lower revenues and substantial fuel hedging losses.
  • Downgrade to HOLD with Target Price of S$6.60 (0.85x P/B).

SIA to post losses of S$1.3bn FY21F as it suffers a double blow from COVID-19 and fuel hedging losses

Drastic capacity cuts to match drastic COVID-19 containment measures:

  • Singapore Airlines announced yesterday evening that it is suspending additional services as more countries impose border controls. These latest suspensions means that Singapore Airlines will only operate 50% of the capacity that had originally been scheduled up to end-April, and the company expects to make further cuts to its capacity as more border controls are potentially imposed.
  • The company also stated that it is actively taking steps to build up its liquidity and will consult the unions once again as it seeks to take urgent steps to cut costs. Additional measures to cut costs will be announced by Singapore Airlines when they have been firmed up.

We cut full year passenger capacity for FY21F to a 20% y-o-y decline leading to a 25% y-o-y drop in revenue:

  • We now factor in a 50% y-o-y decline in passenger capacity for Singapore Airlines and Silkair in the months of March and April, a 75% y-o-y decline in May and a more moderate cut of 50% in June, with steady recovery in capacity and demand by the end of 2020. (See table in attached PDF report).
  • Coupled with weaker load factors and yields, we project overall revenue for 1QFY21 (the quarter ending June) to decline by 66% y-o-y, with an operating loss of S$1bn, before narrowing to an operating loss of S$500m in 2Q20. Our quarterly forecasts assume a normalisation of travel demand and earnings by 4Q20.

Fuel hedging losses to be substantial.

  • At the end of Dec 2019, Singapore Airlines had hedged 79% of its projected 4Q19 jet fuel consumption at US$76 per barrel and 73% of its FY21F fuel consumption at between US$58/bbl for Brent (22%) and US$74/bbl for jet fuel (51%).
  • With the slash in capacity in the months ahead, Singapore Airlines has now more fuel volume hedged than it will consume in the next few months and is effectively long on oil price for the next two quarters. With the precipitous drop in demand for oil (jet fuel being one of them), oil prices are likely stay low in the months ahead, which will lead to substantial fuel hedging losses for Singapore Airlines.

Projecting a full-year operating loss of S$1.27bn for SIA in FY21F.

Paul YONG CFA DBS Group Research | https://www.dbsvickers.com/ 2020-03-19
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