SIA caution over fuel price

Fair value S$10.85


• Decent operating statistics
• Capacity management essential
• Key risk remain elevated jet fuel prices

Decent performance against industry
Despite a reported slowdown in global demand for air transport, Singapore Airlines (SIA) managed to hold its own amidst the challenges, and turn in a decent performance relative to the industry. For the first eight months of the year, SIA saw demand via passenger kilometres (RPK) increase 7.6% YoY while passenger capacity (ASK) grew 4.5% YoY correspondingly. This contrasted favourably with overall industry figures from the International Air Transport Association (IATA), which revealed a growth in demand (RPF) of 6.6% YoY against a similar pace of capacity expansion of 4.6% YoY. However, SIA’s slightly higher capacity base led to a lower passenger load factor (PLF) of 78.8% versus an industry-wide average of 79.1%.

But freight traffic remains weak
On the flip-side, the industry-wide difficulties surrounding cargo traffic remains with Asia-Pacific carriers experiencing the greatest drop-off in freight demand given their 38.8% share of global traffic. For the first eight months of the year, the Asia-Pacific freight market saw
a 7.3% YoY drop in demand outpacing a 2.6% decline in capacity (versus a 2.6% drop in demand and a 1.5% increase in capacity for the industry). When compared to the region, SIA Cargo revealed similar figures with cargo traffic lower by 4.1% on a 1.9% reduction in capacity.

Capacity management key
With SIA’s PLF falling within our expectations, we remain sanguine that passenger yields for the recently completed quarter (2Q13) will stay at 1Q13 levels. Looking ahead, however, while SIA’s promotional fare strategy continues to improve demand for the carrier, capacity management will be essential in minimizing further downward pressures on passenger yields for 2H13 especially if the upcoming peak air travel months disappoint.

Jet fuel price still a threat
Geopolitical risks (i.e. supply issues) seem to outweigh growth concerns (i.e. lower demand) at the moment, and thus fuel prices as measured by Bloomberg’s Jet Kerosene fob Spot Cargo Price index (JETKSIFC) have remained elevated since our last update on 23 Aug. With the S$-adjusted jet fuel prices averaging ~S$158 for 2Q13 (versus S$154 in 1Q13), our FY13 projections adjust downwards slightly. Maintain HOLD with an unchanged fair value estimate of S$10.85.