SIA optimism premature

3Q13 results below expectations
Falling short of our estimates, Singapore Airlines (SIA) reported a 20.4% YoY fall in 3Q13 operating profit to S$131.0m. Although revenue held up well during the seasonal travel peak – meeting expectations with a 0.4% YoY decline to S$3,860.4m – it came at the expense of declining passenger yields (YoY basis) following increased promotional activity, which offset some savings from favourable fuel prices during the quarter. Only with gains from non-operating segments did the Group post a 5.4% YoY improvement in PATMI to S$142.5m (we had estimated a PATMI of S$176.8m).

Operating performance for segments mixed
With yields under pressure, it was not surprising to see operating profit for the main airline fall 36.5% YoY to S$87m. However, there were some positives with SilkAir’s operating profit up 6.3% YoY to S$34m and SIA Cargo narrowing operating losses by almost 60% to – S$29m.

Challenging environment ahead
Given the tepid demand for premium air travel – and competitive pressures especially in the Asia-Pacific region – we lower our forecasts for SIA after an anticipated uptick in yields failed to materialize. In addition, jet fuel prices have started to creep upwards, and if sustained, will place margins under greater pressure. Therefore, our FY13 and FY14 revenue projections drop by
2.2% and 2.9% respectively, and our operating profit fall by 30.9% and 5.5% respectively.

No clear catalyst for now; maintain HOLD
Promotional activities continue to prop up the Group in the near-term but SIA still lacks a clear catalyst to revive its fortunes. With competing airlines aggressively expanding their footprint e.g. Eithad Airways et al, SIA has responded with greater frequency of flights to protect their market share, and this could lead to further deterioration in passenger yields. Given the short run-up in its share price, we maintain HOLD at an unchanged fair value estimate of S$10.85.

Challenging environment ahead

i. Capacity management remains essential
Operating performances amongst its segments was mixed in 3Q13 with capacity management for the different segments yielding differing results. A slower pace of capacity expansion aided an improvement in the passenger load factor (+2.1ppt to 79.3%; -0.5ppt QoQ) for the main airline but the reverse was true for SilkAir (-3.5ppt to 75.3%; +1.9ppt QoQ). As for the Group’s cargo segment, further reduction in cargo capacity (-11.8% YoY; -7.9% QoQ) to match the continued drop-off in cargo demand (-10.0% YoY; -2.8% QoQ) helped to narrow operating losses further.

ii. Yields stable – for now
Despite ongoing promotional activities, passenger yields for the main airline have remained consistent at 11.4 cents/passenger-km for the past three consecutive quarters. This stability has been largely attributed to effective capacity management. However, with the heating up of competition within the premium airline space – especially in Asia-Pacific – this fine balance could prove difficult going forward.


iii. Cargo turnaround in FY14 unlikely
Although SIA Cargo’s operating loss narrowed to S$29m (-S$40m in 3Q12; -S$50m in 2Q13), industry-wide issues surrounding cargo traffic still exist. The persistence of weakness in global manufacturing activity inhibits cargo has hit the Asia-Pacific region particularly hard given its dominant share of global freight traffic. As a guide, Changi Airport saw a drop-off of 3.8% YoY for air freight movement by tonnes for the eight month period from Apr to Nov 2012. As such, we are unlikely to see any positive turnaround in FY14.

iv. Competition for Australian/Asia-Pac market heating up
Eithad Airways announced earlier this month that it will commence daily flights between Abu Dhabi and Brisbane via Singapore. This move by the national airline of the UAE highlights the increase in competition amongst premium airlines for market share in the growing Australia/Asia-Pacific region. SIA has responded to this move by increasing the frequency of flights to Adelaide and Melbourne (commencing 31 March), which brings the total number of flights to Australia by the Group to 133/week (124/week previously).

v. Jet fuel prices inching higher
Jet fuel prices as measured by Bloomberg’s JETKSIFC Index have indicated a gradual uptick in fuel prices for the current quarter (4Q13). If prices stay at present levels, we could see average jet fuel prices for the quarter grow by at least 2% QoQ to break S$158, which would be at the highest level for FY13.


Outlook murkier; previous optimism on hold

i. Strategic investments needed
Despite a disappointing set of 3Q13 results – given our more upbeat expectations – SIA has done relatively well with promotional activities proving supportive for the Group in this challenging environment. However, unless management starts to look for other growth opportunities for the Group, SIA may find itself in an unenviable position with pricing as its only tool to stimulate top-line growth going forward.

Therefore, SIA needs to seek out strategic investments in order to keep pace with its competitors. In recent times, airlines such as the Middle- Eastern carriers have been aggressively seeking collaborations with other airlines via joint ventures/direct investments in a bid to grow their revenue base and expand its reach. On the other hand, SIA recently concluded its unprofitable venture with Virgin Atlantic and was late into the game with its 10% stake in Virgin Australia. With a sizeable war chest, SIA has to turn more active if it wishes to remain relevant at this stage.

ii. Forecasts lowered
With this uninspiring outlook, we lower our forecasts for SIA. Our FY13 and FY14 revenue projections drop by 2.2% and 2.9% respectively and our operating profit fall by 30.9% and 5.5% respectively following an incorporation of higher jet fuel prices and lower passenger yields.

iii. Lack of catalysts in the near-term
We expect SIA to remain in a holding pattern in the near-term. Given the short run-up in its share price, we maintain HOLD at an unchanged fair value estimate of S$10.85.