Singapore Airlines (DMG)

AVIATION: Singapore Airlines is Singapore’s national flagship carrier which is also one of the largest air carrier in the world.

SELL
Price S$14.00
Previous S$12.35
Target S$12.35

May '11 Stats: Load Factor Dips

SIA’s load factor for the month of May continued to weaken as forward bookings levelled off. We expect flat yields for FY12 given that high air fares owing to fuel surcharges are likely to cause passengers to switch to cheaper airlines, and the fact that low cost carriers are aggressively expanding their fleet. We are skeptical on SIA’s move to venture into the long haul low cost carrier segment as we think it would be value destructive to the airline’s premium branding and potentially dilute yields. Maintain SELL with the stock’s FV unchanged at S$12.35.

Passenger load factor weakens. SIA registered a YoY RPK growth of 4.3% (2 months YTD: 6%) in the month of May 2011 on the back of capacity growth of 6%, which further weakened its load factor by 1.2-ppts to 73.6%. Passengers carried was higher by 4% YoY (2M YTD: 5%) while capacity originally directed to the Tokyo route was diverted by adding frequency on routes to Hong Kong, Taipei and Male. SIA has been flying thrice-weekly to Sao Paulo via Barcelona since March but take-up has been poor. Its weaker passenger load factor was attributed to the East Asia and Americas region.

Cargo - Fragile economic recovery. FTK for the month of May was marginally flat on the back a 3.6% YoY increase in capacity as the cargo market braces itself for a faltering global economic recovery amid intensifying competition from other cargo carriers, which suggests that yields would continue to be trend down. This resulted in a YoY drop of 1.9-ppts in its cargo load factor to 64.7%, which was worse across all regions except the South West Pacific region.

Load factor to lighten further. On the back of a forecast 6% growth in capacity for FY12, we expect load factor to continue to dip as high air fares due to fuel surcharges send passengers running to cheaper airlines amid aggressive fleet expansion among low cost carriers that is chipping away market share given their added frequency on short haul routes. As a result, passenger yields are likely to remain flat. The intensifying competition has prompted a review of SIA’s strategy, whereby to maintain market share, SIA is targeting to set up a long haul low cost carrier within the next 12 months. We are skeptical on this move as we think it would be value destructive to SIA’s premium branding and would potentially dilute yields. In our view, the key to succeeding in the low cost business is generating passenger volume, and we believe this could work for shorter haul routes as revenue and high margins are primarily driven by ancillary income initiatives. Separately, recent ash clouds from Chile have halted flights headed for New Zealand and we understand that to date, none of SIA’s flights have been grounded, although flights to Christchurch and Wellington have been diverted to Auckland.

VALUATION AND RECOMMENDATION
Reiterate SELL. SIA's near-term challenges are weakening load factor, flattening yields amid a fragile recovery in the global economy and soaring jet fuel prices, which will also be investors’ primary concern. We are making no changes to our earnings forecast and reiterate our SELL recommendation, with an unchanged FV of S$12.35, premised on 15x FY12 EPS. Since our downgrade last month, SIA’s share price has declined by 4.5% and we anticipate more downward pressure.