Singapore Airlines - Leases more regional aircraft (KimEng)

Event:

 Singapore Airlines (SIA) is leasing an additional 15 A330‐300 aircraft from Airbus. The aircraft will be powered by Rolls‐Royce Trent 700 engines. While this latest order reinforces confidence in its long‐term prospects, the airline may be in for a bumpy ride in the short term due to higher fuel costs and moderating yields. We maintain our HOLD rating and target price of $14.40.

Our View:

 The 15 aircraft will be leased for a minimum of six years with an option to extend the lease term. They will join the other 19 A330‐300s already in service. The aircraft will be delivered directly from Airbus between 2013 and 2015. The A330 is a medium‐range aircraft, and SIA will operate the two‐class configured aircraft on routes within Asia as well as to points in Australia and the Middle East.

 Along with the ongoing delivery of the A380s, as well as future orders for the A350 and Boeing 787, this addition is consistent with SIA’s policy of operating a modern fleet. That the new‐generation aircraft are more fuel‐efficient is particularly critical in the current fuel price environment.

 As with any new orders, SIA will have the chance to refresh its product offering. Business Class will feature a new seat designed for regional and medium‐range routes, in a 2‐2‐2 configuration. Economy Class is laid out in a 2‐4‐2 configuration and will also feature a new‐generation seat that is available on the Airbus A380 and Boeing 777‐300ER aircraft as well.

 With the new aircraft on lease rather than purchased outright, SIA continues to have an optimum mix between leased and owned aircraft for its capital management. Moreover, it still has more than $5b in cash even after discounting the upcoming $1.20 special dividend payout (book closure 4 August). This opens the possibility of more generous dividends in the coming years, subject to ongoing profitability levels.

Action & Recommendation:

We maintain our fundamental HOLD rating on the stock as we expect earnings to peak in the near term and risks, such as higher fuel costs and a flattening of yields, to persist.