Singapore Airlines: Downgrade to HOLD - falling load factors worrisome (OCBC)

Lower passenger load factor as capacity again grew faster than traffic. Singapore Airlines (SIA) reported its Oct 2011 passenger capacity (ASK) increased by 4.6% YoY while its passenger traffic (RPK) only gained 0.7% YoY. As a result, passenger load factor (PLF) for the month fell to 76.7%, compared to 79.6% a year ago and 77.5% in 1HFY12. During the recent 2QFY12 results briefing, management said ASK in 2HFY12 should be similar to that of 1HFY12, which can be achieved if ASK does not grow more than 1.5% YoY in 2HFY12. Given that ASK grew at 4.6% in Oct 2011, SIA needs to significantly lower its ASK growth in 2HFY12 in order to achieve management's guidance.

Load factors of SIA Cargo and SilkAir also fell. SIA Cargo's Oct 2011 cargo capacity (ACTK) contracted 1.5% YoY but its cargo traffic (CTK) eased slightly more at 1.6% YoY. As a result, cargo load factor (CLF) for the month fell to 66.3%, which was slightly lower than the 66.4% a year ago but higher than the 64.2% in 1HFY12. While SilkAir's RPK in Oct 2011 gained a strong 8.0% YoY, its ASK grew even faster at 11.1% YoY. Similarly, SilkAir's PLF for the month fell to 73.8%, lower than both the 76.0% a year ago and 74.3% in 1H12.

Falling load factors and high jet fuel price threaten profit margins. Falling load factor across segments is worrisome for SIA, especially in the current aviation environment. High jet fuel costs are weighing down heavily and resulting in razor-thin margins for air carriers. The Bloomberg Singapore Jet Kerosene fob Spot Cargo Price (JETKSIFC) illustrated in Exhibit 3 is, in S$ terms, already 3.7% higher thus far in 3QFY12 than the average price in 2QFY12. For the rest of 2HFY12, SIA needs to taper its capacity growth, especially if jet fuel price does not come back down to a more manageable level.

Lower estimates, fair value and downgrade to HOLD. We lower our estimate of SIA's FY12 PATMI by 12.3% to S$301.8m after a less than encouraging start to 2HFY12 and persistently high jet fuel prices. We also use an adjusted ex-net cash P/B multiple of 1x, or 1.1 standard deviation below historical average, to derive a fair value of S$10.85 per share (previously S$12.41). Since our new fair value estimate of SIA is 2% lower than its current price, we downgrade SIA to HOLD.