Cargo unit to drag group further into the red. We expect the Singapore Airlines (SIA) Group to report core operating loss of SGD41m for 2QFY3/14F (2QFY3/13: +SGD70m; 1QFY3/14: +SGD82m) when it releases its results on 12 Nov 2013. Across the core business units, we expect breakeven load factors to head north sequentially on higher jet fuel prices and downward pressure on yields. Overall, group earnings would have to be supported by its associates and the joint ventures of SIAEC. We reiterate our HOLD call on SIA with the target price trimmed to SGD10.20. Prefer exposure to SIAEC (BUY, TP: SGD6.19), its profitable engineering arm.

Strong loads at SIA supported by weak yields? SIA reported very strong passenger load factor of 81.1% in the quarter. Nevertheless, we suspect this upbeat figure was achieved under very weak yields in view of management’s guidance for continued downward pressure on yields. Based on data from the Airline Reporting Corporation, we estimate that average airfares for the premium and non-premium markets between the US and Asia have contracted by 6.1% YoY and 5.3% YoY, respectively, over the same quarter last year. In our view, the softening airfares reflect the weak market conditions on long haul routes. We expect core operating loss of SGD22m in 2QFY3/14F for the parent airline.

Load factors for SilkAir at historical low. SilkAir’s 2QFY3/14F load factors fell to a historical low of 69.0%, marginally below the breakeven load factor of 69.5% in the previous quarter. Consequently, we expect the regional carrier to report a weaker operating profit of SGD9m.

Cargo loads continue to fall despite grounding of freighters. In response to the weak global cargo markets, SIA has removed four of its 13 freighter aircraft from service. However, the sharp contraction in traffic continued to weigh on its cargo business. We expect losses to widen to SGD65m in 2QFY3/14F.

Source: Maybank Kim Eng Research - 21 Oct 2013