• Adjusted 1QFY15 PATMI within expectation
• Air travel demand to be hit by recent incidents
• Yields still under pressure

Starting FY15 on a low

Singapore Airlines’ (SIA) 1QFY15 revenue was within expectations (-0.6%) as it decreased 4.1% YoY to S$3.68b. On the other hand, reported operating profit decreased by 51.7% to S$39.5m as expenditure declined slower than revenue by 1.0ppt. SIA’s fuel hedging paid off as fuel costs fell S$68m instead of the otherwise S$9m rise. In 1QFY15, SIA revised the useful lives of some aircraft types and lowered depreciation expenses by S$14m. When adjusted, operating profit would have been S$25.5m, or 68.8% lower YoY. Reported 1QFY15 PATMI was 71.4% lower at S$34.8. But when adjusted for the change in depreciation policy, 1QFY15 PATMI would have been S$25.8m, or 2.7% higher than our forecast (assumptions: effective tax rate=20%, PATMI/PAT=80%). Poor results from associates and JV (-S$27m YoY) dragged PATMI, of which: 1) S$14m loss came from Tiger Airways, and 2) weaker performance from engine repair and overhaul centres caused profits from JV to decline by S$11m.

Outlook just got more challenging

Passenger revenue declined on the back of weaker yields and unanticipated events (e.g. Thai unrest, disappearance of MH370) that depressed travel demand in key Asian markets, while airfreight market continued to be haunted by overcapacity. Though the current political stability in Thailand after the coup will favour pickup in travel demand again, the loss of Chinese passengers travelling to Singapore-Malaysia-Thailand in the MH370 incident aftermath is unlikely to be reversed soon. Safety is also at the top of passengers’ minds now given the recent spate of air travel incidents, which we think will suppress travel demand for the time being at least. Further travel demand dampener will come from renewed economic uncertainty from China and Eurozone.

Pressure on yields to continue

We think aggressive promotions and capacity addition will continue to pressure yields. But given the moderation in QoQ yield declines, we use a higher 0.85x P/B-net cash (previous: 0.77x), which is 1 s.d. instead of 2 s.d. below 2-year historical, and derive S$9.97 FV estimate (previous: S$9.50). Maintain HOLD.

Source: OCBC Research - 31 Jul 2014