• TATA-SIA: 5/20 rule remains a key concern
• Air NZ–SIA: Need to balance passenger load and yield
• Maintain HOLD

Recent development on TATA-SIA

The new proposed new airline of TATA-SIA will be called Vistara and is expected to improve SIA’s coverage of India’s aviation market. According to Airports Authority of India, total passenger traffic registered a 5.8% YoY increase in May-2014 to 16.13m. The progress to obtain AOP is still on track with Vistara to only launch commercial flights in October-2014. However, as the current political situation stands, the 5/20 rule states that Vistara still has to satisfy the criteria of operating five years of domestic flights and having a fleet of at least 20 aircrafts in order to operate international flights out of India. We believe this current rule is unlikely to change due to the intensifying lobbying by the group of airlines including Air India and Jet Airways. With the strong domestic competition to further suppress the yield, we do not expect profitability in its initial years of operation. Hence, we think Vistara will not be a growth driver for Singapore Airlines (SIA) in at least the next few years.

Clear potential from Air NZ-SIA

The recent approval of an Air NZ-SIA alliance will see the two airlines cooperating through codeshare travel on their routes. SIA will commence its first A380 flight from Singapore to Auckland in October-2014, and with five extra weekly flights using B777-300ER, SIA will operate 12 flights weekly to Auckland. We believe the reciprocal codeshare relationship presents a potential for SIA to capture the market for passengers travelling between New Zealand and SIA’s global network, given that passenger arrivals from South-East Asia to New Zealand grew 18% over last 12 months. However, we remain cautious on its impact over the nearer term as it is still too early to tell whether the increased capacity of an estimated 100,000 seats per year will find the right balance between passenger load and yield. We do not expect any significant impact in SIA’s FY15 results though we believe this alliance could contribute to growth going forward.

Significant impact unlikely in the short term

We believe the current pressure in yields due to competition and the long-term nature of these alliances will not provide any significant impact on its results in FY15. The regulations in India also remain a key concern. Maintain HOLD with an unchanged fair value estimate of S$9.97.

Source: OCBC Research - 25 Aug 2014