• Scoot turned profitable
• Partnerships to counter competition
• Beneficiary of cheap jet fuel

Yields still weakening

Singapore Airlines’ (SIA) 3QFY16 reported PATMI improved 35.7% YoY to S$275.6m, on the back of higher operating profit, driven mainly by improvements from parent airline, SilkAir and Scoot, which turned in its first ever operating profit since its launch in 2012. Stripping out disposal gains of S$53.3m arising mainly from SilkAir’s sale and leaseback of four 737-800s, 3QFY16 PATMI YoY growth is 7.9%.

3QFY16 group revenue fell 3.9%, or S$158m, to S$3.94b due to a 4.6% drop in passenger yield and a 13.5% decline in cargo yield; partially offset by higher carriage. 3QFY16 total operating expenses declined 7.6% YoY to S$3.65b, largely due to lower net fuel costs (-23.7%), as average jet fuel price dropped by a material 41.1%. However, fuel savings were partially offset by strengthening of USD against SGD, hedging losses, higher tax expense, impairment of aircraft and weaker results of associated companies.

Partnerships and higher-yielding products the way forward

Competition will intensify as Gulf carriers, mainly Emirates and Qatar Airways, are able to offer lower fares for a prolonged-period, especially on the Asia-Europe routes. We believe this will result in a persistent low-yield environment for the airline industry. However, over the longerterm, we believe SIA’s efforts in multiple fronts will certainly help mitigate and could even overcome such competition by:

1) forming strategic partnerships with other airlines (e.g. the most recent one was with Lufthansa) to counter competition on its key routes;

2) offering higher-yielding products such as premium economy class to counter declining yields;

3) buying fuel efficient A350s for parent airline and B787s for Scoot to lower its unit costs to improve operating margins; and lastly

4) unlocking synergies to capture interlining traffic between Scoot and Tigerair (i.e. to replicate the synergy between parent airline and SilkAir).

Increase FV; maintain HOLD

All said, before these efforts start to bear fruits, we expect pressures on yields to weigh on SIA’s performance in the near term. However, we expect cheaper jet fuel to help boost SIA’s bottom-line and raise our FY17F PATMI by 24.2%. Rolling forward our valuation to 1.0x FY17 P/B, our 12-month FV estimate increases from S$11.45 to S$11.70. Maintain HOLD.

Source: OCBC Research - 11 Feb 2016