• 1QFY17 mainly driven by cheaper fuel
• Deteriorating yields to persist
• Downgrade to HOLD

Recorded S$52m in one-off restructuring cost from VAH

Singapore Airlines’ (SIA) 1QFY17 revenue fell 2.1% YoY to S$3.65b as parent airline recorded a 3.7% and 1.7% decline in passenger yield and carriage, respectively, but partially offset by growth in operations from Scoot and SilkAir. 1QFY17 revenue also recorded one-time credit of S$151m due to change in accounting method in recognizing unutilized tickets.

SIA cargo worsened as yield fell 17.4% YoY but partly mitigated by 6.4% growth in volume. SIAEC also came in weaker but recorded one-off divestment gain less provision of S$156.7m. However, 1QFY17 operating expenses fell 4.4% YoY to S$3.46b, as net fuel cost fell 28.5% YoY on 28% drop in average fuel price and lower hedging loss.

1QFY17 ex-fuel costs rose 8.3% YoY mainly due to capacity expansion at Scoot and SilkAir and impact of stronger USD. Consequently, stripping out one-off items, SIA’s 1QFY17 core PATMI came in at ~S$38m, compared to net core loss the same period a year ago.

Challenging outlook on weakening yields

Looking at the industry environment ahead, we believe cheaper jet fuel alone is unlikely enough to sustain earnings for SIA mainly due to:

1) industry-wide deteriorating yields,

2) expected increase in expenses with capacity growth in Scoot/SilkAir,

3) increasing capex with new cabin products in CY17, in addition to on-going retrofitting of aircraft with new cabin products already previously introduced, and

4) potential delay in delivery of A350s.

We believe weakening yields are likely to persist as Chinese carriers boost long-haul capacity to Europe and the North America, while Gulf carriers continue to increase capacity to Europe. Brexit made global economic outlook more uncertain, and so is air travel demand, even as GBP and EUR depreciates against other major currencies.

The silver lining is SIA’s low cost carriers (LCCs), where yield pressures are less severe. Even so, we think Scoot’s growth will not be enough to offset yield weakness in parent airline and SilkAir.

Lower FV of S$11.56

On weaker yields outlook and expected increase in expenses, we cut our FY17F/18F EPS by 1.4%/6.4%, respectively. Consequently, we downgrade SIA to HOLD as our FV drops from S$12.00 to S$11.56, based on 1.0x FY17F P/B (- 0.5SD 9-year mean).

Source: OCBC Research - 2 Aug 2016