• Falling passenger traffic at parent airline
• Expanding partnership with Lufthansa
• Maintain HOLD

Fall in PLF across all passenger airlines

Singapore Airlines’ (SIA) Oct 16 operating results saw passenger capacity (available seat kilometres or ASK) growth outpace passenger traffic (revenue passenger kilometres or RPK) growth across all its passenger airlines. As a result, overall passenger load factor (PLF) for Oct 16 fell 2.1ppt YoY to 76.7% as capacity grew 3.6% while passenger traffic increased at a slower pace of 0.8%. For the parent airline, falling RPK persisted through Oct 16, as it posted a decline of 3.1% YoY on weak demand across all regions against a 1.1% reduction in capacity, resulting in 1.6ppt drop in PLF to 77.4%.

For SilkAir and Scoot, RPK grew 5.3% and 49.1% YoY, respectively. However, as ASK increased at a faster pace, PLF at SilkAir and Scoot fell 0.7ppt and 10.1ppt to 67.3% and 75.1%, respectively. SIA Cargo, however, was the only one that posted positive growth in PLF as demand outpaced capacity changes, across all regions except for West Asia and Africa as well as South West Pacific. In our view, SIA Cargo’s positive results were likely derived at the expense of cargo yields.

Improving connectivity between SIA and Lufthansa

SIA also recently announced further expansion of its partnership with Lufthansa Group (Lufthansa) by adding new codeshare destinations. Recall that in Nov 15, SIA and Lufthansa signed a wideranging partnership agreement to operate on a JV-basis, on flights between Singapore and key Europe routes, with scope for cooperation in other key markets such as Southeast Asia and Southwest Pacific, in a bid to improve connectivity of both airlines.

Unchanged FV of S$10.22

That said, we believe this JV may help mitigate but is unlikely to overcome the challenges SIA is currently facing. We expect the weak yields environment to persist on overcapacity and aggressive expansion by the Chinese carriers amidst tepid economic growth conditions. Keeping our forecasts unchanged, we maintain our HOLD rating with an unchanged S$10.22 FV.

Source: OCBC Research - 18 Nov 2016