Challenging times. At last week's analyst briefing,Management highlighted that it has adopted a load active strategy by having more promotions, which may further pressure overall yields in the near term. Given the recent launch of Scoot potentially giving rise to some cannibalization, competition from Middle East carriers and the proliferation of low cost carriers, it would be tough for a premium carrier like SIA to increase yields to pre- crisis levels even when the outlook turns positive. While current the strategy of improving loads at the expense of yield seemed to have buoyed earnings in 1QFY13 after consecutive quarters of declines, we do not think investors may be too excited as the airline's pace of profits has been weaker than they had anticipated. The drop in yields was felt in the premium and economy segments, notably on flights to/from Europe and America. Asia was not also spared, although the impact on yields was not as bad.

No change in capacity guidance. The recent changes in SIA's winter schedule will not in any way change management's 3% capacity growth guidance. In an announcement last week', management said it had reduced the flight frequency on its European routes (except London) and at the same time increased the frequency on its flights to London, Perth and Mumbai. In the meantime, flights to San Francisco via Hong Kong and also to Tokyo will be served by the airline's A380s instead of B777-300s.

Trimming yield outlook and profits. We trim our passenger yield forecast, for which we now expect a 1% drop in Rev/RPK to 11.70 cents (1QFY13: 11.4 cents, down by 3.4% y-o-y) from 2% growth earlier. Similarly, in view of the still-sluggish cargo outlook, we are also trimming our cargo yields forecast assumption from a 5% growth to minus 2%. With an unchanged assumption of a jet fuel price average of USD130/barrel, our earnings estimates for FY13/FY14/FY15 are lower by 39%/26%/27% respectively.

Downgrade to NEUTRAL. Though there will be y-o-y improvement in SIA'searnings, the potential upside will not be as exciting as we anticipated earlier. We downgrade SIA from BUY to NEUTRAL, with a lower FV of SGD11.17, premised on 1x on its lower FY13 book value, with ROE of only a meager 3%. Downgrade to NEUTRAL.

Source: OSK