SIA's operating stats for August were commendable,  with  RPK  growing  by  8.7% y-o-y  and  8.1%  YTD.  Nonetheless,  the  cargo  numbers  fell  for  the  fifth  month  on the back of a weak macro outlook. While we expect 2H to be a seasonally stronger period  for  travel  and  cargo  shipments,  management  points  to  yields  remaining under  pressure  due  to  its  promotions  to  stimulate  demand  amidst  intense competition.  With  our  earnings  forecasts  unchanged  for  now,  we  maintain NEUTRAL on SIA, as well as our SGD11.17 FV, premised on 1x P/B.

Commendable. SIA's revenue passenger kilometre (RPK) for the month of August was on track with our forecast. RPK grew 8.7% y-o-y and 8.1% YTD, although the numbers were  down  2.6%  q-o-q  on  a  seasonally  weaker  month  as  the  summer  season  ended. Overall  passenger  loads  perked  up  1.7pts  to  78.3%  on  promotional  activities.  A  closer analysis however reveals that East Asia passenger loads dropped 2.2pts to 77.3% due to the earlier Ramadhan this year while South West Pacific loads were also weaker as capacity  growth  exceeded  demand.  Meanwhile,  load  factors  improved  across  other regions due to aggressive promotions. Silk Air continued to see robust growth, with RPK surging 21.9% y-o-y and 24% YTD, but q-o-q the numbers were only marginally higher by 0.8%.  

Cargo  continues  to  suffer. The  cargo  numbers  remained  weak  as  we  expected,  with freight tonnage carried dropping by 4.3% y-o-y and 4.8% YTD, for the fifth consecutive month of contraction. On a q-o-q basis, tonnage carried weakened for the first time for
the year, dipping 5.7% owing to a weak macro outlook.   

Outlook for 2H. We expect yields to remain under pressure but anticipate the numbers to  improve  in  2H  on  the  back  of  seasonally  higher  demand  for  air  travel  and  cargo shipments. However, management still sees yields (rev/RPK) remaining under pressure amid  stiff  competition.  This  suggests  there  is  further  downside  to  our  numbers.  Our sensitivity  analysis  suggests  that  a  0.1  cent  drop  in  yield  will  reduce  earnings  by  as much as SGD80.7m, or a 20% reduction to our estimate, given the low earnings base. We are assuming that yields would drop by 0.12 cent, or 1%. Furthermore, oil prices are still  rising  and  putting  increasing  pressure  on  earnings.  As  jet  fuel  costs  account  for 44.6% of the airline's total costs, and a USD1 increase will erode earnings by as much as SGD37.5m, equivalent to 9% of our current estimate.  

Maintain  NEUTRAL.  With  our  estimates  unchanged,  we  maintain  NEUTRAL  on  SIA and our FV of SGD11.17, premised on 1x P/B. Within our aviation coverage, we prefer AirAsia (BUY, FV: RM3.91) and airport operator MAHB (BUY, FV: RM7.53).

 Source: OSK