• SIA share price gained 1.8% in Jan, ahead of the 3Q24 earnings report to be announced on 20 Feb. Passenger volume in the seasonally strong quarter rose 19% YoY, slower than 2Q24’s +29% growth.
• SIA passenger load factor in Dec fell 0.3% YoY, the first decline since Sep 2021. This could lead to lower fares to fill seats. Cargo volume returned to negative growth in Dec (-0.9%) after 4 months of YoY gains. We expect travel demand to ease after the Dec peak quarter. Cargo recovery is clouded by weaker economic conditions and lower manufacturing output from Asia.
• We are UNDERWEIGHT on air transportation.

Review

SIA Dec passenger load factor slipped 0.3% point YoY, the first decline since Sep 2021, pointing to peaking air travel demand. The biggest decline was on the South-West Pacific route (-3.1 ppt). European routes fell for the 8th consecutive month. Passenger seat-km was just 4.8% below Dec 19’s level. Cargo volume fell in Dec (-0.9% YoY), after 4 months of YoY increase. 

Brief capacity reduction from the grounding of B737 Max 9 planes. The industry faced disruptions for three weeks when the FAA grounded 171 Boeing 737 Max 9 planes after Alaska Airlines’ Jan 5 incident. This affected not just the US carriers, which operate the biggest B737 Max 9 fleet, but also their code-shared partners and connecting routes.

Continued recovery in China air travel demand. China Dec international passenger volume rose 10-fold YoY, though still 37% lower than Dec 19. Cargo volume surged 43% YoY and was 34% higher than pre-Covid level.

Total market cargo volume grew at a stronger 8.3% YoY in Nov, according to IATA. The North American market recorded its first positive growth since Feb 22. The Red Sea crisis that has affected shipping routes through the Suez Canal might have diverted some time-sensitive cargoes to air freight. It could also signal inventory rebuilding by the manufacturers.

Outlook

Passenger-load factors are expected to moderate after the peak Dec quarter. The rebound in cargo volume might be short-lived, as air cargo rates and sea-freight rates are beginning to normalise.

Boeing’s equipment concerns could drive more maintenance and inspections for aircraft and parts. With tight hangar capacity and skilled manpower, MRO operators could book more orders and higher rates.

Recommendation

SIA (SIA SP, REDUCE, TP S$5.45) Our TP, at 1x FY24e P/B, takes into account an ex-growth operating environment with fading travel demand.

SATS (SATS SP, REDUCE, TP S$2.23) SATS is working to refinance debt to lower its cost of borrowing. The improvement in core aviation earnings could be eroded by higher interest expenses and subdued cargo volume growth in Europe and the US.  

SIA Engineering (SIE SP, Not Rated) Demand for MRO work for aircraft inspection and parts will only grow as the authorities impose more stringent inspections on aircraft equipment.

Source: Phillip Capital Research - 1 Feb 2024