• All three aviation-related counters fell after reporting lacklustre Dec quarter business updates. SIA’s operating profit fell 19.3% YoY; SATS’ EBIT margin of 8.8% was below the mid-teens level pre-pandemic; and SIA Engineering incurred a S$3.4mn operating loss.
• SIA passenger load factor fell for a second month in Jan 24 (Figure 1), though passenger volume surpassed pre-Covid level by 1.5% (Figure 2). Cargo volume surged 19.7% in Jan 24 (Figure 3), a combination of low base in Jan 23, pre-CNY seasonal lift, and tighter sea freight capacity caused by the Red Sea conflict. But volume has eased from Feb.
• We are UNDERWEIGHT on air transportation.

Review

3Q earnings reports disappointed. Higher costs, particularly manpower costs, weighed on an otherwise seasonally strong quarter. SIA’s 3Q24 operating profit fell 19.3% YoY, as yield decline and cost pressure offset strong passenger traffic and cargo load. SATS’ wage bill rose 21% YoY in 9M24, due to the consolidation of WFS’ operations. SIA Engineering was still loss-making at the operating level.

Chinese passenger airlines are allowed to boost their weekly round-trip US flights to 50 from 31 Mar, up from the current 35, according to the US Transportation Department. This would return the market to about one-third of pre-pandemic levels. China was among the last countries to reopen its border. FY23 passenger volume was only about 38% of that in FY19 (Figure 6). An increase in capacity by the Chinese carriers would raise competitive pressure on fares and costs.

Singapore requires flights to use 1% sustainable aviation fuel (SAF) in 2026, possibly rising to 3-5% in 2030. Travellers departing Singapore will have to pay a levy such as S$3 for a flight to Bangkok or S$16 for one to London. SIA and Scoot target using SAF for 5% of the total fuel requirement by 2030. SAF is currently 3 to 5 times more costly than conventional jet fuel. We estimate fuel cost could rise by 20% (assume 5% SAF usage). The levy might not be sufficient to cover the higher fuel costs, unless the cost of SAF falls or levy is raised. But a higher levy could impact the propensity to travel.

Outlook

SIA’s passenger load factors are expected to ease as competing airlines restore flights. For instance, Cathay Pacific added 64% passenger capacity in Jan 24 YoY. Available passenger capacity is now 61.5% of Jan 19’s level, compared with 37% in Jan 23. We also expect lower air cargo volume sequentially as maritime capacity constraints have eased, with more liners resuming the Red Sea route and 3.2mn TEUs new container capacity in 2024 (2023: 2mn TEUs).

Recommendation

SIA (SIA SP, REDUCE, TP S$5.91) Yields are expected to come under pressure as load factor is prioritized to cope with rising costs. The price of jet fuel has risen by 8.9% YTD.

SATS (SATS SP, REDUCE, TP S$2.31): SATS’ operations are at 94-99% of their pre-pandemic level, while flights handled reached 86%. Hence, growth is expected to slow down going forward. It has a further €580mn debt maturing in May 2024 that needs to be refinanced.

SIA Engineering (SIE SP, Not Rated) SIE has signed a lease for 2 hangars at Subang Airport to expand its hangar capacity and lower operating costs. The MRO industry could see a structural shift, with greater deployment of narrow-body aircraft, a higher share of low-cost carriers operating short-haul routes, and faster turnaround demands.

Source: Phillip Capital Research - 6 Mar 2024