Friday, July 27, 2012
SIA: UOBKayHian finds little reason to cheer following a post 1QFY13 results briefing. Here are some of the briefing highlights: 1) On pax yields – Management indicated that it has to be "realistic" and was prepared to cut ticket prices to grow revenue. This is departure from previous stance in protecting yields. SIA is now a price taker, rather than setter. The airline attribute the 3.4% yoy decline in yields to promo fares across both back and front end seats, which may become the new normal. SIA also indicated that corporates have been tightening their travel policy and are now more price sensitive. 2) SilkAir's pax yields - Overall profitability had declined by 14% despite a 24% yoy increase in traffic. This was again due to promo fares. Actual average fares actually rose 2.3% but the longer distances chalked up by SilkAir, yields fell 5.6%, implying declining marginal revenue from the addition of new routes. 3) Cargo traffic and yields - SIA pointed to a tough market, going ahead and that it will focus on capacity management by parking up to 2 freighters. This should provide a reality check as market has generally been optimistic of a recovery in cargo traffic in 2H12. The decline in yields was also broad based. 4) Fuel- Slightly more than 25% was hedged ~US$120+ per barrel. In 1QFY13, SIA's fuel cost amounted to US$132bbl, which was higher than the simple average for the period. The difference was due to hedging margin and earlier hedge. SIA as such did not benefit from the decline in jet fuel. 5) Scoot - Loads were 80% for Jun, which were lower than expected given that SIA's own loads for the period was 83%. 6) Capital management - SIA has $5b in cash but management but as it had already paid out $1.4b, it may want to preserve cash given the economic uncertainty. 7) On Qantas plans to tie with Emirates – So far nothing has been firmed up yet but the kangaroo route between UK and Australia is one of the highest yielding routes and if Qantas successfully ties up with Emirates, just as Virgin Australia has partnered Etihad, then SIA's positioning as a transit hub would be weakened considerably. The house reiterates its Sell recommendation with a target price of $9.10.