Turbulent skies ahead for Singapore Airlines?

Near-term earnings will be shaky due to plummeting yields and anemic demand for European long-haul flights.

While Singapore Airlines has been cutting down its staff bonus and jet fuel costs, it still won't be enough to make up for tepid passenger and cargo market demand. The revenue contributions from Scoot won't kick in until after FY13, which certainly doesn't help the near-term prospects for the airliner.

Here's more from CIMB:

Continued pressure on yields due to promotional activities, and an increasingly weak outlook for European economies suggest that SIA could struggle for a while yet with long-haul travel demand. We think that LCCs remain in a better position to weather the downcycle.

We downgrade our relative call from Neutral to Underperform on better expected returns for FSSTI. We raise our forecasts by around 30% for FY12-13 on better yields as we were too bearish a few quarters ago.

SIA will be announcing FY12 results on Wednesday evening, followed by an analysts’ briefing on Thursday morning. We expect a 4Q core net profit of around S$120m, and a full-year core net profit of around S$400m. Our previous forecasts were too low, and we are raising them in anticipation of the results.

SIA’s 4Q (January-March 2012) ASK capacity grew by 4%, while its RPK demand rose 7% yoy, with its passenger load factor improving 2.1% pts to 77.6%. This was due to an easy comparison base that was affected by Japan’s earthquake. Meanwhile, 4Q’s cargo AFTK capacity dipped 2% but RFTK demand fell an even faster 3% yoy, leading to a 0.7%-pt decline in the cargo load factor to 61.9%. Yields for both the passenger and cargo segments should decline yoy due to
the current weak environment.

However, the impact on profits is partially mitigated by lower staff bonuses than last year, while jet fuel prices also weakened from US$135 in 3Q to US$127/barrel in 2Q.

We do not expect the results to catalyse its share price, as its near-term outlook remains hazy. We also do not expect Scoot to be a material earnings contributor in FY13, since it is a longer-term project.