SIA cargo business doing well: CIMB research

. SIA’s April passenger business suffered from lower load
factors from a year ago across most regions, due to events in Japan and the Middle
East, and also because capacity was added faster than demand. Conversely, April’s
cargo load factor was slightly higher than a year ago, as capacity was managed in line
with demand. Despite the challenges facing the passenger business now, IATA
believes that premium travel demand growth will accelerate in 2H as it is well-
correlated with the global economy. The recent 12% decline in jet fuel price from its
high, and SIA’s S$1.20 final and special dividends (ex-date 4 August) could also be
re-rating catalysts. We maintain our earnings forecasts, Outperform rating and target
price of S$16, still based on 11x CY12 P/E.

Takeaways
First, the numbers should be interpreted with a bit of caution because of prior-
year distortions. In April 2010, Iceland ash clouds had caused passenger capacity
and demand to Europe to fall, as airlines like SIA cut capacity and travel was impeded.
Hence, growth numbers look exceptionally high, with passenger ASK capacity growth
of 11.2% yoy (from just 6.4% yoy in March), and passenger RPK demand growth of
7% (from -3.6% in March).

In the cargo business, the distortion came from different Easter dates. Easter fell on 4
April last year, but on 24 April this year. Furthermore, there was an apparent pre-
Easter rush for air shipments last year, which had caused March 2010 demand to be
exceptionally high, but subsequently slumping in April 2010. This year, there was no
such pre-Easter rush, but instead, post-Easter demand is picking up. This would
explain why cargo FTK demand in April 2011 rose a massive 11.8% yoy, when in the
month of March, it had only risen 0.9% yoy.

Second, passenger airline faces headwinds from weaker demand. This is
apparent in the passenger load factor (PLF), which had declined 3% pts yoy in April.
Although SIA faced challenges in April 2010 from the Iceland ash clouds, there have
been even more challenges this year, from the Middle East political violence (PLF to
the region fell 2.6% pts yoy) to the Japanese earthquake (PLF to East Asia down
4.2% pts yoy last month). SIA said during its recent analysts’ briefing that demand to
Japan had slipped 30% from immediately before the earthquake.

Third, cargo business is doing very well. Even if we strip out the distortions caused
by different Easter dates, cargo demand growth is strong. Taking March and April data
together, cargo FTK demand rose 6% yoy, a respectable pace and comparing
favourably with the average growth of 7.7% in the previous year’s March-April.
Capacity is also being managed nimbly and is more or less closely tracking demand.
For the March-April period, cargo load factor declined only 1.5% pts yoy.