Singapore Airlines’ S$36m operating loss dents its stock price

• Weak 1QFY12 and positioning by Qantas will impact stock price until 2QFY12’s better clarity. Post-results, Singapore Airlines (SIA) was de-rated as the market was concerned about the airline’s S$36m operating loss in 1QFY12. Subsidiary SilkAir reported a S$21m profit in the quarter and this suggests that SIA was losing money on long-haul trips. Weak guidance and Qantas’ plan to set up a rival premium carrier in Singapore has dented sentiment further. A key catalyst would be firmer 2QFY12 earnings, given that it is seasonally a stronger period for pax and cargo traffic.

• SIA’s new long-haul low-cost carrier to be named Scoot. The new airline will use SIA’s B777-200s to operate medium to long-haul flights. There are two reasons for the move to go long-haul: a) Jetstar’s plans to expand long-haul flights from Changi, b) the realisation that the segment offers growth potential. We concur with this strategy as there is a greater propensity for the emerging Asian middle class to travel budget rather than premium. However, there could be some cannibalisation, especially on outbound flights from Singapore. Potential destinations 5-7 hours away include Northeast Asia, Australasia and the Middle East.

• Codeshare with VA will drive premium traffic. The code share appears directly focused on boosting Virgin Australia’s (VA) and SIA’s premium traffic. Under the JV, both VA’s and SIA’s customers will have reciprocal lounge rights and will be able to connect via a single ticket. Australia accounts for 9% of global airline revenue, but this could rise to 16-18% if the entire kangaroo route is taken into account.

• Expecting a weak cargo environment in 2H11. In 1QFY12, cargo traffic grew 4.2% yoy. For FY12, we expect cargo growth to slow down to just 2.2% amid the weak economic outlook for the US and Europe.

• Maintain BUY. We have lowered our FY12 net profit by 14% to S$743m and as a result lowered our target price from S$14.10 to S$12.70. SIA is now valued at an average of 1.0x P/B and a 10% discount to long-term mean EV/EBITDA of 6.3x.