Capacity cuts by SIA Cargo only a stopgap

The new 20% reduction in freighter capacity can alleviate the losses but it won't be enough, says DBS.

The more pressing concern of dismal demand for air cargo, which has been preventing the Singapore Airlines subsidiary from hitting higher load faactors, will persist.

This means earnings and yields will likely to remain lukewarm despite the capacity slashes.

Here's more from DBS:

SIA Cargo, beset by persistent low demand and high jet fuel prices, has decided cut freighter capacity by 20% to curb rising losses. Implementation of the move will continue into the Northern Summer operating season, which starts next month. Management indicated that the air cargo market has been weak for the past 9 months, and we believe forward bookings in the first 6 months of 2012 are likely not strong enough to justify deploying its entire fleet at low load factors.

SIA Cargo has a fleet of 13 Boeing 747-400 freighters. The capacity reductions, which are mainly for long-haul services, will lead to a corresponding reduction in the number of flying hours for each aircraft. SIA Cargo registered operating losses of S$40m for the first 9 months of FY12 (Mar-YE) as it has been operating at sub-breakeven load factors for much of the year. Load factors have ranged in the low to mid 60s (and fell below 60% in Jan 2012, with factory closures in China for Chinese New Year). Breakeven load factors have moved up closer to 70% as fuel prices continue to surge.

This move signals that the demand situation is still quite fragile, amid sluggish US and EU economic growth at best. The cuts in capacity will help SIA Cargo to limit its losses to a certain extent in FY13. But overall, we believe SIA's carriage and load factor performance will remain rather tepid in the near term. In this environment it will be difficult to expect much yield enhancement until demand improves notably. This event is not expected to have a material impact on earnings.