Mayday, mayday: SIA braces for a depressing load factor

With load factor hardly unchanged QoQ and on given the marginal 1.3% QoQ improvement in passenger numbers amid the flattening yields and a 7% higher jet fuel price QoQ, we see the upcoming 1Q results to be released on 29 June likely to disappoint.

Weakness in passenger numbers persists. System-wide passenger numbers and RPK for the month of June were down marginally by -0.4% YoY. The poor take-up for its new frequencies on existing routes in East Asia and South America led to a weaker load factor, which was lower by 4-ppts y-o-y to 78.8%. However, this is SIA’s highest load factor so far for 2011.

Poor load factor was seen across the board, with East Asia showing the sharpest drop of 8.4ppts on weaker travel demand to Japan. In view of the pick-up during the summer travel period, its m-o-m numbers improved across the board as passenger carriage and RPK rose 2.6% and 3.5% m-om respectively, with load factor notching up 5.2ppts. Q-o-q RPK and passenger carriage jumped 1.2% and 1.3% respectively while load factor improved marginally by 0.12ppts to 75.6%.

For the first time, SIA also disclosed its passenger numbers for Silk Air, for which RPK and passenger carriage grew by strong double digits at 10.3% and 11.9% YoY respectively on the back of 6.9% growth in capacity, which strengthened its load factor by 2.4ppts.

Cargo softens as economic recovery falters. SIA's cargo numbers improved marginally, with FTK only improving by 0.7% in tandem with the weakening pace of recovery in the global economy while tonnage carried was stronger, at 4.5% growth.

Cargo activities in the South West Pacific picked up strongly, with load factor accelerating by 5.6ppts to 59.7% and Europe seeing slightly higher shipments (as load factor improved by 0.6ppts to 70.5%). Meanwhile, the other regions saw negative growth, with East Asia seeing the steepest drop in load factor of 1.5ppts to 58.1% owing to the slowing expansion momentum in the Chinese economy.

Maintain SELL as earnings could disappoint. Both cargo and passengers numbers were in line with our expectations so far. We expect RPK and FTK to grow by 3% and 5% respectively in FY12. With passenger numbers improving only marginally, (by 1.3% QoQ) and on the back of a 7% QoQ increase in jet fuel price hike its load factor is barely changed (Q4FY11: 75.5% vs Q1FY12: 75.6%), we think its Q1FY12 earnings may at best be only slightly better than in the previous quarter.

This is because its breakeven load factor is expected to inch up further on higher jet fuel prices and as yields are anticipated to be flat since competition against the Middle Eastern and low cost carriers heightens. SIA reported a core net profit of only S$170m in 4QFY11, representing 17% and 15% of our and consensus’ FY12 forecasts respectively. Hence, we caution that there could be further downside risk in our FY12 earnings projection.

For now, we continue to maintain our earnings estimates (pending more details at its upcoming analyst briefing on 1 July on its foray into low cost carriers, on which we are skeptical) and reiterate our SELL recommendation, with our FV unchanged at S$12.35, premised on 15x FY12 EPS.