Sadly, Singapore Airlines' cargo unit will churn out more losses

It has already shed 3.5% in yields.

According to Nomura, SIA’s cargo business will likely remain loss-making owing to weak demand, with a 1H13 operating loss of SGD99mn as cargo demand and yields declined by 4.7% and 3.5% y-y, respectively.

Here's more from Nomura:

We attribute the loss to weak global air cargo demand, as customers are focusing more on low-cost transportation alternatives. At the 2Q13 analyst briefing, management painted a bearish tone for its cargo outlook citing weak global economies.

However, on the positive side, management said it is acutely aware of the problems and is withdrawing capacity, with its recent announcement that it will park one of its cargo freighter aircraft from Jan 2013 to May 2014, of its total fleet of 13 cargo aircraft.

We estimate SIA’s cargo business will remain loss-making in FY14F, as we estimate cargo yields will decline by 1% y-y, following a 5% y-y decline in FY13F.

Cargo traffic at Changi Airport has declined of late and remained stagnant through most of 2012. In the first nine months of 2012, Changi Airport cargo traffic fell by 1.3%, according to Changi Airport statistics.

With recent Changi Airport data also showing no signs of recovery (October cargo down 8% y-y), we think that a recovery in freight volumes may be delayed.

However, Nomura’s economics team forecasts show a rebound in Singapore’s GDP for 2013F after bottoming out in 2012F, which should support cargo volumes and possibly lead to a recovery going into 2013F, in our view, given GDP growth has been a leading indicator of cargo volumes historically.

That said, the recovery momentum would likely be anaemic, given that our economics team forecasts Singapore GDP growth of only 2.4% y-y for 2013F, after downgrading from 4.2% in November. Cargo accounts for 17-18% of SIA’s revenue but a large part of the losses – hence, a recovery in cargo would be a positive for earnings, albeit very slow.