SIA and SATS to suffer from flight cancellations and capacity cuts

Changi airport traffic could plunge, which affects most of the firms’ operations.

Rising fears on the novel coronavirus (nCov) outbreak have led to numerous flight cancellations and capacity cuts, which is expected to crash on Singapore Airlines’ (SIA) and SATS’ profitability for 2020, according to a note by UOB Kay Hian.

“Overall, there is a possibility that traffic at Changi could fall by that quantum over a two-month period. SATS and SIA would be most impacted,” said K Ajith, analyst at UOB Kay Hian.

The report is projecting SATS’ H2 2020 net profit to decline by 21% YoY, as 80% of SATS’ revenue are from the aviation sector and labour cost accounts for 53% of opex. Furthermore, the reduction in flight capacity to and from China along with a delay in opening of factories will also hit the firm’s revenue from handling air cargo during February and March.

However, its earnings may still recover in FY2021 after the virus gets contained.

Meanwhile, SIA’s FY20 net profit could go down by 29% to $483m. Its available seat capacity (ASK) from China to Singapore flights is estimated to be marginally under 10% from February to end-March amidst visa suspensions of Chinese tourists. In addition, the report added that the estimated seat capacity to China could be 12-14% for Changi Airport in 2019.

SilkAir’s and Scoot’s traffic are expected to decline by a greater quantum as the carriers have a greater share of capacity towards China. Yields could also be affected due to a decline in corporate travel.

Lesser flight arrivals at Changi could also hit SIA Engineering’s earnings, the report noted that cost savings initiatives could buffer the impact of lower revenue in H2 FY20.

“Line maintenance is a key earnings driver for SIAEC, accounting for the largest operating margin. A decline in flight arrivals, albeit for a two-three month period, would still impact margins. However, we do not expect SIAEC to swing to a loss in 4QFY20 due to ongoing cost saving initiatives,” Ajith said.