SIA's cargo revenue could be hit by US-China row

Cargo loads already fell 3.9% due to reduced traffic in all regions.

Despite improvements in cargo capacity, Singapore Airlines’ (SIA) cargo loads have fallen 3.9% in a year due to reduced cargo traffic across all route regions. Things could still go much worse for the airlines due to trade tensions between the US and China, UOB Kay Hian said.

UOBKH analyst K Ajith noted that in FY2018, SIA’s cargo division registered the largest gain in operating profits among the airline subsidiaries. This performance could reverse in FY2019 for three reasons.

Ajith noted that there has been growing concerns of a trade war between the US, China, and European states; a 3.3% decline in NODX to China for January to May 2018; and SIA’s cargo traffic decline of 1.9% in the first two months of FY2019.

In view of increased trade protectionism from the US and tentative signs of economic slowdown in China, exports to China are expected to decline, Ajith noted and added, “China is Singapore’s largest export market, having accounted for 18% of NODX in 2017, and reduced exports to China could potentially lead to lower NODX.”

NODX to China has already been on a downtrend, the analyst observed. “For the past year, SIA’s cargo traffic had a positive correlated to NODX and a potential decline could slow down recovery for SIA’s cargo traffic,” he said.

As a forecast, Ajith said, “We believe that these are causes of concern for weakening cargo traffic for FY2019, which will fall below our expectations of a 5% increase in cargo traffic.”

Meanwhile, pax load factors for SIA, SilkAir, and Scoot rose 2.1%, 3.1% and 3.9% YoY respectively for May 2018. Load factor for parent airline rose across all regions except Europe due to higher capacity injection. Year-to-date, pax load factors for SilkAir and Scoot rose 4.2% and 2.7% respectively YoY.

Ajith noted that the improvement in SIA’s pax load factor is marginally above expectations. “For FY2019, we have assumed SIA’s pax load factor to decline by 0.2%. However, YTD pax load factors have risen by 1.9% YoY, indicating strong underlying demand for travel,” he said.