SIA's profits may continue descent as passenger yields lose altitude

It was also hit by a 24% YoY hike in jet fuel costs.

Singapore Airlines’ (SIA) interim profits dragged in Q2 FY19 and may continue to do so as passenger yield fail to improve, according to a report by DBS Equity Research.

Passenger yield for the flagship carrier declined 1% YoY, whilst a one-off share of losses at its associate Virgin Australia (VAH) led to a 80.9% nosedive in profits for Q2 to $56.4m. Interim earnings fell 81% YoY to $196m.

Also read: SIA Q2 profits dropped 80.9% to $56.4m in Q2

“With fuel prices at a sustainably higher level currently, passenger yields need to improve for SIA to post returns equal or better than its cost capital,” DBS analyst Paul Yong said.

Analysts also noted that SIA cut its interim dividend from $0.10 to $0.08 as a result amidst a 4.2% growth in revenue to $4.06b from $3.85b.

Flown revenue rose $422m thanks to a 5.8% increase in passenger flown revenue and a 7.4% rise in cargo flown revenue, according to SIA’s financial statement.

“Passenger flown revenue was lifted by an 8.8% increase in traffic,” OCBC Investment Research’s report added. “Passenger unit revenue grew 1.3% as transformation efforts yielded positive results.”

Meanwhile, SIA’s earnings before interest and tax (EBIT) declined 35% YoY to $233m even as Q2 revenues improved on the back of higher carriage across its key segments.

“Fuel costs rose by 24% YoY to $1.16b,” Yong noted. “Non-fuel costs rose at a slower pace than revenue growth at 4.4% YoY.”

CGS-CIMB’s report however noted that Scoot’s revenue per available seat kilometres (ASK) capacity (RASK) rose YoY for four consecutive quarters.

“SIA’s new revenue management system and philosophy of maximising RASK has shown results,” CIMB analyst Raymond Yap said. “In previous oil price upcycles, SIA has typically struggled to fully pass on higher fuel costs due to strong competition in the Asian landscape.”

Yap also highlighted that SilkAir may need to rethink its expansion strategy as SIA’s gamble did not deliver the results it had hoped for. “SilkAir’s yields have declined YoY for the past 12 quarters, and alarmingly, RASK has also continued to decline over the same period,” he added. “It is a clear indication of significant overcapacity in the price range that SilkAir occupies. Half of SilkAir’s current fleet may eventually be transferred to Scoot.”

Whilst analysts agree that SIA will continue to face headwinds due to a combination of jet fuel price hikes, higher Changi airport taxes and a weak business cycle, they noted that SIA’s recovery initiatives to lower costs and sustain improved revenues may result in a rebound in core earnings. “SIA’s transformation program has started to bear fruit as non-fuel costs across all segments have fallen and further gains from the program could help to alleviate cost pressures and further optimise revenues,” Yong said.