Singapore Airlines' cargo yields still vulnerable despite ending loss streak

Main cause for worry revealed.

Worsening glocal cargo revenues due to increasing belly capacity will add downward pressure on Singapore Airlines' cargo yields, according to OCBC Investment Research.

The alert came as Singapore Airlines' cargo division reported its first operating profit after 10 quarters of loss, and is meant to warn investors that the company is "not completely out of the woods yet."

Here's more from OCBC:

Bottom-line hurt by once-off items. Singapore Airlines’ (SIA) 3QFY14 revenue was in line with our expectations (+0.4% YoY to S$3.9b), while PATMI was off (-64.8% to S$50.1m) due to exceptional items and losses from associated companies. The exceptional items were mainly provisions for SIA Cargo’s (SIAC) settlement costs of S$78.3m in the US air cargo class action and fine of S$2.3m in a Swiss air cargo competition law case. In addition, the S$46m one-off items from Tiger Airways arose from impairment in Tigerair Mandala and losses related to assets held for sale in Tigerair Philippines. If these exceptional items and losses from associated companies are excluded, the adjusted PATMI would have increased 12.9% to S$160.9m, which is in line with our expectations. Lower net fuel costs were partially offset by higher staff and other costs which rose in line with increase in capacity, resulting in marginal 0.1% decrease in group expenditure to S$3,724m.

SIAC reverses 10 quarters of losses. SIAC reported operating profit of S$1m after 10 quarters of consecutive losses since 1QFY12, which averaged S$35.7m. While the profit is insignificant to SIA group, it is a positive sign of successful capacity management in face of competing modes of transport and overcapacity within air cargo space. However, global cargo revenues will be worsened by the belly capacity arriving from the improving passenger business, which will add to the downward pressure on cargo yields. Hence, we do not see SIAC as being completely out of the woods yet.

Expect yield pressure to continue. While softening jet fuel prices may alleviate cost concerns, yield pressure will continue to haunt SIA. We maintain our fair value of S$9.50 using P/B less net cash model. As SIA’s share price has fallen by 8% from S$10.25 to S$9.50 since its previous quarter’s results release, we upgrade SIA to HOLD on valuation grounds.