Singapore Airline's stock rating still in limbo

Flat passenger operating data for the past two months and soaring jet fuel prices are making the carrier’s stocks unattractive despite its 18% revenue increase for 2QFY11 to S$3,631.2m.

In a statement, Phillip Securities Research said the airline’s revenue for the quarter was fairly in line with its estimates after incorporating the operating statistics announced for the quarter. The improved revenue is primarily driven by improving passenger yield (2QFY11:11.8¢ vs 2QFY10:9.8¢).

The research firm noted, however, that the passenger operating data had been fairly flat on a y-y basis over the past two months. “In our initial estimates, we expected a stronger y-y RPK growth of 7% for 2QFY11 based on expectations of a stronger demand for air travel due to gradually improving business and economic conditions. However, the actual data for the quarter showed that the y-y growth was merely 1.5% as compared to the same quarter last year,” it said.

On an YTD basis, the demands for passenger travel were still below the pre-crisis levels in FY08 & FY09. However, the Passenger Load Factor (PLF) for the quarter was 80.3%, which is higher than the research firm’s assumption of 79.0%. Cargo demand for the last quarter had been within our expectations at a y-y FTK growth of 8.8%.

“While we expect profits for SIA to be sustained for the rest of the financial year, we do not think that the price of the stock is attractive at the moment. Phillip Securities said.“

Meanwhile, SIA expressed confidence over the advance bookings for the coming months and are optimistic that the demand is holding up to match the 5% increase in passenger capacity for the next half of the financial year. During the media and analyst briefing held yesterday, SIA’s management also guided that the yields would be expected to be held steady or could grow sequentially amidst at a slower pace. This is in line with our revised expectations of a fairly flat yield assumption for the rest of the financial year as we foresee yield to be kept under pressure from increasing capacity across the industry. We also expect minimal impact from fuel hedging costs as management guided that they are currently hedging on the lower end of their forecasted fuel requirements.

In reply to queries from the media and analysts with regards to the potential impacts from issues with A380 and Rolls Royce Engines, SIA advised that 3 of the planes will have an engine replaced as a pre-cautionary measure and there would be no flight cancellations. As the replacement of engines is expected to take 24-48hrs, we foresee minimal disruptions to our capacity projections.

With regards to a decision by the European Commission to fine its subsidiary, SIA Cargo, for anti-competition cartel price setting, SIA expressed that they intend to contest against the allegations and maintain that they do not engage in anti-competition activities. However, they could make provisions for the fine of €74.8million (S$134million) in the current financial year.