SINGAPORE (Apr 18): UOB KayHian now believes Singapore Airline’s B737 Max aircraft is likely to remain grounded beyond the research house’s initial July estimate.

Six of SilkAir’s B737 Max aircraft -- accounting for 20% of its current seat capacity -- have been grounded by SIA since mid-March. Two B787-10 jets have also been grounded due to wear and tear on engine blades.

On Apr 5, Boeing announced it will be reducing the production of B737 Max aircraft from 52 to 42 aircrafts monthly. UOB says this means the airline does not expect a quick solution and also could be expecting further order cancellations.

While SIA should be compensated for loss of revenue, UOB believes there is downside risk to revenue, profits and cash flow, given capacity constraint will worsen with the grounding of two of SIA’s nine B787-10 aircraft while future delivery of 38 outstanding orders could also be affected due to engine shortage.

UOB is maintaining its “hold” on SIA. “We continue to value SIA on an SOTP basis, with the airline operations valued at 0.75x book value. Our fair value remains at $10.10. Suggested entry price remains at $9.00,” says analyst K Ajith in a recent report.

“We have made marginal changes to our net profit assumptions for FY19 (+1.5%) and FY20 (+2.5%) due to slightly higher-than-expected full-year operating statistics,” says Ajith.

To recap, group overall passenger traffic in 4Q19 remained robust, with SIA’s passenger traffic rising 6.6% y-o-y for March and 8.8% y-o-y for 4Q19. However, cargo traffic declined y-o-y for seven straight months so uncertainty regarding the grounded aircraft is likely to limit upside over the next three months.

SIA also saw an 8.8% y-o-y rise in passenger traffic in 4Q19. SIA’s passenger carriage rose 7.8% y-o-y indicating strong underlying demand. Passenger load factor however declined 1.2 ppt y-o-y in March but edged up 0.5 ppt y-o-y in 4Q19.

Except for West Asia and Africa, there was a broad-based decline in pax load factors for the parent airline, with flights to and from the Americas showing the biggest y-o-y weakness of 3.4ppt in March. SIA indicated that the 1.9% decline in SilkAir’s capacity was due to B737 Max’s temporary withdrawal.

Cargo traffic declined y-o-y for seven straight months, while load factor fell y-o-y for five straight months. Cargo load factors declined 2.2ppt y-o-y in March. All routes reported lower cargo load factors in Mar 19, with South West Pacific registering the largest decrease of 4.1 ppt y-o-y mainly due to weakening global PMI and slowing intra-Asia trade.

Although YTD rise in jet fuel costs to US$82.60/bbl also poses risk to profitability, Ajith says this is in line with his estimated average fuel price of US$82/bbl for FY20. SIA has also hedged 65% of jet fuel requirement for FY20 at US$74/bbl. Every US$5 rise in average jet fuel price will result in a $297 million change in PBT for FY20, estimates UOB.

As at 3.16pm, shares in SIA are down 8 cents at $9.80.