SINGAPORE (May 21): Analysts are now more positive on Singapore Airlines than any time over the past three years given higher fuel prices could alleviate some of SIA’s competitive pressure from Chinese carriers.
The SIA group has hedged 45% of its jet fuel requirements at US$65/bbl jet fuel for the next five years, against spot jet fuel price of US$90/bbl, says CGS-CIMB Securities.
While SIA will still be negatively affected by pricier oil, its hedging position gives it a competitive advantage against Cathay Pacific, and the unhedged Chinese and Middle Eastern Gulf carriers.
“We view this as a strategic move, especially given that Chinese carriers do not hedge jet fuel,” says UOB analyst K Ajith in a Monday report.
In previous years, yields were depressed due to aggressive capacity additions by Chinese carriers. Now, with lofty fuel prices, Chinese carriers are unlikely to lower ticket prices aggressively at the expense of profitability.
After five years of flat capacity, SIA mainline is guiding for 5% ASK (Available Seat Kilometres) growth in FY19F, as it is confident that it has the right aircraft to expand. The A350ULR will be deployed for the resumption of non-stop Los Angeles and New York flights while the 787-10 and the regional A350-900 will be deployed for medium-haul flights.
“We are banking on SIA mainline delivering matching 5% RPK (Revenue Per Kilometre) growth in FY19F, with its new A380 and 787-10 products helping to grow its pool of customers,” says CGS-CIMB analyst Raymond Yap in a Friday report.
For the SIA group’s passenger business as a whole, management has guided for “strong advance passenger bookings” and “continued stabilisation in yields” despite “intense competition and cost pressures”.
“We expect SIA mainline to build on the 1% y-o-y increase in 4QFY18 yields (the first yield increase in three years) as we head into FY19F,” says Yap, “Rising fuel prices would no doubt impact SIA’s unhedged competitors more than SIA itself, and may lead to an industry-wide rise in ticket prices which SIA can ride on.”
With long-term fuel hedges working in its favour, analysts say management can now focus on improving its yield and ancillary revenue. By integrating SilkAir with mainline SIA after the regional carrier has completed a US$100 million cabin upgrade, the plan is to offer a differentiated product and open up new revenue opportunities.
“The integration of SilkAir and the investment in new A380 seats are aimed at maintaining SIA’s edge,” says Ajith, “The commencement of non-stop flights to San Francisco, New York and Los Angeles were also cited as attempts aimed at strengthening SIA’s premium positioning.”
As for new revenue opportunities, SIA has highlighted the partnership with DFASS and SATS to grow e-commerce revenue as well as new flight training JV with Airbus as examples. SIA also noted that Krisflyer revenue from sale of miles to non-airline passengers had more than doubled over the past few years.
Ajith now expects SIA’s net profit to hit the $1 billion mark in FY19. “We raise our target price from $11.90 to $12.60,” says the UOB analyst.
“We maintain ‘add’ but reduce our target price from $12.05 to $11.75 due to the negative earnings impact from higher oil prices,” says CGS-CIMB’s Yap.
As at 12.44pm, shares in SIA are up 13 cents at $11.69 or 14.3 times FY19F earnings by UOB.
