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Slow first quarter for Singapore air transport sector: PhillipCapital

Douglas Toh
Douglas Toh • 4 min read
Slow first quarter for Singapore air transport sector: PhillipCapital
Operating metrics were down in recent months, pointing to a stagnant quarter. Photo: by Kevin Wong via Unsplash
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PhillipCapital’s Peggy Mak has kept her “underweight” rating on Singapore’s air transport sector, amid weaker metrics during a “seasonally lulled” quarter.

In her April 3 report, the research manager notes that Singapore Airlines C6L -

’ (SIA) passenger load factor fell consecutively in February, while cargo volume similarly declined following January's short spike from the Chinese New Year period and the Red Sea conflict.

“It was a similar trend for passenger and airfreight volume at the Changi Airport,” adds Mak.

With the weaker month for the country’s air transport sector, the disparity in valuation has drawn investors to Hong Kong and China-listed peers. 

She continues: “China was the last country to lift border restrictions, and Hong Kong/Chinese carriers,such as Cathay Pacific, are catching up on volume and profitability.”

Asia’s present status

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With the recovery of air travel in Asia, jet fuel prices climbed 12.4% year-to-date (ytd) in tandem, with Mak noting that the sanctions imposed on Russia by Europe and the UK have also reduced the supply and hence raised the price of diesel. 

The research manager adds that another lifting factor to jet fuel prices could come from the prioritisation of diesel output over jet fuel production by more complex refineries.

Meanwhile, although the merger of Air India and the SIA co-owned Indian airline, Vistara, has received conditional approval from the Competition and Consumer Commission of Singapore, it still requires further regulatory and foreign direct investment clearances. 

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On this, Mak writes: “The two airlines undertake to maintain flight capacity at pre-pandemic levels to address concerns that the combined entity would have a dominant share of some routes between Singapore and major Indian cities.”

SIA will own 25.1% of the combined entity in exchange for its existing 49% stake in Vistara and $360 million cash, while the company has also committed to injecting a further $880 million cash into the joint venture (JV).

On SIA’s engineering arm, SIA Engineering Company (SIAEC), $25.1 million will be exited and written off from its participation in Pratt & Whitney’s PW1500G engine Risk-Revenue Sharing Programme (RRSP). 

“Participants are required to share the costs, risks, and revenues of the PW1500G geared-turbofan engine, from its design and development to production (including engine spare parts), post-certification engineering support, marketing and sales, and aftermarket services, including maintenance, repair and overhaul (MRO),” writes Mak.

She notes that the exit would cut SIAEC’s need for further capital injection into the RRSP, but could negatively impact engine capability and engine MRO jobs for its 49%-owned Eagle Services Asia, which contributed $17 million to SIAEC’s FY2023 pre-tax profit.


Mak estimates that the merger of Air India and Vistara could result in a non-cash accounting gain of $1.1 billion for SIA, at 40 cents a share.

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She adds: “This has not been included in our FY2025 net asset value (NAV) estimate of $5.91.”

Meanwhile, the Federal Aviation Administration (FAA) has halted the production expansion of Boeing's 737 MAX aircraft in January following the company’s recent string of incidents, potentially reducing the supply of narrow-body aircraft and indirectly raising airlines’ operating costs. 

“Post-pandemic travel demand is skewed towards shorter-haul routes and quick turnarounds, which are better served by narrow-body aircraft with better seats and fuel efficiency,” concludes Mak.

Sector recommendation

With her bearish outlook on Singapore’s air transport sector, Mak has a “reduce” call on SIA at a target price of $5.91, explaining that costs are “expected to rise” while airfares are expected to further normalise. 

For Singapore Airlines Terminal Services (SATS), the analyst similarly has a “reduce” call, at a target price of $2.31.

“It needs to restructure a further EUR580 million ($844.5 million) debt maturing in May 2024,” adds Mak.

Finally, she has no rating nor target price on SIAEC.

The research manager concludes: “The $25.1 million write-off related to the RRSP could impact FY2024 (March) net profit. The exit from the RRSP might also affect ESA’s ability to scale the technology ladder for new engine types.”

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