SINGAPORE (Aug 7): Singapore Airlines is worried about the weakening global economy, which in the past had portended a softening of business travel demand and yields, the airline told analysts in its 1Q results briefing on Aug 1.

SIA said it is also bearish on the outlook for its cargo business, as the US-China trade war has caused demand to fall although freighter capacity put in place during the cargo boom years of 2017-18 have remained in place, causing oversupply and continuing to put pressure on cargo yields. 

For the 1Q19/20 ended June, SIA reported earnings of $111.1 million, 20.7% lower than a year ago, as revenue growth was offset by higher losses of $31 million from associate Virgin Australia. Excluding the losses, earnings would have been come in flat.

Group revenue for 1Q19/20 came in 6.7% higher at $4.1 billion as passenger flown revenue improved $271 million or 8.8%, led by traffic growth of 8.1%, on a 6.6% increase in capacity. Despite the significant capacity injection, RASK (revenue per available seat kilometre) improved 1.3%.

See: SIA posts 20.7% fall in 1Q earnings to $111 mil on higher losses from Virgin Australia

SIA said that passenger demand for the mainline carrier remained robust, with premium cabin yields holding steady. However, economy class yields have trended lower throughout 2017, 2018 and into 1H19. In 1Q19/20, SIA mainline’s passenger yields rose 3.9% y-o-y on constant-currency basis, although it rose only 1% due to negative currency effects as the A$, €, GBP, IDR, and INR depreciated against the $. 

As for budget carrier Scoot, SIA said its $37 million operating loss was mainly due to a forced reduction in utilisation hours by 15% or two hours a day and setting aside more spare aircraft, along with lower yields and weaker demand out of Singapore. To recap, Scoot is facing issues with the reliability of the Rolls-Royce Trent 1000 engines which power its 787-9 fleet. This had caused lengthy flight delays in the last few months of 2018 and a fall-off at its Singapore point-of-sale.

Meanwhile, the grounding of six 737 MAX 8 planes by SilkAir had caused non-fuel operating costs to escalate, as it continued to depreciate the planes while generating no revenue from them, said SIA. With multiple regulatory hurdles to clear, SilkAir is unsure when the planes could be reactivated, which means SilkAir’s financial performance might be lacklustre for a while yet.

In an Aug 1 report, CGS-CIMB Research is keeping its “hold” call on SIA with a target price of $10.04. Analyst Raymond Yap insists SIA is not a “compelling investment case” at the closing price of July 31 of $9.67 but is closing in on its trough P/BV valuation of 0.8x, or $8.93, which is just 3% lower than the current share price.

“Nevertheless, we are not upgrading our call to an ‘add’, because the earnings momentum for SIA looks set to decelerate, given the ongoing cargo demand and yield weakness, and an expected delayed flow-through in the future to premium demand and yields,” says Yap.

Similarly, UOB KayHian is keeping SIA on “hold” with a target price of $9.50 and an entry price of $9.10.

“For now, SIA is positive on yields, which implies that at least for the next 3-4 months yields should be supported. Aside from a weak cargo environment, escalating staff costs and a deteriorating earnings outlook for Virgin Australia are key risks,” says analyst K Ajith in an Aug 2 report.

As at 1.00pm, shares in SIA are trading 2 cents higher at $9.06 or about 0.8 times FY20 book with a dividend yield of 3.3% based on CGS-CIMB’s valuations.