SIA - Collapse in Feb 2009 Traffic Suggests Ugly March Quarter Earnings

SIA at risk of only its second quarterly loss in history — With Feb 2009 passenger traffic falling 17% yoy, and a 7ppt fall in load factor to 70% (vs. Dec 2008 breakeven 73%), SIA will do well to avoid making losses in its key passenger business. Cargo is likely to face further losses, Feb 2009 traffic fell 15% yoy with a load factor of 57% (vs. Dec 2008 breakeven 63%). Yield pressure should mount as fuel surcharges fall and premium traffic weakens, SIA is fuel-hedged at US$131/bbl vs. spot of US$48 suggesting mounting hedging losses (Dec qtr: S$340m). We view that SIA's prior year DPS of S$1 could be under threat. We retain our Sell (3L) rating and S$8.50 target price.

Operating margins may collapse in line with load factor-to-breakeven spread — Historic data shows a close relationship between actual passenger or cargo load factor spreads over breakeven and operating margins (Figures 1- 6). Assuming an improved March passenger load factor of 72-73%, the March quarter spread could plunge to zero, and further cargo losses would mean SIA will have to rely on its subsidiaries to lift group operating profits into the black.

Cutting fleet capacity — SIA recently announced plans to decommission 17 aircraft (total fleet 101) for FY10, reducing capacity by 11%. This is the first such action since SARS in 2003. With c.70% of its operating costs variable, we view this is a necessary cut for SIA to remain viable. Based on 3QFY09 expenses, wages (17%) are the second largest cost component after fuel (43%).

Feb 2009 operating data — Passenger load factor fell 7.1ppt yoy to 69.7% as traffic fell 17% yoy vs. capacity down 8.5% yoy. PLF declined across all regions by 6-10ppts. Cargo load factors fell 5.5ppt to 56.7% as traffic fell 15.2% yoy vs. capacity -7% yoy. The sharpest fall was in Europe (-9.3ppt) as shown on page 8.

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