Singapore Airlines - Qantas' new A380 deliveries could steal market share

• Passenger demand collapsed: Traffic fell 23% y/y in May, deteriorating sharply from the 16% decline in Jan-Apr. SIA’s year-to-date operating numbers have been weaker than sector average (-11%) and Cathay’s 7% drop partly because SIA has focused more on cutting capacity, giving up low-yielding traffic and has been less aggressive in offering promotional fares compared to some of its peers. The premium airline has also been losing market share to low cost carriers, which have been expanding flights on short-haul routes on liberalized air services agreements and as passengers traded down to cheaper airlines.

• Load factors fell to five-year low: Passenger load factor was 66.9%, down 8ppts y/y as SIA’s 14% capacity reduction failed to keep pace with falling demand. Planes were emptier across all route regions. US flights suffered the sharpest load factor decline, down 12ppts y/y to 68% (partly due to the conversion of A340s to all-business class cabins where loads are generally lower). North and Southeast Asian loads fell 9ppts y/y to 62%, hurt by Influenza A. Southwest Pacific flights held up best at 70%, down 5ppts y/y. Demand is expected to come down further in June as families defer/cancel vacation plans during the school holidays.

• Short-haul cargo did better than long-haul: Cargo traffic fell 21% y/y in May, worse than Jan-Apr decline of 17%. Demand on short-haul routes held up better than long-haul. SIA Cargo slashed capacity by 21%, which helped to keep load factors relatively flat at 61%.

• Competitors’ rising A380 deliveries could steal away demand: Qantas announced today that it plans to increase its Sydney-Singapore-London A380 services from three to five flights per week from Aug 6 after the airline takes delivery of its fourth A380 at the end of July. This, as well as Emirates’ (which has a secondary hub in Singapore) rising A380 deliveries, should put greater pressure on SIA’s passenger loads and yields over time.

• Rebounding fuel price a double-edged sword: SIA has hedged c.25% of its FY10E fuel consumption at c.US$125-130/bbl (Singapore jet kerosene). As such, the silver lining of rebounding oil prices is that SIA will incur smaller hedging losses and write back some of its previous mark-to-market fair value losses on balance sheet. Furthermore, y/y spot jet fuel prices are still c.28% lower versus FY09 average despite the recent rebound. However, the main challenge for SIA and the airline sector is on the demand side. Weak demand makes it harder for SIA and other carriers to pass on the rising fuel costs via surcharges in contrast with previous years. There are no signs that passenger demand is on the recovery path and SIA will likely be loss-making at the operating level in 1QFY10 (results due out in August).

• Recent rebound overdone: Last week’s bounce on market speculation that SIA will invest in the combined China Eastern-Shanghai Airlines entity is overdone; a potential investment will unlikely be value-accretive in the first 1-2 years. SIA is trading at 1.1x FY10E PB vs SARS/Sep 11 troughs of 0.9x, Asian Crisis trough of 0.7x and only 6% shy of historical average.

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