SIA - Cargo shows further improvement

Singapore Airlines (SIA) posted a sequential rebound for its June 09 passenger load factors, hitting 75.7 versus 66.9 in May. Although YoY this was below June 08’s 79.2, this is still a strong showing in the current market environment. The load factors were also boosted by SIA’s capacity cuts to match demand – passenger capacity has been cut by 14.4% YoY, while passenger loads have fallen 18.2%.

On a sequential basis, passenger loads were up by 9.1%, partly due to the school holidays – however, the sequential boost this year is higher than the usual seasonal 3-5% of previous years, which probably indicates that passenger loads are picking up off the lows of May, which were impacted by H1N1 fears. Cargo posted a load factor of 62.9, on the back of a 20.8% reduction in loads, matched by a 22.3% drop in capacity, to actually post a YoY improvement of 1.3 ppts. Thisreinforces the trend that the business may have bottomed out, with a consecutive improvement of 1.7 ppts in load factors.

These latest numbers reinforces our belief that the worse of the H1N1 flu scare may be over, as air travel returns to non-crisis conditions. While we reiterate that this may not entirely indicate that SIA is out of the woods, and that the situation remains very fluid, we believe that the signs are encouraging.

We are leaving our full year load factor and yield assumptions unchanged, and maintaining our FY10 earnings forecasts at S$865m. We also maintain our Buy call on SIA, with a target price of S$14.70, based on 1.2x book value. Despite weak business conditions, SIA is well equipped to weather the downturn, and investors continue to recognise the quality of this blue chip investment.

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