SIA - May passenger loads plummet on H1N1 concerns

Singapore Airlines (SIA) posted a sharp drop in passenger traffic, down 22.8% YoY for the month of May. This was at the height of concerns over the H1N1 swine flu pandemic, which saw discretionary travel affected. As a result, passenger load factors fell by 7.8 ppts YoY to 66.9, despite SIA’s planned passenger capacity cutback of 13.9% to mitigate lower demand from the weak global economy.

Cargo posted a load factor of 61.2, on the back of a 20.7% reduction in loads, matched by a 21.4% drop in capacity, to actually post a YoY improvement of 0.5 ppts. While cargo numbers continue to look weak, they indicate that the business may have bottomed out, with a consecutive improvement of 2.1% in cargo carried.

We believe that the worse of the H1N1 flu scare may be over, as air travel returns to non-crisis conditions. As of June 10, 2009, the World Health Organization (WHO) stated that 74 countries have officially reported 27,737 cases of H1N1 infection, which included 141 deaths. Despite the WHO officially declaring the outbreak to be a "pandemic" on June 11, it has stressed that the designation was a result of the global spread of the virus, and not its severity. The fatality rate is estimated at 0.4%, which is down sharply from when the virus first surfaced, as medical authorities have learnt to contain its spread and provide treatment.

For passenger traffic, we therefore expect June loads to show some improvement, not only on the back receding H1N1 fears, but also due to June school holiday demand, as well as moderate improvement of economic conditions. A recent check of SIA’s airfares on its website also indicates a lower level of discounting, with special offers of airfares to high traffic destinations such as Hong Kong, Sydney and London discontinued. While 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. This implies that we expect SIA to post a fairly decent profit, mainly due to reduced overheads, such as jet fuel. We also maintain our Buy call on SIA, with a target price of S$13.20, based on 1.1x 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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