KUALA LUMPUR, Aug 5 — Analysts are divided over whether Singapore Airlines Limited will enjoy a rebound in its performance, on the back of the competition scaling back expansion plans.

Maybank Kim Eng Research is the most bullish of the lot.

The analyst thinks SIA will enjoy performance recovery if competitors scale back their expansion plans, in order to manage costs and improve yields.

Yet even if this happens, yields will remain thin because the market itself is already weak.

The trail of recent aviation disasters has only made travellers more wary of aeroplanes and this is keeping demand for air travel weak.

OCBC Investment Research and DBS Group Research, on the conservative side, have not found catalysts to motivate them to give a positive call.

Management in its outlook guides the overall operating climate will stay challenging.

Load factors should stay stable but competitors’ aggressive fares and capacity injection will continue to flatten yields.

Overcapacity and the continuing slow demand recovery for airfreight will impact the cargo business.

To counter this and possibly boost its performance, SIA Cargo is changing tact by targeting specific product segments and traffic lanes.

Management says it will maintain cost discipline and continue to monitor demand trends closely and make appropriate adjustments to capacity deployment.

The company just announced earnings for Q1FY15:

Revenue: -4.1 per cent to S$3.68 billion (RM9.4 billion)

Profit: -71.4 per cent to S$34.8 million

Cash flow from operations: S$646.8 million vs S$850.4 million

Dividend: Nil vs Nil

Revenue dropped because passenger revenue reduced as a result of weaker yields arising from increased competition and unforeseen events.

In the cargo business, SIA Cargo also suffered revenue declines as the airfreight market still has more capacity than required.

But yield for SIA Cargo did climb 0.9 per cent.

Costs dropped 3.1 per cent because fuel and non-fuels costs were managed.

Fuel hedging drove down fuel costs by S$77 million.

Depreciation expenses for aircraft went down by S$14 million.

The change in estimated useful lives of the respective aircrafts with effect from April 1, 2014, is in line with industry standards, the airline says.

Profit dropped 71.4 per cent because of weaker operating performance at the associates and joint venture companies.

SIA incurred share of losses of S$14 million because of associate Tiger Airways Holdings Limited.

Share of profits from joint-venture companies declined by S$11 million because of weaker performance in the engine repair and overhaul operations.

Exceptional items were lower by S$18 million.

Operating Profit Overview:

SIA (Parent Company): S$45 million vs S$89 million

SIA Engineering: S$21 million vs S$28 million

SilkAir: S$2 million vs S$14 million

SIA Cargo: (S$18 million) vs (S$40 million)

SIA Engineering’s performance declined as revenue was not enough to cover increases in expenses.

SilkAir’s performance declined as revenue reduced as a result of weaker yields and higher operating expenses from a capacity injection.

SIA Cargo’s performance improvement was a result of ongoing efforts to improve capacity demand match.

As at June 30, 2014, debt is at S$1.45 billion.

Bullish analyst report

Despite the trail of air travel disasters, Maybank Kim Eng Research is hopeful a recovery for SIA will come when competitors in the region cut their passenger capacity in response to the suppressed demand for travel.

Though there is a window of opportunity, market weakness could still keep yields low indefinitely.

Management has already guided that the air transportation industry will continue to face an uncertain global economic climate, geo-political events and high fuel prices.

Maybank Kim Eng Research maintains a BUY call with a price target of S$12.00.

Bearish analyst report

OCBC Investment Research believes competition pressures for SIA will sustain with aggressive promotions and passenger capacity expansion.

The airline’s first-quarter financials were otherwise expected because of the operating losses Tiger Airways sustained, weakened profits from the engine repair and overhaul businesses, and low air travel demand resulting from unanticipated events unfolding.

Passenger revenue had weaker yields and was impacted by the unrest in Thailand and the disappearance of Malaysia Airlines flight MH370.

Travel safety will continue to pose doubts in travellers’ minds, which means travel demand is going to remain low for quite a while.

Even if air travel confidence renews, economic uncertainty is expected to return in China and the Eurozone, further supressing earnings.

OCBC Investment Research has a HOLD call with a price target of S$9.97, revised from S$9.50.

DBS Group Research says the second-quarter earnings will also finish on a muted note, just like the first quarter has.

But the second half of this 2015 fiscal could be better should economic conditions improve

The muted performance is a result of travellers being all the more wary of taking planes as more aviation disasters unfold.

Generally, the aviation industry will continue to be exposed to demand shocks resulting from the volatility of fuel prices and geo-political events.

SIA managed a small win in the first quarter by better cost management to lower overall costs for fuel and non-fuel requirements.

DBS Group Research has a HOLD call with a price target of S$10.12.

Investor Central. We keep your investments honest.

1. How much of a recovery can it make if competitors do scale back?

Can this figure be quantified?

Does SIA know how much precisely it is losing to competitors?

Management reply: We regret we are unable to provide specific replies to this query, as it calls for speculation. For reasons of commercial confidentiality we also do not provide forecasts.

2. How is it dealing with the false statement made about not using the Ukraine air space?

Shortly after announcing that it does not use the exact route the ill-fated MH17 took over Ukraine air space, it was discovered that SIA flights do use that route.

What have been the repercussions from this?

Is a backlash in sight?

Management reply: This was a poor choice of words on our social media channels. We should have said we are no longer flying through Ukrainian airspace, rather than say we are not using Ukrainian airspace, as a decision was immediately taken that evening to change our routings. We do regret this, and we have apologised for it.

3. Does it still have the ability to tighten costs further than it is already doing?

It is good to learn of the small victory against ever-high fuel prices, but does management have even stronger plans to meet developments along the way?

Or are these the best plans already?

Management reply: We believe there are always opportunities to reduce costs further, and we are constantly looking out for such opportunities. As stated in the outlook section of our Q1 results announcement on 30 July, the Group will continue to monitor demand trends closely and make appropriate adjustments to capacity deployment, alongside a continued focus on cost discipline.

4. Could there be an opportune moment despite the gloom?

Given the scenario, could SIA make the most out of the situation and emerge victorious?

Great strategists can make the best out of the worst and perhaps management can see this now?

Management reply: We take a long term approach to our business, which is why we continue to invest heavily in our products, our service and our network, to ensure we remain competitive. The current outlook for the air transportation industry is very challenging, but we believe the investments we are making will put us in a strong position for when operating conditions improve. For more, you may wish to review the transcript from our full-year results briefing in May, at which time our CEO gave a detailed overview of the work that has been taking place to better position the SIA Group for the future. You may find the transcript [here] as well as a presentation that went with it on our website.

We thank the company for its response. — Investor Central

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