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Singapore Airlines (SGX: C6L) - Pax Load Factor Under 10%, Forward Bookings Are Bleak; Downgrade to SELL

  • We recommend taking profit on Singapore Airlines (SGX:C6L). While the general expectation is for traffic to recover only in FY22, there is significant uncertainty over the extent of decline in traffic and load factors, and consequently the extent of cash burn in our view. We raise FY21 y-o-y traffic decline estimate from 45% to 58%.
  • In addition, unless Singapore Airlines defers some of its aircraft deliveries, it is likely to require further funding in FY22.
  • We lower our fair value P/B to 0.8x from 0.9x, resulting in a lower target price of S$3.80.
  • Downgrade Singapore Airlines to SELL.

SIA Group: MAY20 Operating Statistics

Capacity (M seat-km)481.0-95.6
Pax-km (M)44.4-99.5
Paxs carried ('000)8.6-99.5
Pax load factor (%)9.2-70.5ppt
Capacity (M seat-km)67.7-97.5
Pax-km (M)1.8-99.9
Paxs carried ('000)0.6-99.9
Pax load factor (%)2.7-82.7ppt
Capacity (M seat-km)4.1-99.6
Pax-km (M)1.3-99.8
Paxs carried ('000)0.4-99.9
Pax load factor (%)31.7-43.4ppt
Capacity (M tonne-km)360.8-61.9
Freight tonne-km (M)270.4-52.8
Freight carried (M kg)45.2-58.1
Cargo load factor (%)74.914.5ppt
Source: SIA, UOB Kay Hian

May’s Weak Data Is No Surprise, But Do Not Hold Out for a Quick Recovery

  • Singapore Airlines and SilkAir’s pax traffic fell 99.5% in May, at the same pace as in April, and load factors were below 10% for both months.
  • Still, there is no reason to cheer as Singapore’s borders are effectively closed, with mandatory COVID-19 testing and stay home notice for returning travellers. We also believe that border restrictions will only be gradually opened and will focus on “travel bubbles” corridors in Australia and parts of Southeast Asia.

Forward Bookings Are Down 82% for the Autumn Period, According to IATA

  • IATA also noted that a survey showed that only 40% of respondents indicated that they will travel within a few months of the pandemic subsiding, down from 61% in April. IATA also called for COVID-19 testing prior to departure as a preferred option to mandatory quarantine.

China’s Domestic Sector and Delay a Much Needed Recovery in Outbound Traffic

  • Beijing has raised its alert to the second highest level. Various cities and provinces, including Shanghai, now require mandatory quarantine for visitors from Beijing. The move is significant as it is likely to delay a recovery in China’s outbound traffic. Presently, China allows for only one weekly inbound flight from each country.

Little Visibility on Traffic Recovery But Raising Our Traffic Decline Estimate by 10ppt for FY21

  • While sentiment has improved of late amid expectations of a vaccine, the reality could pan out differently as IATA’s recent survey on the willingness to travel appears to indicate.
  • We had previously assumed that the rate of traffic to decline by 20% in 4Q20 but we are now less confident and expect load factors to decline to 63% for FY21. In lowering our estimates, we are guided by IATA’s estimate of week autumn bookings.

SIA Has to Push Back Scheduled Pre-delivery Payments or Else the S$8.8b in Rights and MCB Proceeds Might Run Out by End-FY22

  • Singapore Airlines had earlier guided for S$11b in capex for FY21-22 and we estimate the carrier would have S$4b in debt and lease repayment due by FY22. Airline manufacturers however are reluctant to delay deliveries and have threatened law suits on some airline customers. This highlights the tremendous pressure that airlines are in due to large capex and a dearth of cash flow.

Downgrade to SELL

  • We raise our Singapore Airlines's FY21 net loss estimate from S$1.26b to S$1.64b.
  • We lower our target price from S$4.35 to S$3.80, reducing our fair value P/B multiple from 0.9x to 0.8x. Downgrade to SELL from BUY.
Source: UOB Kay Hian Research - 18 Jun 2020

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