SINGAPORE (Sept 5): The headwinds are about to get stronger for Singapore Airlines (SIA), according to OCBC Investment Research.
SIA’s South West Pacific and Europe routes, which are estimated to account for close to 50% of the national carrier’s total capacity, is expected to come under pressure from ASX-listed Qantas Airways.
Qantas last week announced it will re-route its daily Sydney-London A380 flights via Singapore rather than Dubai.
As part of a 5-year extension of its partnership with Emirates, Qantas will also upgrade its existing daily Melbourne-Singapore flight from an A330 to an A380.
See: Qantas reroutes Sydney-London A380 flights via Singapore to meet strong Asia demand
“In essence, there will be increased capacity on the Sydney-Singapore-London route as well as the Melbourne-Singapore route,” says OCBC lead analyst Eugene Chua in a Tuesday report. “London, Sydney and Melbourne are key cities that are material for SIA.”
The changes by Qantas are expected to take effect from March 2018.
“With Qantas’ injection of capacity on some of the key Kangaroo routes of SIA, we expect the most direct impact would be on the yields on these routes as SIA now has to compete with Qantas to fill up its aircraft, assuming demand does not grow at the same pace as capacity,” Chua says.
Despite expectations of tougher competition, OCBC is keeping its “hold” call on SIA with an unchanged fair value estimate of $10.10 as it is “too early” to determine and quantify the impact of Qantas’ changes.
“While SIA loads had been gaining strength in recent months, it remains to be seen if this will sustain and whether the demand growth will be able to offset the higher capacity by 4QFY18,” Chua says.
In the 1QFY17/18 ended June, SIA saw its group revenue climb 5.6% to $3.86 billion on the back of improved revenue across all SIA Group airlines.
However, SIA warned of continued pressure on yields, amid a 3.1% drop in passenger yields during the quarter.
See: Singapore Airlines 1Q earnings fall 8.4% to $235.1 mil despite improved revenue
As at 12.55pm, shares in SIA are trading flat at $10.25, implying a FY18F P/E of 21.3x and dividend yield of 3.1%.
