SINGAPORE (Mar 19): SilkAir, the regional wing of Singapore Airlines (SIA), has grounded six of its Boeing 737 MAX 8 jets following the crash of an Ethiopian Airlines flight last week – the second fatal accident involving the best-selling Boeing aircraft in less than five months.
But even as the B-737 MAX fleet accounts for some 16% of SilkAir’s total seat capacity, analysts say the net impact of their grounding – which is unlikely to be lifted until at least May this year – is nowhere that significant.
See: CAAS suspends Boeing 737 MAX operations out of Singapore
“With the announced schedule changes for March 16-30, the impact of the MAX 8 grounding will amount to only 1.5% of SilkAir’s systemwide seat capacity,” says CGS-CIMB Research lead analyst Raymond Yap in a Monday report.
“SilkAir has increased the utilisation of its A320 and 737-800 planes and SIA mainline has mounted supplementary widebody flights,” he explains.
According to Yap, the SIA group will see a net capacity reduction of 935 seats per week as a result of the grounding of SilkAir’s 737 MAX 8 planes – just a fraction of SilkAir’s total systemwide seat capacity of 61,842 seats per week.
Yap estimates that SilkAir will see a reduction of 306 seats per week on flights to Phuket, or lower by close to 6%, while seat capacity on flights to Hyderabad will be reduced by 14%, or 258 seats per week.
At the same time, seat capacity on flights to Kuala Lumpur will be reduced by 10%, or 233 seats per week; and seat capacity on flights to Wuhan will be reduced by 13%, or 138 seats per week.
Seat capacity on all its other flight destinations are likely to remain intact.
“Short-term impact on SilkAir’s flights is manageable,” Yap says. “But MAX grounding may delay SilkAir’s long-term strategic plans… The MAX 8 planes are envisioned as the cornerstone of its future fleet because SilkAir has orders for a further 31 MAX planes.”
Further, SilkAir had planned to retire its existing Airbus fleet as well as Boeing 737-800 planes, which will see the regional airline operate only one aircraft type – the MAX planes.
It has also planned to retrofit its MAX planes with lie-flat business class seats and seatback In-Flight Entertainment (IFE) in order to offer a comparable product with SIA mainline.
SilkAir was intended to be formally merged with its parent company into one SIA brand following these changes.
“All these plans, including the delivery of MAX 8 orders from Boeing, retirement/transfer of other models and seat retrofit, will now likely be delayed due to the MAX grounding,” Yap says.
While the analyst believes it could be possible for SilkAir to claim compensation from Boeing for the MAX groundings, he says it is “too early to assess the long-term impact on SilkAir and the wider SIA group”.
CGS-CIMB is keeping its “hold” call on SIA with an unchanged target price of $10.25.
As at 3.30pm, shares in SIA are trading 1 cent higher at $9.84, implying an estimated price-to-earnings (PE) ratio of 18.2 times and a dividend yield of 2.0% for FY19.
