SINGAPORE (Feb 14): CIMB says the biggest takeaways from Singapore Airlines' 3Q18 results were that SIA Cargo’s profits were the highest in 10 years while Scoot’s profit growth was the highest in five.
"If there is one aspect to celebrate, it would be Scoot’s strong performance," says CIMB analyst Raymond Yap in a Wednesday report.
Scoot's 3Q18 EBIT rose almost 50% y-o-y, which was even more surprising given lacklustre 1H performance when EBIT fell.
To be sure, Scoot's demand growth in Revenue Passenger Kilometres (RPK) has outstripped capacity growth in Available Seat Kilometres (ASK) in the past three quarters.
"But what was interesting in 3Q18 was Scoot’s first-ever increase in quarterly yields in more than two years," says Yap.
This could suggest a maturation of its network or a fillip from the Osaka-Honolulu launch in December 2017.
Another big surprise for the SIA group was the stronger y-o-y demand for airfreight that pushed up cargo loads and yields.
Demand rose far ahead of capacity growth, leading to healthy loads and strong yields, which more than offset higher unit costs.
In 3Q18, SIA Cargo’s EBIT rose by $35 million y-o-y, accounting for 85% of the group’s y-o-y rise in quarterly EBIT.
The demand for airfreight also benefitted SIA's bellyhold, which is marketed by SIA Cargo, but whose profits are booked under the SIA mainline.
While SIA mainline’s combined 3Q18 passenger and bellyhold EBIT rose by 9.2% y-o-y, Yap says this was due entirely to the rise in its bellyhold EBIT, which more than offset the 55% y-o-y drop in the underlying EBIT of the passenger airline business.
Still, SIA's 4Q18 outlook seems less robust. Spot jet fuel prices from Dec 1 2017 until Feb 13 averaged US$77/bbl, reflecting a one-month lag in jet fuel pricing.
Coupled with SIA’s hedge for 40.7% of its requirements at a strike price of US$65/bbl, 4Q18’s weighted-average cost should be around US$72/bbl, against US$65/bbl last year.
"This, coupled with the seasonally slower 4Q, suggests that the group will be very reliant on the continued outperformance of the cargo and LCC businesses to deliver the earnings for the final quarter," says CIMB.
As at 3.45pm, shares in SIA are up 54 cents at $11.16 or 22.8 times FY19 earnings.
