Morningstar | Singapore Airlines' 1Q Result In Line with Estimate, Maintaining FVE at SGD 11
No-moat Singapore Airlines, or SIA, reported a first-quarter fiscal 2019 result in line with our expectation. While passenger yield was down 3.2% for the period, the negative impact was primarily offset by an 8.3% increase in traffic. Management expects passenger traffic to continue to grow in the near term while citing rising fuel price pressures to the group's bottom line. We are maintaining our fair value estimate at SGD 11, and view company shares as fairly valued.The group's robust performance coming out of its cargo segment was an operational highlight. Cargo revenue was up 6% year over year aided by an almost-10% increase in yield. We believe demand for Singapore Airline's cargo service will remain steady over the next couple of years, despite management citing the looming trade war which could adversely impact the segment in the long term.
During the first quarter, the average jet fuel price increased by almost 40%, leading to a SGD 154 million reduction in operating income. While fuel costs will continue to be a headwind for airlines over the next two years, we think the Brent oil price will decline to a midcycle price of USD 60 per barrel by 2023.
SIA is on track for a sustained recovery, and we believe the company should see stabilizing yield ahead. Relative to Cathay Pacific, SIA has broader exposure to the rapidly growing mainland market via its budget labels. Its main passenger operation will continue to face intense competition, in our view, driven by rapid international market expansion by China's Big Three and the entrance of premium Middle Eastern competitors in Southeast Asia, SIA's traditional stronghold.
Singapore Airlines is engaged in the business of passenger air transportation. Co. and its subsidiaries have four reportable operating segments as follows: Airline Operations, which provides passenger air transportation; Engineering Services, which is in the business of providing airframe maintenance and overhaul services, line maintenance, technical ground handling services and fleet management programme; Cargo Operations, which is involved in air cargo transportation and related activities; as well as Other, which consists of services provided by Co. and its subsidiaries, such as training of pilots, air charters and tour wholesaling.
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