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Morningstar | Singapore Airlines Reported in Line 2Q Results Despite Higher Fuel Cost, FVE Maintained at SGD 11

No-moat Singapore Airlines reported second-quarter fiscal 2018 results that featured solid revenue growth of 6%, but higher fuel cost continued to weigh on the group’s profitability. While passenger yield was down 1% for the second quarter, it was offset by a 9% increase in traffic. Management expects passenger traffic to grow, but rising fuel price will continue pressure to the group's bottom line in the near future. We maintain our fair value estimate at SGD 11 for Singapore Airlines and view company shares as fairly valued.

Second-quarter recurring profit was down 35% to SGD 233 million mainly due to a rising fuel cost outweighing revenue growth. On the passenger side, the group posted decent revenue passenger growth for all three of its airlines (SIA, SilkAir, and Scoot). Strong growth was primarily driven by a total of 10% capacity expansion and a 310-basis-point rise in load factor. With all of its airlines filling more seats than it added during the second quarter, we think SIA is on track for a sustained recovery and should see stabilizing yield ahead. The two budget arms of SIA, SilkAir and Scoot, both reported operating losses as results of fuel costs running ahead of top-line growth. SilkAir’s load factor is still under much pressure, running at around 75%. While we are encouraged by the group’s announced plans to integrate SilkAir's fleet into Singapore Airlines, we wait to see whether these initiatives will produce tangible results.

Singapore Airlines' cargo revenue was up 7% year over year aided by a 10% jump in yield. We believe demand for its cargo service will remain steady over the next couple of years, despite management citing the looming trade war that could adversely impact the segment, if it persists.

Lastly, on the cost front, the group’s ex-fuel costs were $112 million, or 4% higher year over year, trailing the 5% capacity growth during the second quarter. Both the Singapore Air and SilkAir had stable ex-fuel passenger unit cost, while Scoot posted a slight 3% drop in ex-fuel cost per available seat kilometers. We continue to think the long-term positive impact cost-cuttings have on the bottom line will be somewhat muted, as some of the savings will inevitably be passed on to the end consumers, given that the airline operates in an industry that is highly exposed to low switching costs and price transparency.