EUR 850.00 For Business Accounts Only

Morningstar | Singapore Airlines' Third-Quarter Results Weighed Down by Fuel; FVE Maintained at SGD 11 Per Share

No-moat Singapore Airlines reported third-quarter fiscal-year 2018 results that featured solid revenue growth of 7%, but higher fuel cost continued to weigh on the group’s profitability. While passenger yield was flat compared with the same period last year, an 8% increase in traffic drove the sales increase. During the quarter, the company experienced a 22% rise in post-hedging fuel cost, which dragged down the group’s operating profit to SGD 388 million, or a 15% year-over-year decline. Excluding the impacts from non-recurring items and fuel, the carrier’s operating profit would have been up 7%. Underpinned by solid forward bookings, Singapore Airlines continues to expect passenger flow to grow over the near term. We maintain our fair value estimate at SGD 11 for Singapore Airlines and view company shares as fairly valued.

On the passenger side, the group posted decent revenue passenger growth for all three of its airlines (Singapore Airlines, SilkAir, and Scoot). Strong growth was primarily driven by a total of 7% capacity expansion and a 90-basis-point rise in load factor. The two budget arms of the group, SilkAir and Scoot, both reported small operating gains despite fuel costs running ahead of top-line growth. Aggressive expansion in capacity for Scoot, as evidenced by a 17% jump in available seat kilometers, was not matched by demand, leading to a decline in load factor. At the same time, the existing plan to integrate SilkAir into Singapore Airlines means several SilkAir’s routes will be transferred to Scoot. We await to see whether this initiative will produce tangible results for Singapore Airlines. On the cargo front, Singapore Airlines' cargo revenue was up by merely 1% year over year, as strong yield was offset by a drop in load factor. We believe that uncertainties surrounding U.S.-China tariffs and Brexit will cloud the demand outlook for both passenger and cargo.

Last, on the cost front, the group’s ex-fuel costs were $2.7 billion, or 4% higher year over year, running behind the 5% capacity growth during the third quarter. The group’s main airline and SilkAir all maintained relatively stable ex-fuel passenger unit costs, while Scoot posted a nearly 10% jump. The group will continue to hedge fuel at around 50% of consumption till 2024 at Brent price of around USD 50 to USD 60.