Robust VTL and cargo demand to benefit 3Q
? Reiterate Add as SIA may report a narrower qoq 3QFY22F loss due to the robust response to the VTL schemes and strong year-end cargo demand.
? Our TP of S$5.86 is unchanged, still based on P/BV of 1.06x (+1 s.d.), on our adjusted FY23F BVPS.
Strong VTL demand may reduce net loss in 3Q sequentially
We estimate that SIA will deliver a reported net loss of c.S$300m in 3QFY22F (Oct-Dec 2021), narrower than the S$409m loss in 1QFY22 and S$428m loss in 2QFY22, when the quarterly update is released on 24 Feb. Underlying the better performance is the sharp recovery in passenger demand as Singapore began its Vaccinated Travel Lane (VTL) schemes to selected countries from 8 Sep 2021 and SIA benefitted from a full quarter’s impact in 3QFY22F. SIA’s ASK capacity as at 30 Jun 2021 rose from 28% of the pre-Covid-19 level to 32% as at 30 Sep and to 45% as at 31 Dec but RPK demand rose faster than ASK growth in 3QFY22F, leading to stronger PLFs. SIA’s PLFs rose from 14.8% in 1QFY22 and 17.4% in 2QFY22 to 33.2% in 3QFY22F and to 46.5% in the month of Dec 2021 alone. Our reported net loss estimate of c.S$300m in 3QFY22F factors in the rise in average spot jet fuel prices from US$75/bbl in Jul-Sep 2021 to US$88/bbl in Oct-Dec 2021, the qoq expansion in the jet fuel crack spread against Brent crude from US$2.2/bbl to US$8.4/bbl and SIA’s lower fuel hedge cover of 30% in 3QFY22F vs. almost 100% prior. There is potential for SIA to deliver a 3QFY22F net loss that is narrower than our c.S$300m estimate, if passenger yields increase qoq given the higher PLFs and strong demand for VTL flights (we have assumed no change to yields) and if the share of JV losses from 49%-owned Vistara falls qoq since India’s domestic passenger demand has rebounded after the massive Delta wave in Apr-Jul 2021. Cargo RFTK demand remained robust in 3QFY22F, although cargo load factors fell qoq due to the introduction of more passenger flights.
SIA passenger demand on track to exceed our full-year estimates
The outlook for 4QFY22F is less robust, as the VTL quota was halved from 21 Jan 2022 onwards due to the Omicron outbreak. Also, spot jet fuel prices have rallied to US$98/bbl, against our FY23F assumption of US$82/bbl, and SIA hedged only 40% of its fuel needs for 15 months from 1QFY23F to 1QFY24F. Nevertheless, we note that our forecasts for SQ’s FY22F passenger RPK demand of 10,635m and PLF of 20.4% are conservative, relative to SQ’s actual 9MFY22F RPK demand of 9,919m and PLF of 24.9%, which are on track to exceed our current full-year forecasts for FY22F due to strong demand for VTL flights. Hence, SIA’s potential revenue outperformance relative to our current projections may help offset higher jet fuel costs. Potential rerating catalysts: the Covid-19 pandemic may become endemic by mid-2022F, leading to a restoration of Singapore’s daily VTL quota and general reopening of global borders. Downside risks include higher jet fuel prices in the near term due to tight oil supplies and geopolitical risks involving Russia’s intentions for Ukraine.