Near-term cargo yield upside
? The Russia-Ukraine war and the Covid-19 lockdowns in China will likely raise
cargo yields in Mar 2022, after the seasonally-weak Lunar New Year period.
? High oil prices from late-Feb onwards will not materially affect SIA’s
4QFY22F performance, as jet fuel is usually priced with a one-month lag.
? Reiterate Add with an unchanged TP of S$5.88, still based on FY23F P/BV of
1.06x (+1 s.d. from the mean since 2011) on our adjusted BVPS.
Tighter airfreight capacity may help lift cargo yields
SIA hosted an analyst briefing to speak about its air cargo strategy on Tuesday, and
highlighted how market developments are working in its favour. Generally, airfreight
capacity remains tight and cargo yields remain strong, even though it may have been
seasonally weaker during the Feb Lunar New Year period. The strength is now being
accentuated by two developments. First, the Russia-Ukraine war has resulted in a
tightening of airfreight capacities, as European carriers are avoiding Russian airspace on
flights to North Asia, w hile South Korean and Japanese carriers are also avoiding
Russian airspace. This has resulted in longer flight times, and payload restrictions that
tighten airfreight capacity. SIA’s geographic position is such that it will not have to take
payload restrictions on its passenger or cargo flights to Europe. Second, the recent
Covid-19 outbreak in China and China’s moves to implement lockdowns in several major
cities have had the effect of increasing seaport congestion and may increase demand for
airfreight. SIA Cargo may face some pressure from high fuel prices, but higher air cargo
yields and higher fuel surcharges may help to offset that.
Our forecasts for FY3/22F remain intact despite expensive fuel
Jet fuel prices spiked up to US$151/bbl on 9 Mar in the fallout from the Russia-Ukraine
war, and has since eased to US$112/bbl at the time of writing, but remains high against
an average of just US$88/bbl during Oct-Dec 2021. Airlines typically purchase jet fuel at
one-month lagged prices, so the rise in oil prices after Russia’s invasion of Ukraine on 24
Feb is unlikely to have a significant impact on SIA’s Jan-Mar 2022F quarterly results.
SIA’s FY23F may be negatively affected if jet fuel prices remain elevated, as w e have
assumed an average spot jet fuel price of US$82/bbl only. How ever, we leave our
forecasts intact for now, as negotiations between Russia and Ukraine may yet bring the
war to an end and oil prices could fall, but more importantly, the Singapore government
continues to financially support the beleaguered aviation industry as a policy imperative.
DHL collaboration to have favourable spillover benefits
On 10 March 2022, SIA announced that it has signed an expanded collaboration
agreement with DHL, for SIA to provide crew and maintenance services for the operation
of 5 x 777Fs on transpacific routes. Although the direct profit margins are likely thin, the
SIA group will benefit from more high-value interconnecting express cargo traffic, and
more maintenance revenues for SIA Engineering (Add, S$2.20, TP: S$2.92). Downside
risk: higher oil prices; future removal of industry support from Singapore government.