Changi Airport passenger traffic up 3.2% in November

 

SIA Cargo' s loads also did not improve as cargo traffic growth slowed to a mere 3.4 per cent from October 2016' s 10 per cent growth. Aside for East Asia, cargo loads declined across all other regions. We reckon cargo yields will likely remain weak.

Passenger loads to Southwest Pacific fell 8 percentage points, highlighting the risk to SIA' s traffic on the Kangaroo route. SIA attributed the decline to " material increases in industry capacity" . We reckon this was due to capacity additions by the Big Three Chinese carriers, which seat capacities to Australia have risen by 12 per cent in December 2016 thus far. This will likely be exacerbated by the recent open skies agreement between China and Australia (Dec 4, 2016), which removes all capacity restrictions between the two countries. About 19 per cent of SIA' s capacity in km-terms is directed towards Australia and we believe SIA' s loads on this sector will likely continue to fall.

Rising fuel prices could lead to higher into-plane fuel costs, offset by lower fuel hedging losses. Since end-August 2016, jet fuel prices have risen 15 per cent to US$65/barrel. Our full-year estimate implies into-plane jet fuel cost of US$65/barrel in H2 FY17. Should fuel prices rise further, this will result in higher into-plane fuel costs, partly offset by lower fuel hedging losses or possibly even fuel hedging gains. As at Q2 FY17, SIA had hedged 29 per cent of its H2 FY17 jet fuel requirements at US$68/barrel and 3 per cent at US$63 on Brent.

Maintain " hold" and target price of S$10.10. We continue to value SIA at 0.7 times FY17 forecast core book value ex-SIA Engineering Co, or one standard deviation below mean price-to-book value. Suggested entry price is S$8.90.