Markets and Investing
AVIATION | Staff Reporter, Singapore
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Price pressure: SATS’ rates to drop by 15% after new competitor ASIG starts

But this doesn’t pose a major impact, as SATS controls 80% of businesses in Changi, says OCBC.

Besides, SATS has the size advantage, and it also provides a wide range of unique and integrated services that differentiates itself from its competition and may promote customer loyalty.

Here’s more from OCBC:

Third ground handling license at Changi Airport awarded. Changi Airport Group (CAG) recently announced that it awarded a third ground handling license (for 10 years) at Singapore Changi Airport to US-based Aircraft Service International Group (ASIG). ASIG will now compete with SATS Ltd and Changi International Airport Services (CIAS) for airline customers in both full service and low-cost carrier segments to provide quality and cost competition for services that include passenger and cargo handling servicing, and ramp handling.

In operation since 1947, ASIG has a wide portfolio of airline customers both in the US and Europe that include Vigin Atlantic, JetBlue and Ryanair. It also currently has refueling operations at Suvarnabhumi Airport in Bangkok. The third license comes two years following Swissport International's withdrawal of operations in Apr 2009 after sustaining losses in excess of US$50m over its four years of operations.

Pr ice competition expected going forward. Based on precedence, we expect the two existing players to pose stiff competition to ASIG. In a press release issued by the Civil Aviation Authority of Singapore (CAAS) back in 2009 when Swissport withdraw its operations, it noted that ground handling rates fell by an average of 15% during the time Swissport was in operations.

In a Business Times article on 31 Mar 2008, Swissport blamed "massive undercutting" as one of the key challenges it faced, although the allegations were refuted by its rivals. The re-emergence of a new handler will likely reignite and re-energize competition, and will provide airlines with more options as well as increase their leverage in price negotiations.

SATS to maintain dominance but will face some price pressures. As the dominant player, SATS controls about 80% of the business in Changi. While we anticipate some potential customer losses and potential reduction in ground handling rates, we believe that its regional size advantage and operational experience will not only allow it to survive any price competitions but also to dictate the extent of any potential price reductions.

As such, we expect similar reduction of ground handling rates of about 15% going forward once ASIG commences operations, especially given the somewhat stagnant global economic recovery where passenger traffic maybe affected in the near- to medium-term. This market leadership should continue to favour SATS in the face of new competition. We fine-tuned our fair value estimate to S$3.02 (S$3.06 previously) to incorporate anticipated price competition and maintain our BUY rating.  

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