Why Singapore Airlines remains under threat despite 4% jump in traffic

Competitive pressures still linger.

According to CIMB, parent company load factors climbed 2% pts yoy as traffic rose 4% in 2M13. Load factors across all route segments improved, with the exception of the South-West Pacific region.

On the other hand, SilkAir’s loads deteriorated 4% pts in 2M12 as traffic growth of 9% was outstripped by a 15% rise in supply.

However, CIMB adds that despite the continued improvements in traffic, SIA continues to report in its commentary that its efforts to boost loads are expected to place downward pressure on yields.

Here's more:

Due to differences in Chinese New Year dates between 2012 and 2013, we used combined traffic data for Jan and Feb to make a fairer yoy comparison.

Also, we believe that the muted yield growth is partially a function of the persistently strong S$ against other currencies. In our view, air freight for SIA is likely to remain slow due to its heavy European exposure.

We reiterate our Neutral rating on SIA as we think that competitive pressures will continue to weigh on traffic, while persistent S$ strength will eat into yield growth as well. We leave our target price and estimates unchanged. Our CY14 target price of S$11 is based on a trough multiple of 4.2x CY14 EV/EBITDAR, reflecting the de-rating that we believe SIA is undergoing.

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