Morgan Stanley analysts: Daniel L Lau & Edward H Xu, CFA
Quick Comment – Capacity discipline bestows pricing flexibility: A strong yield environment was one of the major positives for SIA Group. SIA mainline was able to grow pax yields at 2.7% YoY, while SIlkAIr saw a 7.6% increase in pax yields.
According to SIA, the yield improvement was largely due to capacity discipline, which led to the increase in base fares. In particular, premium yields fared much better compared to economy yields, suggesting a strong corporate travel demand environment.
While stronger yields came at the expense of load factors, the yield improvement more than offset the decline in passenger load factors. SIA is now trying to find a good balance between yields and loads, which reflects a healthy demand environment.
This reduces direct competition with LCCs on economy seats and at the same time allows SIA to target budget-conscious corporate travellers. We expect further yield upside from current levels amid:
i) capacity reduction as SIA takes out its aircraft for retrofitting in 2015 and 2016; and
ii) contributions from premium economy and higher load factors upon successful implementation.
The only downside from introducing premium economy class is that SIA will have to take a one-time noncash provision on de-recognising its capex on existing aircraft, which will have an impact on earnings in F2016.
» Maintain OW: We think that investors should accumulate on weakness. Despite giving back some of its recent gains, we think that SIA has a longer term turnaround story as it executes its long-term initiatives. SIA has yet to benefit from lower fuel prices, which is likely to drive margin expansion and share price performance.