They write in their July 30 report: “We believe that SIA’s valuations have slightly outpaced its fundamentals at this juncture, given the downward earnings trajectory and uncertainty surrounding Air India.”
In the period, the group delivered an operating profit of $405 million, 13.8% lower y-o-y. This, the team at DBS notes, is broadly in-line with expectations, respectively tracking 28% of theirs and 24% of consensus full-year forecasts.
Revenue rose 1.5% y-o-y to $4.79 billion, supported by record passenger volumes of 10.3 million and a 4.1% increase in passenger traffic.
However, pricing softened across the board as group passenger yield fell 2.9% y-o-y to 10 cents per revenue passenger kilometre (RPK), with budget-carrier Scoot's 4.7% drop outpacing SIA’s 3.5% decline.
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Cargo remained lackluster, with yields down 4.4% and load factor slipping 0.8 percentage points (ppts) to 56.9%. Cost-wise, group operating expense (opex) rose 3.2% y-o-y, driven by a 3.7% capacity increase and non-fuel cost pressures, partially offset by a 7.9% drop in net fuel cost.
This led to a contraction in operating margin to 8.4% while net profit plunged 58.8% y-o-y to $186 million, significantly below expectations at 17% of DBS’s and 13% of consensus full-year estimate.
Sum, Foo and Yong attribute the miss to a sharp drop in interest income of $61 million, which they note reflects reduced cash balances and a decline in interest rates, as well as a negative $122 million swing in contributions from associates and joint ventures (JV).
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The latter was driven mainly by deeper-than-expected losses at Air India at $130 million for SIA’s 25.1% stake, which SIA began equity accounting from December 2024. Excluding the share of losses from associates, net profit would have declined by a smaller 32% y-o-y to around $308 million.
“Air India remains not only a drag on SIA’s bottom line but also a wildcard, given the lack of visibility on its path to profitability,” writes the team.
They add that losses for the Indian airline are“significantly deeper than expected” and are unlikely to ease in the near term as the airline navigates a complex restructuring alongside reputational damage.
“Following the Dreamliner incident in June, reports suggest that Air India experienced a 20% drop in bookings across domestic and international routes, an 8% to 15% decline in average fares, a rise in cancellations, especially among corporate and premium leisure travellers,” write Sum, Foo and Yong.
SIA’s management indicates that the impact could have been “largely concentrated” in the immediate aftermath of the incident and it is still premature to determine the full financial implications.
The team at DBS adds: “As a result, no provisions were made in 1QFY2026, and SIA is not aware of any provisions Air India may make in 2QFY2026.” Additionally, Air India’s performance in the quarter was “significantly weaker” compared to its results from December 2024 to March, as well as its FY2025 performance.
Excluding fuel, unit cost per available tonne kilometre (ATK) rose 4.7% y-o-y in the 1QFY2026, driven by inflationary pressures including rising wage costs, supply chain disruptions and higher airport service fees.
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Despite this, Sum, Foo and Yong note that quarterly comparisons are “somewhat distorted” by timing differences.
They note that management views the 2% y-o-y increase of the 1QFY2026 unit cost excluding fuel as a “reasonable run rate” for the FY2026 when compared to the full-year FY2025. “We continue to expect a modest y-o-y increase in ex-fuel unit costs for the full year,” writes the team at DBS.
Overall, Sum, Foo and Yong have lifted their FY2026 operating profits by 9% on steady core performance, mainly reflecting higher passenger load factors, partly mitigated by lower Scoot and cargo yields.
They add: “While operating performance remains resilient, we lowered our FY2026/FY2027 net profit estimates by 12%/8% respectively, driven by increased losses from Air India at the associate level.”
Meanwhile, OCBC Investment Research’s (OIR) Ada Lim has similarly kept her “hold” call at an increased fair value of $7.10 from $6.80 previously.
She notes that the closure of Jetstar Asia could allow Scoot to gain market share in intra-Asia routes.
On Air India, she writes: “While management was not able to provide more colour on the outlook for Air India, we are cautiously optimistic that SIA’s corresponding share of losses will narrow over time as Air India continues to execute on its transformation strategy.”
“All things considered, we finetune our forecasts and factor in higher non-fuel cost expectations, the recent Comprehensive Services Agreement signed between SIA and SIA Engineering Company (SIAEC), as well as a larger share base,” adds Lim.
With this, her lifted fair value estimate is based on a higher forward 12-month target price-to-book (P/B) ratio of 1.3 times, which is pegged to one standard deviation (s.d.) above its five-year historical average.
Potential catalysts noted by the OIR analyst include a stronger-than-expected recovery in capacity, rapid network growth to capture demand, especially in the Asia-Pacific (APAC) region, as well as favourable fluctuations in oil prices.
On the other hand, investment risks include significant further weakening in cargo demand, increased competition as other airlines ramp up on international capacity and a steep moderation in air travel demand and prices.
For Morningstar Equity Research (Morningstar) analyst Lorraine Tan, SIA’s operating performance in the quarter was “generally positive” and consistent with her view for margins to normalise to pre-pandemic levels.
“The share of Air India's net loss at $122 million for the June quarter is larger than expected, and we now think that it will take longer for Air India to break even,” adds Tan.
She notes that SIA's share price fell and hovered around $7 as at July 29, as investors expect Air India Group's performance to weigh on SIA in the near-term, this coming despite no cash flow impact.
With this, while believing risk to SIA’s valuation is “currently contained”, she has cut her earnings estimates by an average of 17% through the FY2029.
Tan has raised her fair value estimate by 5% to $6.40. She writes: “SIA remains overvalued, in our view. Our profit forecasts have been below market consensus as we factor in a decline in operating margin to around 6% over the next few years as competition rises.”
She lowers her FY2026 fuel cost assumptions, lifting her projected operating margin to 6.6%. Tan notes that she will adjust her forecasts after analysing another quarter of data.
The analyst has a three-star rating against Morningstar’s five-tier scale, which indicates that “investors are likely to receive a fair risk-adjusted return”.
As at 3.55pm, shares in SIA are trading eight cents lower or 1.16% down at $6.82.
