Ajith is keeping a “hold” call on SIA, but warns that its stock price is expected to react negatively to the earnings miss.
SIA’s 4Q loss dragged full year earnings down 55.2% y-o-y to $360.4 million, from $804.4 million a year ago.
The group in 4Q saw an 81.7% drop in operating profit to $27.6 million, from $153.2 million a year ago.
This was mainly on the back of an operating loss of $41 million by the parent airline company in 4Q, compared to an operating profit of $98 million in the same period a year ago.
(See: Singapore Airlines swings to 4Q loss; dividends slashed)
“While SIA managed to boost load factor, this was achieved at the expense of yields, which fell by a whopping 7.5% year-on-year in Feb 2017,” Ajith says. “It appears that SIA had been too aggressive in discounting fares at the expense of loads and at the same time faced a 52% increase in plane fuel cost.”
On the other hand, Ajith says the profitability of SilkAir and budget carriers TigerAir and Scoot stand in stark contrast to the parent airline.
In 4Q, SilkAir reported an operating profit of $27 million while the budget carriers posted operating profit of $22 million.
Meanwhile, SIA Cargo’s losses narrowed to $5 million, from $40 million a year ago.
“SIA needs to rationalise capacity on unprofitable routes,” says Ajith. “We believe that SIA’s strategy of aggressive price discounting is not sustainable and the carrier needs to rationalise unprofitable routes, cut capacity or frequency to improve yields and profits.”
To continue to address the structural changes in the industry, SIA said in a filing to SGX on Thursday that it has launched a dedicated Transformation Office to conduct a wide-ranging review to better position the group for long-term sustainable growth across its portfolio.
SIA on Friday morning announced that SIA Cargo will be re-integrated as the cargo division within the group in the first half of 2018.
(See: Singapore Airlines announces reintegration of SIA Cargo as group division)
As at 1.35pm, shares of Singapore Airlines are trading 70 cents lower at $10.06.
