Singapore Air Low-Yield `Bugbear' to Benefit on Weak Dollar

  • Morgan Stanley analysts predict rising yields for airline
  • Cheaper Singapore dollar will support inbound tourist arrivals

Singapore Airlines Ltd., Asia’s second-largest international carrier, will benefit from the decision by the city-state’s central bank to lower the local currency’s appreciation slope as a cheaper Singapore dollar will support inbound tourist arrivals, Morgan Stanley said.

About 40 percent of the airline’s revenue is denominated in U.S. dollars, Australian dollars, the yen, the pound and the euro, likely helping to lift yields for the company, Morgan Stanley analysts led by Daniel Lau and Edward Xu wrote in a note Thursday.

The Monetary Authority of Singapore’s announcement Thursday of its move to a neutral policy of zero percent appreciation in the exchange rate is net positive for the city-state’s stocks, Mikey Hsia, a trader at Sunrise Brokers LLP in Hong Kong, told Bloomberg News in an interview. The surprise decision caused the local dollar to decline and dragged down currencies across Asia Pacific.

“A weaker Singapore dollar is likely to lift yields for Singapore Air, which has been a bugbear amid fuel benefit pass-through,” the Morgan Stanley analysts wrote, reiterating the carrier as their top pick in the aviation sector.

Singapore Air declined to comment on the central bank’s move.

The stock rose 0.7 percent to close at S$11.48 in Singapore trading, while the city’s benchmark Straits Times Index gained 0.8 percent. Shares of Singapore Air have advanced 2.5 percent this year.

The airline could benefit from stronger inbound tourism from countries in the Association of Southeast Asian Nations, the Morgan Stanley analysts wrote. Without adjusting for higher passenger traffic growth, they estimated a 1 percent depreciation in the Singapore dollar would result in a 0.5 percent increase in revenue for the carrier.

Singapore Air will report earnings for the year ended March next month.

The announcement by the Monetary Authority of Singapore came two days after the International Monetary Fund warned of the risk of negative shocks to the global economy.

As Asia’s financial hub, Singapore is feeling the effects of the global downturn and China’s weakening economy. Monetary easing follows an expansionary budget announced by Finance Minister Heng Swee Keat last month, indicating how severe authorities view the slowdown as businesses shut and growth in bank loans contract.

The central bank’s move is bad for domestic consumption and property, but potentially good for bank margins, said Mixo Das, an equity strategist at Nomura Singapore Ltd.

“On the one hand, some currency weakness helps competitiveness for exporters, but it will also likely put upward pressure on domestic rates,” Das said.

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