SINGAPORE (Nov 11): OCBC is keeping its “hold” call on Singapore Airlines with $11.45 fair value.

In a Monday report, lead analyst Eugene Chua says privatising Tigerair will benefit SIA over a longer-term horizon as it gives management flexibility to accelerate the process to unlock synergies within the group to achieve cost savings and maximisation of revenue.

“Within SIA’s portfolio, we believe there are much more in terms of route rationalisation that can be done between Scoot and Tigerair to capture interlining traffic,” says Chua.

However, given competitive landscape of the airline industry within the region, SIA’s traditional strategy of pursuing growth through its full service parent airline will not help.

“We believe pressure on passenger yields on its parent airline is likely to remain with the continued capacity expansion of the Gulf carriers, especially for the Europe routes,” adds the analyst.

To recap, SIA’s 2Q core PATMI missed OCBC’s expectations as it formed only 21.1% of its FY16 forecasts. Excluding Tigerair, 2Q revenue declined 5.8% to $3.7 billion, mainly due to a 7.0% decline in revenue from the parent airline as a result of a 4.6% decline in passenger yields. Cargo yield also fell 9.4% despite higher freight carriage.

If not for the 15.2% decline in 2Q fuel costs, total operating expenses would have been higher, driven mainly by higher aircraft lease rentals, costs to retrofit cabins for premium economy product, and aircraft maintenance and overhaul costs.

Consequently, 2QFY16 reported PATMI jumped 135.0% to $213.6 million, but stripping out one-off dividend income of $91.1 million, 2QFY16 core PATMI came in at $122.5 million.

“Incorporating 2QFY16 results and mixed outlook, we cut FY16F PATMI by 1.1% but raise FY17F PATMI by 4.3%,” says Chua.

SIA is down 2.3% at $10.88.