We are upgrading SIA to a Buy, with price target raised to S$13.20, in line with its forecast bookvalue. Lower crude oil prices have led to a corresponding slump in jet fuel to around US$60 perbarrel, a third of its peak price, and down by 30% in the last month alone. This is significantlybelow our forward assumption of US$120 per barrel. Against an uplift of around 40m barrels perannum, every US$10 reduction translates to a S$400m improvement to SIA’s bottom line,indicating a potential significant upgrade to earnings if current fuel prices are maintained.

Furthermore, SIA’s passenger loads have been relatively resilient, and are still higher on a y-o-ybasis. SIA already plans to scale back capacity in the year ahead. Yields are likely to beimpacted from lower demand in the premium classes, but should remain relatively strong - wehave already factored in weaker passenger traffic and load factors to our forecasts.

We remain confident of our EPS forecast of S$1.21 for FY09 and S$1.40 for FY10, which isalready significantly ahead of consensus expectation of S$1.05 and S$1.00 respectively. Whilewe are currently leaving our forecasts unchanged, we also believe there is further room for asignificant upgrade to our FY10 earnings on sustained lower fuel prices. However, potential fuelcost gains in FY09 (year-end March) will be mitigated by its conservative hedging policy.

The Civil Aviation Authority of Singapore (CAAS) has announced that it is extending its Air HubDevelopment Fund by S$130m until end 2009, which essentially is a rebate of up to 25% onlanding fees and rents at Singapore’s airports. However, Changi’s costs are already one of thelowest in the world, and SIA’s landing fees at Changi are relatively small versus its annuallanding fee expenses which exceed S$650m per year. Nevertheless, it exhibits Singapore’scommitment to maintain its position as a global air hub, and SIA remains very much part of thoseplans.