Passenger demand continues to soften: Traffic fell 4% y/y in December, slightly weaker than November’s trend and much worse than its Jan-Dec 08 growth rate of 3%. Demand weakened across all route regions with shorter- haul flights faring worse than long-haul. System-wide load factor slid further, down 4ppts y/y to 79.9% versus November’s 3ppts decline. Load factors fell in all route regions (N and SE Asia -6ppts y/y, W Asia and Africa -7ppts, US -6ppts, Europe -4ppts) with the exception of Australia/New Zealand where loads were maintained at a high of 89.8% (flat y/y), helped by the weaker A$.

More capacity reduction needed: We believe SIA will need to lower its <1% capacity growth plan for FY10 to support loads and limit pressure on fares. The positive impact of lower fuel prices is partially offset by hedging losses. Fortunately, SIA’s cost structure tends to be relatively less sticky than that of peers, and its balance sheet is also stronger today than in previous crises. We still expect SIA to be one of the few airlines to remain profitable in FY09-10 unless demand falls more sharply than expected.

Cargo dropped a lot: Traffic fell 19% y/y in December, the largest decline in history in a single month and much worse than November’s 13% decline, in line with the industry trend. Although SIA cut capacity more substantially by 9% y/y during the month, this was not enough to prevent a further slide in cargo load factors. Consequently, system-wide load factor fell 7ppts y/y versus November’s 4ppts decline. North and SE Asian routes were worst affected, with loads down 13ppts y/y to a record low of 50%. Australia/NZ routes also outperformed on the cargo side as weaker currencies helped fuel outbound trade, with loads down 3ppts y/y. Loads fell 7ppts y/y on W Asia & Africa and EU routes while US loads fell 5ppts.

PT, key risks: We think it is too early to turn positive on the stock as we believe risks are on the downside in the near term. Our Dec-09 PT of S$10 is based on 0.85x P/BV, SIA’s trough valuation in the past 10 years, although it could de-rate further as the industry outlook worsens. Key risks: earlier demand recovery, declining competition as peers are worse off, and M&A.