Singapore Airlines (SIA) has released May traffic statistics and the market share degradation of recent months has continued. Passenger traffic was down 23% yoy while load factor fell 7.8 percentage points (pp). This compares to an 18% traffic decline in April, with the swine-flu outbreak having an impact while the April figures benefited from the timing of Easter. Key peer, Cathay Pacific, saw traffic decline 7% in the same period and load factor decline 1.6pp.

Cargo traffic declined 21% (April was down 22%) but aggressive capacity reductions led to a slight increase in cargo load factor (up 0.5pp). We are less concerned about market share losses in cargo (Cathay Pacific was down 14% in May) because we consider this a structurally unattractive segment for airlines.

These statistics reinforce our view that SIA’s fleet configuration (particularly the Boeing 777-300ER’s) may be a strategic mistake as it could lead the group to attempt to sustain a yield premium, which we do not think is possible in the current economic environment. The recent rally is jet fuel prices are also of concern in the context of ongoing weak demand (our estimates assume $US60/bbl jet fuel).

SIA’s balance sheet strength is likely to ensure that it is well placed in a relative context but we remain concerned that the fleet configuration will mute earnings recovery if the industry does start to experience a traffic recovery in H209. Our price target is based on UBS VCAM analysis.