SINGAPORE (April 5): UOB Kay Hian is maintaining Singapore’s aviation sector at “market weight” after observing a decline in flight movements in recent months, which suggest varying fortunes for both airlines and ground handlers in the industry.

In a report on Wednesday, analysts K Ajith and Sophie Leong recall that Changi’s flight movements in February declined for the first time in 23 months even as pax throughput rose, which points towards the likelihood of airlines reducing frequencies while flying fuller loads.

Improving average air freight rates in US dollar terms, as observed by UOB up until February, also bear positive implications for Singapore Airlines’ (SIA) cargo yields – leading the analysts to believe that the group’s cargo losses could narrow in 4Q17.

“SIA’s cargo earnings are more dependent on cargo load factors, and cargo yields. SIA cargo loads rose 1.6ppt in Jan-Feb 17, greater than 3Q’s 0.9ppt improvement,” say the analysts.

However, Ajith and Leong warn that SATS could be impacted as airlines in general begin exercising greater capacity discipline in response to rising fuel prices.

“In 3QFY17, SATS posted 2.2% yoy growth in gateway services revenue on the back of a 8.4% and 3.7% rise in cargo handled and flights handled at Changi respectively. Both cargo and flights handled growth rates in Jan-Feb 17 were less than half of 3Q’s. If the trend persists, we believe there is downside risk to street earnings estimates,” they explain.

SIA and SATS have been rated “hold” by UOB at target prices of S$10.40 and S$4.60 respectively.

While the research house recommends to “sell” SIA Engineering at a target price of S$3.30, ST Engineering has been rated “buy” with a S$3.70 price target.

As at 11.37am, shares of SIA, SATS, SIA Engineering and ST Engineering are trading at S$10.21, S$4.82, S$3.70 and S$3.64 respectively.