Singapore Airlines’ tie-up with Duty Free provider DFASS (Singapore) and SATS is a positive, potentially applause-worthy, move to boost ancillary revenue, UOB KayHian said in a note dated Friday.
The deal is for SIA to provide travel-related retail operations in Singapore under the KrisShop and Scootalogue brand names, with SIA to take a 70 percent stake in DFASS SATS, which is currently 50:50 owned by those two companies, the note said. The venture will then enter a management contract with DFASS and SATS for procurement and logistics, respectively, the note said.
With DFASS’ “attractive” procurement costs, “SIA will be able to offer better pricing on alcohol and fragrances compared with other retail outlets,” UOB KayHian said. “If Krisflyer members choose to utilise their miles for such purchases, SIA will generate better margins than if they choose to redeem flights.”
Better margins on air miles?
UOB KayHian added that SATS could benefit from expanded cooperation with DFAAS at other hubs.
“SIA will be tapping into the rising trend of e-commerce retail sales and doing so by partnering with key players in the supply chain,” the note said, adding that SIA can target its Krisflyer members and its 30 million passenger base.
Due to DFASS’ lower bulk purchasing costs, pricing for duty paid wine, spirits and cosmetics at KrisShip can also be more attractive than at local retail stores, UOB KayHian noted, adding this could attract non-airline shoppers.
UOB KayHian estimated that every S$3 increase in ancillary income per passenger from SIA alone would boost profit before tax by S$60 million.
Top sector pick
The brokerage noted that SIA’s stock price has fallen since the announcement of plans to raise Changi Airport levies, but it said it didn’t expect the additional S$13.30 would impede travel.
It added that SATS was its top avaiation sector pick, with associate profits set to improve over the medium term. It also expected SATS would announced similar tie-ups with DFAAS and Turkish Airlines and Chinese carriers.
It rates SIA at Buy, with S$11.90 target; it rates SATS at Buy with S$5.90 target. It kept a Market Weight on the Singapore aviation sector.
Shares of SATS were up 2.54 percent at S$5.25 at 1:12 P.M. SGT; SIA was up 2.19 percent at S$11.20.