With reference to the announcement released on 25th May 2011 by SIA, SIA is going to establish a new wholly-owned low-cost carrier that will operate widebody aircraft on medium and long-haul routes. The new airline, being established following extensive review and analysis, will allow the SIA Group to serve a largely untapped new market and cater to the growing demand among consumers for low-fare travel, SIA said.
This is a positive news for SIA given that fact that SIA is facing stiff competition from both low-cost airlines and branded airlines namely those from Middle East, Qantas, Cathay Pacific, etc. SIA at the moment has another subsidiary airline in the name of SilkAir that provide cheaper airfare to destination within of 5 hours flight. The newly established low-cost carrier could be used to cover the gap between SIA and SilkAir.
Medium and long-haul destinations could extend to North Asia, Middle East, Oceania and Europe regions which currently being served by SIA. This should give air-traveler an alternative in getting to those destination via a cheaper airfare option and at the same time still maintain the status quo of "traveling by SIA". Meanwhile, SIA itself could wholly focus on business and first class travelers.
SIA with free cash on hand that is equivalent to at least $4/share ( even with the recent dividend declaration of $1.20/share, still have $3/share amount of free cash ) will have no cash flow issue in setting up this new establishment.
This could be the catalysts that SIA is looking at to recover its stagnant load factor.
Fundamentally, at the price of $13.50 and below is a buy. With the piece of positive news and the $1.20/share dividend, a new fundamental buy price of $14.00 and below is possible.
Investors should watch out for more detail like features of the air-carriers, destinations, airfares, etc to further deduce on the potential upside of SIA. At the moment, on the surface, this is a positive catalysts to SIA.
