Singapore Air Transport: Sector Rated NEUTRAL as Cargo Growth Offsets Jet Fuel Headwinds — SATS (TP S$5.01), CAO (TP S$2.01), SIA Engineering (TP S$3.90) at BUY November 4, 2026

Brief Overview

In Sep 2026, the Singapore aviation sector continued its decline. China Aviation Oil (CAO) dropped significantly by 7.5%, followed by SATS and SIA at negative 2.3% and negative 0.7% respectively, while SIA Engineering edged up incrementally by 1.0%. Passenger growth remains under pressure from elevated jet fuel prices. However, cargo has been a relative bright spot, with SIA’s cargo volume rising 9.4% year-on-year in September 2026. Load factor improved most in the East Asia route region, up 5.3 percentage points to 55.8%. Phillip Securities Research maintains a Neutral stance on the air transport sector amid the lack of near-term stabilisation in the US-Iran conflict.

Investment Positives

Strong Cargo Growth Driven by AI and Semiconductor Demand

Overall cargo volumes held steady in September 2026, but performance diverged sharply by trade lane. Asia-Pacific to US volumes rose 13% to 17% year-on-year, driven by demand for semiconductors and other high-tech goods. South Korea led the growth with volumes up 54% year-on-year, and Singapore posted gains of 26% year-on-year. Singapore’s position as a regional processing and re-export hub for artificial intelligence supports its growth, even though it lacks sizeable domestic AI trade production capability.

Cargo rates remained elevated. China’s Mid-Autumn Festival and National Day Golden Week holidays prompted exporters to rush shipments out before factories closed, which would typically push air freight rates higher. Global spot rates held at US$3.45 per kilogramme, up 33% year-on-year, while Asia-Pacific to US spot rates averaged US$6.75 per kilogramme, up 40% year-on-year. Singapore to US rates were up 62% year-on-year, which supports SIA’s cargo yields on US-bound flows.

Capacity Expansion into the Fourth Quarter

Airlines continue to add international capacity into the fourth quarter of 2026 despite elevated jet fuel prices. Chinese carriers plan to raise international seats by about 9% year-on-year, with available seat kilometres to increase 13%. Long-haul routes to Europe, Russia and Canada are driving the growth. Singapore’s fourth-quarter flight capacity is set to rise about 4% year-on-year, driven by the China-Singapore route, where SIA is adding 24% more seats. We believe this could reflect SIA’s deepening partnership with Air China to enhance route coordination and revenue sharing.

SIA Engineering Benefits from Boeing 777X Certification Delays

SIA’s largest aircraft backlog is 31 Boeing 777X aircraft, intended to replace the Airbus A380s (12 units, average age 12.7 years) and Boeing 777-300ERs (22 units, average age 16.5 years), the oldest passenger aircraft in the fleet. The 777X is not expected to be delivered before April 2027 because of certification delays, with 665 unfulfilled 777X orders from at least 17 customers. The delays keep these maintenance-heavy aircraft flying longer, supporting near-term demand for SIA Engineering. Furthermore, SIA’s largest unit base, the A350XWB (65 units with an average age of 7.5 years), will power SIA Engineering’s SAESL joint venture going forward as SAESL expands engine servicing capacity from 300 to 400 engines per annum.

SATS Positioned for AI-Driven Airfreight and Middle East Expansion

Although e-commerce-driven tailwinds may be weaker, the analyst believes AI-driven airfreight will continue to support SIA’s cargo demand. SATS is also expected to expand in the Middle East market alongside Riyadh Air’s cargo infrastructure build-out.

CAO Special Dividend Potential

CAO may benefit from trading margins as regional fuel price differentials have widened. The likelihood of a special dividend or higher payout ratio — currently the lowest among Sinopec subsidiaries, backed by US$589 million in net cash — is identified as the near-term catalyst.

Investment Challenges

CAO Facing Higher Procurement Costs

CAO’s decline reflects sustained high jet fuel prices feeding through to cost of sales. With its lower-cost inventory largely used, the benefit from cheaper procurement has faded, and future jet fuel procurement will have to be at current elevated costs.

Asia-Europe Cargo Route Remains Weak

The Asia-Europe route remained under pressure. Hong Kong to Europe volumes were still down approximately 30% year-on-year as the EU’s removal of de minimis exemptions in July 2026 continued to weigh on e-commerce flows.

Elevated Jet Fuel Prices

Persistently high jet fuel prices remain a headwind for SIA and the broader sector. Singapore jet fuel price normalisation is not expected until 2029.

Outlook

The sector outlook is mixed. Cargo growth driven by AI and semiconductor demand continues to provide a tailwind, but elevated jet fuel prices and weak Asia-Europe trade lanes present headwinds. SIA’s fourth-quarter capacity expansion and deepening partnerships signal cautious optimism, while SIA Engineering benefits from aircraft delivery delays that keep older, maintenance-intensive fleets in operation.

Recommendation and Target Price

Phillip Securities Research maintains a Neutral sector stance on Singapore air transport. At the individual stock level, SIA carries a Neutral rating with a target price of S$7.09. SATS is rated BUY with a target price of S$5.01. China Aviation Oil is rated BUY with a target price of S$2.01. SIA Engineering is rated BUY with a target price of S$3.90.

This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst.

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