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SEE APPENDIX II FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

17 October 2011

PP16832/01/2012 (029059)

Sector Update 5 July 2012

Regional

of 2

Aviation: LCC A new kid in the long haul market

NEUTRAL retained on regional LCCs. Scoot, SIA’s wholly-owned

airline specialising in low-cost, long haul flights, has been in service

since 4 Jun 2012 with its maiden flight to Sydney. We are unexcited by

this development as it is an unproven model; even perceived market

leader AirAsia X has not turned a cash profit since its inception back in

2007. We maintain our HOLD call on SIA with an unchanged target

price of SGD11.15, pegged to historical mean P/B of 1.0x. This

development will also not impact the LCCs in our coverage: AirAsia,

Asia Aviation and Cebu Pacific.

SIA’s atypical experiment. This foray into the low-cost carrier (LCC)

business segment is a material departure from SIA’s forte as a premium

airline. SIA has carefully set up a new team to work independently of

the parent airline, and has appointed Mr. Campbell Wilson – an SIA

veteran with 16 years of experience – to head the new airline.

Purist low-cost, long-haul model. We note that Scoot’s business

model is a purist low-cost, long-haul airline with high aircraft seat

density, high utilisation and the unbundling of frills. Scoot has

incorporated many best practices from its rivals (AirAsia X, JetStar) and

should have a comparable unit cost. It is the first LCC to use the Boeing

777-200 aircraft as its workhorse; other LCCs prefer the Airbus A330.

Risky venture. This business model is not a proven success; even the

industry leader has yet to turn a profit. We also fear that Scoot may

suppress yields at the parent airline especially during a downturn, as

people downtrade to save costs. Furthermore, there is no product

differentiation vis-a-vis competitors, and winning market share is a case

of lower ticket fares. While we prefer that SIA focus on what it does best

– offering a premium service – we recognise the merits of setting up

Scoot to counter the aggressive growth of competing budget carriers.

SIA still well positioned for recovery despite Scoot’s startup

challenges. Judging by the experience of AirAsia X, we caution that

SIA’s earnings may be weighed down by Scoot’s startup losses in the

initial 3-5 years. We however have complete faith in the parent airline’s

premier status, and that it is fundamentally well positioned to take

advantage of an upturn in the industry’s fortunes.

Summary of Singapore Airlines and LCC recommendations

Sectors Country of

domicile

Recommendation

Price (local $) PE (x) Note

4-Jul T.P. 2012F 2013F

Singapore Airlines Singapore Hold 10.46 11.15 18.8 12.9 Full service airline which owns Scoot

AirAsia Malaysia Hold 3.70 3.36 12.7 12.1 Malaysia based LCC with four JVs globally

Asia Aviation Thailand Buy

3.60 4.30 11.5 7.3 Thailand based LCC

Tiger Airways* Singapore N.R 0.71 N.R 101.4 12.7 Singapore based LCC with JV in Indonesia

Cebu Pacific Philippines Hold 69.0 77.5 11.2 7.9 Philippines based LCC

Note: Share price updated as of market close 4 July 2012

* for non-rated stocks (N.R), we have used consensus’ estimates

Sources: Bloomberg, Maybank IB

Neutral (unchanged)

Wong Chew Hann, CA [email protected] (603) 2297 8692

Country coverage: Singapore Airlines Bernard Chin [email protected] (65) 6433 5726 Asia Aviation Jaroonpan Wattanawong [email protected] (662) 658 6300 ext. 1404 Cebu Pacific Kenneth Nerecina [email protected] (632) 849 8839

mailto:[email protected]

mailto:[email protected]

5 July 2012 of 17

Regional Aviation 17 October 2011

Page 1 of 2

Introducing Scoot

SIA’s foray into the low-cost, long haul market. Scoot is a low-cost

long-haul airline wholly owned by SIA. It was established in November

2011 with the aim of capturing a share of the fast-growing budget travel

market and expanding the group’s business reach. The airline operates

independently from the parent airline, with a standalone aircraft

operator’s certificate license and a separate management team.

Brief history:

May 2011: SIA announces its intention to establish a low-cost, long-

haul airline.

July 2011: Campbell Wilson was named as the CEO of the yet-to-

be-named new airline.

Nov 2011: The name “Scoot” was officially unveiled, along with its

website and images of its livery.

March 2012: Received its first two Boeing 777-200 aircraft that will

be modified and repainted to yellow-white.

4 June 2012: Scoot’s maiden flight to Sydney. Flight was delayed for

2 hours due to technical oversights.

Deep management, but on unfamiliar territory. Campbell Wilson is a

16-year veteran of SIA. He has served in various capacities across

SIA’s entire operations. He was the General Manager based in Tokyo

before taking on the role of CEO of Scoot. SIA enjoyed great success

and has positioned itself as the premium airline of choice under Mr.

Wilson’s watch. We have confidence over his management capabilities

and the ability to create a good team.

However, Mr. Wilson has no prior experience in the LCC industry and

therefore we have some concerns over the management’s ability to

employ savvy marketing techniques and to stimulate latent demand

from the budget conscious clientele. The initial media buzz surrounding

Scoot was satisfactory in our view, but the acid test is to keep it going.

Asia Pacific is Scoot’s backyard. Scoot’s focus is to serve medium-

and long-haul routes (4-10 hours flight time) originating in Singapore.

The confirmed destination lists are shown in the table below. In addition

to the stated routes, Scoot also intends to fly to more destinations in

China, Japan, South Korea, Australia, Japan and India in the future.

Scoot’s destination from Singapore

Country Airport name Commence Note

Australia Sydney Airport 4 June 2012 In-service

Australia Gold Coast 12 June 2012 In-service

Thailand Suvarnabhumi Airport 5 July 2012 In-service

China Tianjin Bihai 23 August 2012

Taiwan Taiwan Taoyuan 3rd quarter 2012

Japan Narita Airport 3rd quarter 2012

Sources: Scoot, Maybank KE

Picture of Campbell Wilson and the members of Scoot team during official launch

Scoot Airways logo

http://en.wikipedia.org/wiki/Low-cost_carrier

5 July 2012 of 17


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Fleet information

Hand-me-down Boeing 777-200s from SIA. Scoot currently has two

Boeing 777-200ER aircraft in its fleet and plans to have 14 aircraft by

2016. These aircraft are inherited from SIA which are then retrofitted to

suit LCC operations. SIA has a total of 27 B777-200 aircraft (21 owned,

6 leased) with an average age of 9 years and 8 months (end June

2012). Scoot is the first low-cost, long-haul airline to utilise the Boeing

777-200 aircraft as its workhorse; other airlines generally use the Airbus

A330 aircraft.

Modified to reduce costs. The aircraft engines have been de-rated to

help reduce fuel burn. Furthermore, Scoot does not need SIA’s original

engine specification for its mission profile (Scoot’s flights are much

shorter than SIA’s). Secondly, the in-flight entertainment system (IFE)

has been removed. This helps to free up two tonnes worth of equipment

(TV, wiring, consoles), increasing the aircraft’s payload. Customers

have a choice of leasing iPads as their in-flight entertainment system.

High-density seating. The Boeing 777-200 aircraft is fitted with a total

of 402 seats comprising 32 business class and 370 economy class

seats. This is a 16-55% higher seat count than other airlines with

comparable aircraft. Against SIA, it has a 41% higher seat count.

Selected airline’s Boeing 777-200ER aircraft seat configuration

# Seats Business Economy Total % Premium

seats Toilet Ratio

SIA 30 255 285 10.5% 29

MAS 35 247 282 12.4% 31

Thai 30 262 292 10.3% 21

Cathay 45 291 336 13.4% 42

Emirates 42 304 346 12.1% 35

Qatar 42 217 259 16.2% 26

Average 37 263 300 12.5% 31

Scoot 32 370 402 8.0% 40

Sources: Respective companies

Minimalist business class seat. Scoot’s business class seat is the

most frugal among its peers. Its 38 inch pitch x 22 inch width might

seem superior to JetStar’s, but in reality it is packed densely in a 2-4-2

configuration against JetStar’s comfy 2-3-2 configuration. The best in

class is AirAsia X’s lie-flat seats with 59 inch pitch x 20 inch width

packed in a neat 2-2-2 configuration.

Economy class, slightly better than peers. Scoot’s economy class

seat pitch is in line with the peer group average of 31-inch. Its width

however is superior at 19-inch as compared to 16.5-inch at AirAsia X

and 18-inch at JetStar. This will be beneficial for long distance flights as

customers enjoy the extra space.

Selected low cost, long-haul airlines’ seat comfort level

Airline Business (inches) Economy (inches)

Type Pitch Width Type Pitch Width

Scoot Recliner 38.0 22.0 Slim line 31.0 19.0

AirAsia X Lie-flat 59.0 20.0 Slim line 31.0 16.5

JetStar Recliner 38.0 20.0 Slim line 31.0 18.0

Sources: Respective companies

5 July 2012 of 17


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Business model

Purist low-cost, long-haul model. Scoot’s business model adheres to

the purist low-cost, long-haul model. It has a single aircraft type fleet,

which helps to simplify operations, eliminates duplication and reduces

cost. It operates a point-to-point route network with no burden of

managing interlining passengers. Ancillary income is an important part

of Scoot’s business model, with frills unbundled and sold for a fee.

However, Scoot’s route network has one flight which is short-haul

(Singapore to Bangkok), which contravenes the business model. Apart

from this breach, Scoot is perhaps the purest low cost, long-haul airline

among its peers.

Scoot’s business model versus other comparable airlines

Low fares ±

Single aircraft fleet * x

Point-to-point network

Exclusive medium-long-haul routes x

Minimal complexity ** x x

Ancillary income

* AirAsia X have two aircraft variants; Airbus A330-300 and A340-300

** AirAsia X and JetStar provides interlining services with their sister airline

Sources: Respective companies, Maybank KE

Product offerings identical. We list in the table below the product

offerings available for purchase at the respective airlines. Note that the

product offerings among the respective airlines are identical, despite

the different definitions or product names used. It is observed that

Scoot is the most aggressive among the airlines as it charges for

literally every value-added service. JetStar, on the other hand, is the

most customer-friendly, as it provides a complimentary baggage

allowance of 10kg.

Product offerings subject to a fee

Seat selection

Strategically located seats

Priority boarding n/a

Basic baggage no charge

Oversized baggage

Sports gear

Food & beverages

Comfort kit

In-flight entertainment

In-seat power no charge n/a

Sources: Respective companies, Maybank KE

5 July 2012 of 17


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Scoot’s advantages. Scoot has some advantages over its rivals by

using the B777-200 aircraft; the aircraft has the highest payload, which

enables it to carry the highest number of passengers and cargo. It also

has the longest range, which is useful for long-distance destinations.

Despite being a brand new airline, Scoot will have all the benefits of an

established airline thanks to the support it gets from SIA. This comes in

the form of attractively priced hardware (aircraft, spare parts), common

aircraft engineering support, and a comprehensive distribution system.

The aircraft’s extra payload can deliver freight on behalf of Singapore

Airline Cargo, thereby generating extra revenue.

Scoot’s disadvantages. Scoot’s B777-200 aircraft is much older than

its competitors. This will result in lower operational reliability and higher

maintenance cost, in our view. Secondly, Singapore is a well-served

aviation hub and fares in and out of Singapore are often very

competitive. This will somewhat inhibit Scoot’s ability to raise yields

going forward.

Scoot compared to AirAsia X and JetStar

Scoot AirAsia X JetStar (long-haul)

Aircraft type Boeing 777-200ER (de-rated to 200) Airbus A330-300 Airbus A330-200

Business class seats 32 12 38

Economy class seats 370 365 265

Total seats 402 377 303

Premium seats ratio 8.0% 3.2% 12.5%

# Toilets 10 8 7

Toilet to seat ratio 40 47 43

Max take-off weight (kg) 287,800 233,000 233,000

Structural payload (kg) 60,025 50,059 51,160

Max range with structural payload (km)

10,455 6,978 7,906

Aircraft cost per month * $500,000 $830,000 $780,000

Aircraft average age 9 yr 7 mths <3 years <3 years

* we use current market lease rate for Scoot’s B777-200 and for JetStar’s A330-200. AirAsia X figures is extracted from its financials

Sources: Airbus, Boeing, respective companies, Maybank KE

5 July 2012 of 17


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Economic analysis for Scoot, AirAsia X, and JetStar

We compare the direct operating cost for flights of 1,000 nautical miles

(nm), 2,000 nm and 3,000 nm using each airline’s respective aircraft

type. We have assumed the standard formulas commonly used by the

airline fraternity to estimate the route data (navigation and landing

fees). Mission rules, such as taxi time, cruise time, cruise altitude and

cruise speed, have been made in accordance with the aircraft

manufacturer’s standard long-range rules.

1,000 nm journey

Cost Items (US$) Notes / Assumptions Scoot

B777-200 AirAsia X A330-300

JetStar A330-200

Aircraft ownership cost Based on a 3:00 hour journey time 5,115 7,217 6,522

Fuel cost (assume US$120/bbl) Consumption (bbls): B777 = 134, A330-3 = 112, A330-2 = 108 16,061 13,388 12,931

Maintenance cost Cost / flight hour: B777 = 1,760, A330-3 = 1,222, A330-2 = 1,099 4,148 2,880 2,592

Navigation fee US cents / km: B777 = 7, A330-3 = 6, A330-2 = 5.5 2,293 1,856 1,856

Landing fee 8.2 US cents per aircraft maximum take-off weight 2,446 1,980 1,980

Cockpit crew # Crew: B777 = 11, A330-3 = 10, A330-2 = 9 1,100 1,000 900

Total Cash Operating Cost 32,822 29,396 28,256

Cost per seat (USD)* Total operating cost / seat 81.6 78.0 93.3

Cost per ASK (US cents) Total operating cost / ASK 4.41 4.21 5.04

Cash cost per ATK (US cents) Total operating cost / loadable payload 31.5 31.7 29.8

2,000 nm journey


B777-200

AirAsia X

A330-300

JetStar

A330-200



Maintenance cost Cost / flight hour: B777 = 1,530, A330-3 = 996, A330-2 = 896 6,902 4,493 4,044



Cockpit crew # Crew: B777 = 11, A330-3 = 10, A330-2 = 9 1,100 1,000 900





3,000 nm journey


B777-200

AirAsia X

A330-300

JetStar

A330-200



Maintenance cost Cost / flight hour: B777 = 1,450, A330-3 = 907, A330-2 = 816 9,661 6,043 5,438



Cockpit crew # Crew: B777 = 11, A330-3 = 10, A330-2 = 9 1,200 1,100 1,000





* This does not include airport taxes Sources: Airbus, Boeing, Maybank KE

5 July 2012 of 17


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Scoot cost per available seat kilometre (CASK) Scoot cost per available tonne kilometre (CATK)

Sources: Boeing, Maybank KE Sources: Boeing, Maybank KE

Scoot’s CASK is slightly higher than AirAsia X’s. The graphs above

map out the estimated CASK and CATK for the respective airlines.

Scoot’s CASK is slightly higher (+1.1% to +4.7%) than that of AirAsia X.

The gap narrows for longer flights, as the B777-200 aircraft performs

well for flights of a longer distance. Jetstar’s CATK is significantly higher

(+12.4% to +14.8%) than Scoot’s. This is due to the size limitation of

the Airbus A330-200 aircraft; it can only have 303 seats as opposed to

377 for AirAsia X and 402 for Scoot.

Scoot’s CATK is better than AirAsia X’s. Scoot’s CATK is lower (-

0.6% to -4.0%) than that of AirAsia X. This is due to the B777-200’s

superior payload capabilities. However, Scoot’s CATK is higher (+2.9%

to +5.7%) than JetStar’s Airbus A330-200. Jetstar has the best CATK

because the A330-200’s limited seat count provides high payload

availability for cargo.

Scoot is stuck in the middle. Scoot’s unit cost position is nestled in

the between that of AirAsia X and JetStar. We think this is a good

position to be in because it is competitive against AirAsia X. The trick is

for Scoot to achieve satisfactory cargo load factors of above 60% in

order for it to generate superior returns. This is where its alliance with

Singapore Airline Cargo will be very critical.

3.00

3.50

4.00

4.50

5.00

5.50

1,000 2,000 3,000

US cents

nm

Scoot AirAsia X JetStar

20.0

22.0

24.0

26.0

28.0

30.0

32.0

34.0

1,000 2,000 3,000

US cents

nm

Scoot AirAsia X JetStar

5 July 2012 of 17


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Ticket fare comparisons

Route comparison. Thus far, Scoot has four scheduled routes in

service (Sydney, Gold Coast, Bangkok, Tianjin). We have made fare

comparisons on the Sydney and Bangkok routes, given that Gold Coast

and Tianjin are unique routes.

Scoot is cheap against FSCs... Scoot’s fare is the cheapest for the

Singapore to Sydney route by a significant margin (75%-78%). Even

after including all the charges for perks that are provided by full service

carriers (FSC), the discount gap remains attractive at 71%-74%. The

only trade-off is its inconvenient departure time of 0210 hours, whereas

SIA departs at 0705hrs and Qantas and British Airways at 2000hrs.

Singapore to Sydney one way ticket fare on economy (SGD)

Base date

4 July 2012

Scoot

(basic)*

Scoot

(perks)** SIA

Qantas

Airways

British

Airways

2 days forward 213 248 1,236 1,551 1,225

2 weeks forward 243 288 996 1,226 1,401

4 weeks forward 138 183 996 562 562

6 weeks forward 97 142 996 562 562

Average 170 215 1,056 975 938

* Scoot basic is for flights only

** Scoot with perks includes meals, 15kg baggage, seat selection

Source: Respective companies

…but less so against LCCs. Against other LCCs, Scoot’s average

fare is only 10% cheaper in our Singapore-Bangkok route comparison.

Singapore to Bangkok one way ticket fare on economy (SGD)

Base date (4 Jul) Scoot SIA* Tiger AirAsia JetStar

2 days forward 156 441 158 231 190

2 weeks forward 78 441 85 231 78

4 weeks forward 83 441 118 203 88

6 weeks forward 92 441 95 203 98

Average 102 441 114 217 113

Note: LCC quotes are for flights only (no check-in, no meals) and afternoon or evening

departure where possible.

Source: Respective companies

Scoot faces an uphill task to be profitable for Sydney route. Based

on our average ticket price observation, we think Scoot should be able

to achieve profitability on the Bangkok route if it achieves a load factor

of 64%. The Sydney route is not profitable as the average fare achieved

is lower than the unit cost per seat. Hence we think fares will have to be

increased to ensure the route’s sustainability in the long term.

Scoot break-even for Singapore to Sydney and Bangkok route

Singapore - Sydney Singapore - Bangkok

Average fare 170.4 102.3

Break-even at 100% load factor 194.9 65.8



Sources: Scoot, Maybank KE

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We think Scoot can work, but it will be a long journey

Scoot offers nothing new. We don’t see anything new or remarkable

that sets Scoot apart from its competitors. In fact, the closer we look,

the more we are convinced that Scoot is a remake of AirAsia X and

JetStar put together. The products are identical, with similar seat pitch

and width, and similar charges for frills and other value-added items.

Competition will intensify. Since the route network consists of similar

destinations (Sydney, Gold Coast, Taiwan, Tokyo), customers now

have an extra choice for their long-haul travel. This will intensify

competition and the customer selection criteria will be based on price

and end destination preference (eg. Singapore over Kuala Lumpur).

Whilst this is good news for customers, it may not necessarily be quite

as good for shareholders of SIA.

Good for Singapore. Budget travel accounted for 28.6% of all flights to

Changi airport in 2011 and is growing four times faster than flights by

FSCs. Singapore is fast becoming a tourist hotspot for the region given

its variety of attractions (casinos, shopping arcades, theme parks,

Formula 1), fuelling strong demand from budget-conscious vacationers.

Scoot’s entry into the market will help to accelerate this growth and

make Singapore a formidable LCC hub in the region.

We remain critical of some decisions made by Scoot

Singapore to Bangkok route is not competitive. Scoot’s Singapore

to Bangkok route is an off-tangent strategy as, with a flight time of 2:25

hours, the flight is too short. The reason cited by Scoot for offering this

route is to maximize aircraft utilisation by a further five hours daily and

capture feeder traffic from Bangkok. We don’t think this is a good idea

because the B777-200 aircraft is not economically feasible for short

flights; B777-200s are best used for flights over 4-5 hours.

We have compared the cost economics of using a B777-200 aircraft

versus an Airbus A320 aircraft below – the A320 is the aircraft used by

other LCCs (Thai AirAsia and Tiger Airways) servicing this route. We

estimate that Scoot’s CASK is 18.0% higher. Its CATK is 5.3% lower

but this could be meaningless because there is hardly any freight traffic

between Singapore and Bangkok due to their close proximity. The cost

economics don’t add up, and we do not think this flight is sustainable.

Singapore to Bangkok flight


B777-200

Other LCC

A320

Aircraft ownership cost* Based on a 2:25 hour journey time 4,263 2,182

Fuel cost (assume US$120/bbl) Consumption (bbls): B777 = 106, A320 = 37 12,710 4,415

Maintenance cost Cost / flight hour: B777 = 1,935, A320 = 578 3,915 1,168

Navigation fee US cents / km: B777 = 7, A320 = 4.5 1,720 793

Landing fee 8.2 US cents per aircraft maximum take-off weight 2,446 642

Cockpit crew # Crew: B777 = 9, A320 = 4 1,393 840

Total Cash Operating Cost 26,446 10,039

Unit cost

difference

Cost per seat (USD)** Total operating cost / seat 65.8 55.8 +18.0%

Cost per ASK (US cents) Total operating cost / ASK 4.65 3.94 +18.0%

Cash cost per ATK (US cents) Total operating cost / loadable payload 33.2 35.1 (5.3%)

* Assume Airbus 320 aircraft cost USD300,000/month, A320 has 180 seats

** This does not include airport taxes Sources: Airbus, Boeing, Maybank KE

5 July 2012 of 17


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Business class seats too small. We think business class seats with a

38-inch pitch are a hard sell. Asian customers are not willing to pay

extra for a seat that is only slightly (+22%) bigger than an economy

class seat, as they would not see the value of doing so. Asian

customers will only pay for a business class seat if it is at least 40-50%

bigger than an economy seat.

A case in point is the experience of AirAsia X; it revamped its slow-

selling 38-inch business class seats in favour of 59-inch lie-flat seats,

which proved to be an instant hit. Customers loved it and gave AirAsia

X stellar reviews, based on postings on the Skytrax website

(www.airlinequality.com). JetStar’s business class seats (of a size

similar to Scoot’s) by contrast have proven to be unpopular, attracting

harsh criticisms and complaints from its customers, as seen on the

same website.

iPad sounds good, but unlikely to succeed. We have observed, on

our flights with both AirAsia X and JetStar, that take-up rates for paid

IFE systems are very low (10-15%). We don’t think the iPad will be any

different because it has the same limitations as the IFE systems of both

AirAsia X and JetStar. Furthermore, Scoot will have to foot the bill if any

of the iPads are spoilt; they are fragile and can easily malfunction when

damaged.

Low cost, long-haul airline is not a lucrative business

Uninspiring history. The low-cost, long-haul business model is mired

in controversy and subject to deep skepticism. The pioneer of this

model, Laker Airways, had a brief stint of success in 1977 before

succumbing to bankruptcy in 1982 due to the global recession. This is

ironic as it was thought that this airline business model would thrive

during a recession. Another notable demise was Oasis Hong Kong,

which went bankrupt in 2008 – barely two years after its inception.

AirAsia X is near break-even. AirAsia X is the most notable low-cost,

long-haul airline. It has yet to be profitable after adjusting for one-off

and non-cash items (refer to Appendix I a) since its inception back in

2007. However, it is near break-even, with a core net loss margin of

2.6% in 2010. It needs to raise yields by just 3.0% to break even. With

the benefit of greater route maturity and the prospect of lower fuel

prices, we think it will just be a matter of time before it turns profitable.

AirAsia X’s historical financial performance underlines the fact that this

business is not easy, nor is it lucrative. It takes roughly 5-6 years before

it can breakeven and it requires significant capital. AirAsia X has had

two rounds of capital injection since its inception, and it is slated for an

IPO in the near future to raise more capital. The low-cost, long-haul

airline is a capital-intensive business and the gestation period before it

reaches the cash generative stage is very long.

Similarly, Scoot will incur start-up losses for 3-5 years. We believe

that Scoot will incur start-up losses due to lack of scale and it will likely

have to render heavy discounts to spur customer interest. This process

will take time (>3 years) and there is a possibility that some of the

destinations will turn out as not economically viable. These are the

growing pains that Scoot and SIA will have to endure; we think it will be

3-5 years before Scoot turns a profit. In the interim, this will hit SIA’s

profits and margins, although not significantly.

http://www.airlinequality.com/

5 July 2012 of 17


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We think Scoot has a chance to work in the longer term

Sizeable price-sensitive segment. We believe there is a business

case for the low-cost, long-haul airline. There is always a segment of

the population that is willing to do away with frills in return for the

cheapest ticket available. To illustrate: the total number of air travelers

in 2011 was 2.4b. Assuming just 1% of these travelers were budget-

conscious, that amounts to 24m people. The catchment market is huge,

and the challenge is to have a consistent low-cost operation in order to

be able to continuously offer low fares. It is a very challenging business,

but it can work.

Greater acceptance of budget travel. A recent Straits Times article

also highlighted the drop in complaints received by the Consumers

Association of Singapore (CASE) against low-cost carriers. While low-

cost carriers in Singapore are carrying approximately 20% more

passengers a year, the projected number of complaints in 2012 at 160

will be 40% fewer than the 270 complaints received in 2011. When

compared to the 343 complaints received in 2010, this decline is even

more encouraging; it suggests greater acceptance by the general public

of product differences between a full-service and budget carrier.

Keeping it within the family. The recent surge in passenger growth

among budget carriers has developed partially at the expense of full-

service airlines. Budget carriers are definitely here to stay – and we

think that this development has left SIA with little choice but to set up

Scoot to ensure that at least part of this lost revenue can be recaptured

by its own low-cost carrier subsidiary.

5 July 2012 of 17


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Appendix I (a): AirAsia X Sdn. Bhd. Financials

INCOME STATEMENT (MYR ‘000)

OPERATING STATISTICS

FY Dec 2008 2009 2010

FY Dec 2008 2009 2010 2011

Passenger seat sale 131,460 538,336 1,002,718 Profitability Margin:

Surcharges and administrative fees 87,974 89,378 29,205 EBITDAR margin -12.9% 9.9% 14.4%

Others (cargo, etc) 11,291 92,705 257,179 EBIT margin -23.0% -4.7% 0.8%

Total Revenue 230,725 720,419 1,289,102 Profit before tax margin -23.1% -8.8% 7.1%

Net profit margin -23.1% 12.5% 10.3%

Other income 10,956 27,595 39,338 Core net income margin -7.4% -1.6% -2.6%

Expenses: Operating Statistics:

Staff cost (28,037) (69,088) (125,234) Available-Seat-Kms (m) 1,858 7,779 13,574 17,646

Depreciation (6,073) (51,939) (101,791) Revenue-Passenger Kms (m) 1,449 5,990 10,352 14,100

Fuel (107,098) (287,377) (597,875) Passenger carried ('000) 340 1,034 1,921 2,747

Maintenance & station charges (46,005) (149,958) (229,190) Load factor 78.0% 77.0% 77.0% 80.1%

Aircraft operating lease (17,357) (52,852) (74,320)

Advertising expenses 16,351 37,354 (33,032) Average fare (MYR) 387 521 522

Other operating expenses (106,542) (207,720) (157,281) Average fare (USD) 112 152 167

Total Operating Expenses (294,761) (781,580) (1,318,723) Yields (Rev / RPK) (US cents) 4.38 3.06 3.18

EBITDAR (29,650) 71,225 185,828 CASK (US cents) 4.03 2.85 3.21

EBIT (53,080) (33,566) 9,717 CASK - ex fuel (US cents) 2.36 1.77 1.80

Net finance income / (cost) (123) (29,506) 81,848

Profit before tax (53,203) (63,072) 91,565 Number of aircraft 3 8 11 11

Average stage length (km) 4,262 5,795 5,389 5,133

Current tax 0 (229) (641) Aircraft utilisation (hours/day) 15.3 16.4 15.4 17.0

Deferred tax 0 153,136 41,707

Total tax 0 152,907 41,066

Net profit (53,203) 89,835 132,631

Core Net income calculation:

Net profit (53,203) 89,835 132,631

(add back)

Disposal of assets (gains) / loss 0 (1,711) (27,004)

Unrealised forex (gain) / loss (5,904) (2,039) (97,394)

Deferred taxation (gain) / loss 0 (153,136) (41,707)

Other once off events (gain) / loss 41,980 55,728 0

Core net income (17,127) (11,323) (33,474)

Source: AirAsia X

5 July 2012 of 17


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Appendix I (b): Singapore Airlines Financials

PROFIT AND LOSS (SGD m) BALANCE SHEET (SGD m)

FYE Mar 2011 2012 2013F 2014F 2015F FYE Mar 2011 2012 2013F 2014F 2015F

Sales 14,524.8 14,857.8 15,578.0 16,422.9 17,079.2 Total assets 24,544.5 22,043.0 22,288.4 22,889.0 23,491.7

Operating expenses (13,253.5) (14,571.9) (15,105.0) (15,557.7) (16,019.9) Current assets 9,779.2 7,205.9 7,336.6 7,319.2 6,549.2

Operating Profit 1,271.3 285.9 473.0 865.2 1,059.3 Cash & ST investment 7,832.0 5,389.4 5,031.2 4,897.2 4,036.7

Net interest (32.8) (23.8) (19.5) (13.9) (7.8) Inventories 389.5 306.1 436.2 459.8 478.2

Interest income 37.3 50.5 55.6 61.1 67.2 Accounts receivable 1,557.7 1,510.4 1,869.2 1,962.1 2,034.3

Interest expense (70.1) (74.3) (75.0) (75.0) (75.0) Others - - - - -

Net investment income/(loss) 103.9 18.0 19.8 21.8 24.0 Other assets 14,765.3 14,837.1 14,951.8 15,569.8 16,942.5

Aircraft /spare sales 103.3 (1.4) 160.0 160.0 160.0 LT investments 642.9 1,030.1 1,081.6 1,135.7 1,192.5

Net JV and Associates 175.1 174.9 244.6 246.5 248.4 Fixed assets 13,877.6 13,381.4 13,461.9 13,975.8 15,290.7

Net exceptional items (201.8) (5.4) - - - Others (incl goodwill) 244.8 425.6 408.3 458.3 459.3

Pretax income 1,419.0 448.2 877.9 1,279.5 1,483.9 Total liabilities 10,041.7 8,855.6 8,429.3 8,702.3 8,896.2

Income taxes (270.2) (51.4) (149.3) (217.5) (252.3) Current liabilities 6,232.3 5,265.0 5,177.2 5,546.6 5,832.1

Minority Interest (56.8) (60.9) (61.5) (89.6) (103.9) Accounts payable 5,269.2 5,197.8 5,107.2 5,476.6 5,762.1

Net profit 1,092.0 335.9 667.2 972.4 1,127.8 ST borrowings 963.1 67.2 70.0 70.0 70.0

Net profit (less excep) 1,293.8 341.3 667.2 972.4 1,127.8 Others - - - - -

EBITDA 2,983.0 1,897.5 2,073.0 2,515.2 2,859.3 Long-term liabilities 3,809.4 3,590.6 3,252.0 3,155.7 3,064.1

EPS(S cts) 91.2 28.3 55.6 81.0 94.0 Long-term debts 1,281.2 1,337.1 1,100.0 1,100.0 1,100.0

Others 2,528.2 2,253.5 2,152.0 2,055.7 1,964.1

Total Equity 14,204.4 12,893.4 13,409.1 13,661.6 14,069.5

Paid-in capital 1,832.4 1,856.1 1,856.1 1,856.1 1,856.1

Reserve 12,474.7 11,295.7 11,363.0 11,615.5 12,023.4

Others (102.7) (258.4) 190.0 190.0 190.0

CASH FLOW (SGD m) KEY RATIOS

FYE Mar 2011 2012 2013F 2014F 2015F FYE Mar 2011 2012 2013F 2014F 2015F

Operating cash flow 3,285.20 1,702.80 1,945.41 2,772.48 3,115.67 Growth (% YoY)

PBT 1,418.98 448.20 877.95 1,279.53 1,483.89 Sales 14.3 2.3 4.8 5.4 4.0

Depreciation & amortisation 1,671.70 1,588.50 1,700.03 1,782.53 1,977.53 Operating profit 1911.5 -77.5 65.5 82.9 22.4

Change in working capital 567.30 180.50 (235.77) 177.50 158.11 EBITDA 63.9 -36.4 9.3 21.3 13.7

Others (372.78) (514.40) (396.80) (467.07) (503.86) Net profit 406.0 -69.2 98.6 45.7 16.0

Investment cash flow (566.60) (1,580.40) (1,453.19) (2,126.22) (2,862.80) EPS 401.4 -69.0 96.5 45.7 16.0

Net capex (1,223.80) (1,641.20) (1,550.00) (2,200.00) (3,100.00) Profitability (%)

Change in LT investment (278.20) (623.20) (18.69) (19.62) (20.60) Gross margin 8.8 1.9 3.0 5.3 6.2

Change in other assets 935.40 684.00 115.50 93.40 257.80 Operating margin 20.5 12.8 13.3 15.3 16.7

Financing cash flow 284.20 (2,884.30) (880.47) (810.23) (1,143.41) EBITDA margin 7.5 2.3 4.3 5.9 6.6

Change in share capital 44.90 65.70 47.80 48.00 24.80 Net margin 7.7 2.6 5.0 7.1 8.0

Dividends paid (382.70) (1,557.20) (239.97) (599.93) (719.91) ROA 4.4 1.5 3.0 4.2 4.8

Net change in debt 737.40 (1,232.60) (540.00) (110.00) (300.00) ROE

Change in other LT liab. (115.40) (160.20) (148.30) (148.30) (148.30) Stability 15.8 10.9 8.7 8.6 8.3

Net cash flow 2,345.60 (2,822.70) (485.06) (237.74) (1,127.74) Gross debt/equity (%) 39.3 30.9 28.8 27.3 20.4

Free cash flow 2,061.40 61.60 395.41 572.48 15.67 Net debt/equity (%) 15.6 4.5 8.9 13.0 15.0

Int. coverage (X) 15.6 4.5 8.9 13.0 15.0

Int. & ST debt coverage (X) 33.5 -38.0 -6.5 -3.2 -15.0

Cash flow int. coverage (X) 33.5 -38.0 -6.5 -3.2 -15.0

Cash flow int. & ST debt (X) 1.6 1.4 1.4 1.3 1.1

Current ratio (X) 1.5 1.3 1.3 1.2 1.0

Quick ratio (X) 5,587.7 3,985.1 3,861.2 3,727.2 2,866.7

Net cash/(debt) (SGD m)

Per share data (SGD) 91.2 28.3 55.6 81.0 94.0

EPS 250.8 -230.2 -32.4 -13.7 -74.2

CFPS 1,186.2 1,074.6 1,117.6 1,138.6 1,172.6

BVPS 1,213.0 1,238.3 1,298.3 1,368.7 1,423.4

SPS 249.1 158.1 172.8 209.6 238.3

EBITDA/share 140.0 20.0 50.0 60.0 60.0

DPS 14.3 2.3 4.8 5.4 4.0

Sources: Singapore Airlines, Maybank KE

5 July 2012 of 17


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RESEARCH OFFICES REGIONAL

P K BASU Regional Head, Research & Economics

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WONG Chew Hann, CA Acting Regional Head of Institutional Research


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5 July 2012 of 17


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APPENDIX II: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES

DISCLAIMERS

This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction’s stock exchange in the equity analysis. Accordingly, investors’ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.

The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad, its subsidiary and affiliates (collectively, “MKE”) and consequently no representation is made as to the accuracy or completeness of this report by MKE and it should not be relied upon as such. Accordingly, MKE and its officers, directors, associates, connec ted parties and/or employees (collectively, “Representatives”) shall not be liable for any direct, indirect or consequential losses or damages that may arise from the use or reli ance of this report. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice.

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MKE and its officers, directors and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. MKE may, to the extent permitted by law, act upon or use the information presented herein, or the research or analysis on which they are based, before the material is published. One or more directors, officers and/or employees of MKE may be a director of the issuers of the securities mentioned in this report.

This report is prepared for the use of MKE’s clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of MKE and MKE and its Representatives accepts no liability whatsoever for the actions of third parties in this respect.

This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all juri sdictions or to certain categories of investors. Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this report.

Malaysia

Opinions or recommendations contained herein are in the form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis.

Singapore

This report has been produced as of the date hereof and the information herein may be subject to change. Maybank Kim Eng Research Pte. Ltd. (“Maybank KERPL”) in Singapore has no obligation to update such information for any recipient. For distribution in Singapore, recipients of this report are to contact Maybank KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of th is report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), Maybank KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law.

Thailand

The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) does not confirm nor certify the accuracy of such survey result.

Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the pri or written permission of MBKET. MBKET accepts no liability whatsoever for the actions of third parties in this respect.

US

This research report prepared by MKE is distributed in the United States (“US”) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Maybank Kim Eng Securities USA Inc (“Maybank KESUSA”), a broker-dealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Maybank KESUSA in the US shall be borne by Maybank KESUSA. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if MKE is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Maybank KESUSA is permitted to provide research material concerning investment s to you under relevant legislation and regulations.

UK

This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regulated, by the Financial Services Authority and is for Informational Purposes only. This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that for accurate guidance recipients should consult with their own independent tax advisers.

5 July 2012 of 17


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DISCLOSURES

Legal Entities Disclosures

Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938-H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This material is issued and distributed in Singapore by Maybank KERPL (Co. Reg No 197201256N) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Kim Eng Securities (“PTKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission.Philippines:MATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Kim Eng Vietnam Securities Company (“KEVS”) (License Number: 71/UBCK-GP) is licensed under the StateSecuritiesCommission of Vietnam.Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited (Reg No: INF/INB 231452435) and the Bombay Stock Exchange (Reg. No. INF/INB 011452431) and is regulated by Securities and Exchange Board of India. KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Services Authority.

Disclosure of Interest

Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies.

Singapore: As of 5 July 2012, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report.

Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time have interests and/or underwriting commitments in the securities mentioned in this report.

Hong Kong: KESHK may have financial interests in relation to an issuer or a new listing applicant referred to as defined by the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.

As of 5 July 2012, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report.

MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment.

OTHERS

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or vi ews expressed in the report.

Reminder

Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase.

No part of this material may be copied, photocopied or duplicated in any form by any means or redistr ibuted without the prior consent of MKE.

Definition of Ratings

Maybank Kim Eng Research uses the following rating system:

BUY Total return is expected to be above 15% in the next 12 months

HOLD Total return is expected to be between -15% to +15% in the next 12 months

SELL Total return is expected to be below -15% in the next 12 months

Applicability of Ratings

The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investm ent ratings are only

applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings

as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear):

Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings

BV = Book Value FV = Fair Value PEG = PE Ratio To Growth

CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio

Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter

CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset

DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share

NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds

EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital

EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year

EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date

EV = Enterprise Value PBT = Profit Before Tax

5 July 2012 of 17


Page 1 of 2

Malaysia

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Singapore

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Singapore 038989 Tel: (65) 6336 9090 Fax: (65) 6339 6003

London

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Tel: (44) 20 7621 9298 Dealers’ Tel: (44) 20 7626 2828 Fax: (44) 20 7283 6674

New York

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Tel: (212) 688 8886 Fax: (212) 688 3500

Stockbroking Business: Level 8, Tower C, Dataran Maybank,

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Hong Kong

Kim Eng Securities (HK) Ltd

Level 30, Three Pacific Place, 1 Queen’s Road East, Hong Kong

Tel: (852) 2268 0800 Fax: (852) 2877 0104

Indonesia

PT Kim Eng Securities

Plaza Bapindo Citibank Tower 17th Floor Jl Jend. Sudirman Kav. 54-55 Jakarta 12190, Indonesia

Tel: (62) 21 2557 1188 Fax: (62) 21 2557 1189

India

Kim Eng Securities India Pvt Ltd

2nd Floor, The International 16, Maharishi Karve Road, Churchgate Station, Mumbai City - 400 020, India

Tel: (91).22.6623.2600 Fax: (91).22.6623.2604

Philippines

Maybank ATR Kim Eng Securities Inc. 17/F, Tower One & Exchange Plaza

Ayala Triangle, Ayala Avenue Makati City, Philippines 1200 Tel: (63) 2 849 8888

Fax: (63) 2 848 5738

Thailand

Maybank Kim Eng Securities (Thailand) Public Company Limited

999/9 The Offices at Central World, 20th - 21st Floor, Rama 1 Road Pathumwan, Bangkok 10330, Thailand

Tel: (66) 2 658 6817 (sales) Tel: (66) 2 658 6801 (research)

Vietnam

In association with

Kim Eng Vietnam Securities Company 1st Floor, 255 Tran Hung Dao St. District 1

Ho Chi Minh City, Vietnam Tel : (84) 838 38 66 36 Fax : (84) 838 38 66 39

Saudi Arabia

In association with

Anfaal Capital Villa 47, Tujjar Jeddah Prince Mohammed bin Abdulaziz Street P.O. Box 126575

Jeddah 21352 Tel: (966) 2 6068686 Fax: (966) 26068787

South Asia Sales Trading

Connie TAN [email protected]

Tel: (65) 6333 5775 US Toll Free: 1 866 406 7447

North Asia Sales Trading

Eddie LAU [email protected]

Tel: (852) 2268 0800 US Toll Free: 1 866 598 2267

www.maybank-ke.com | www.kimengresearch.com.sg

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