Singapore Freight Transportation Report Q2 2008

In late December and early January Singapore Airlines (SIA's) ambitious plan to acquire a 24% stake and a management role in Shanghai-based China Eastern Airlines (CEA) for US$920mn, unraveled. The acquisition, painstakingly negotiated over more than a year, would have given SIA a 'way in' to the fastgrowing Chinese market, well on its way to becoming the largest aviation market in the world. It was stymied, however, by an unforeseen realignment within China's state-owned airline sector, leading to a revolt by minority shareholders in CEA. China National Aviation Holding (CNAH), the parent of Air China, signaled that it would be prepared to offer at least HKD5 per share for a 'significant' holding in CEA, trumping the SIA offer constructed on a price of HKD3.80. Hong-Kong based Cathay Pacific, which is tied to Air China through cross-shareholdings, said it would 'seriously consider' any requests to join moves to create a strategic partnership between Air China and CEA. In effect, such a realignment would give Cathay Pacific the 'way in' to the Chinese market that SIA had sought to achieve. While clearly a setback for SIA, a number of analysts and brokers suggested Singapore's main airline had done the right thing by resisting the temptation to get into a bidding war with CNAH. SIA's share prices dipped on the news that its bid for CEA had failed, but a number of analysts said they remained bullish on the airline. BMI's newly-released Singapore Freight Transport Report concludes that led by SIA, the country's air freight volume will rise by an annual average of 9.8% throughout the five year 2008-2012 forecast period.

Our airfreight forecast is based on a number of factors. Our forecast for economic growth in 2008-2012 now stands at an annual average GDP increase of 4.9%. SIA has established itself as one of the world's most profitable airlines, and should benefit from the imminent introduction of the Airbus A380 superjumbo. The strategic move into China opens up new possibilities, while the budget airline sector is also looking dynamic.

Maritime cargo growth will also be vigorous, expected to average 8.9% per annum in volume terms, despite a growing competitive challenge from Chinese ports. Overall, we now expect average annual growth in freight tonnage across all modes to total 5.8% in 2008-2012. With an aggregate score of 75.4 out of a theoretical maximum of 100, Singapore scores well in the BMI freight rating for Asia Pacific, coming out comfortably above the regional average. Its strong points include low long-term political and economic risk and a strong regulatory environment, as well as a moderate but healthy rate of infrastructure growth.

For the 2008-2012 forecast period, we expect the transport and communications sector to continue outpacing the economy as a whole in value terms. It will achieve average annual growth of 5.3%, versus 5.1% for overall GDP. The total value of transport and communications GDP will rise to US$24.2bn in nominal terms by 2012, representing 12.1% of Singapore's GDP.