STEng – JPMorgan
Skybus Airlines filed for bankruptcy – ALERT
• Skybus Airlines filed for Chapter 11: ST Engineering has announced that Skybus Airlines has filed for bankruptcy on 7 April 2008. The low cost carrier was operating a fleet of 11 aircraft.
• ST Engineering’s US$635MM contract to cease: ST Engineering’s unit, ST Mobile Aerospace Engineering (MAE), was awarded the US$635MM (S$1Bn) Total Aviation Support contract by Airbus in Nov 2006 to provide aircraft line and light maintenance, components management and support, engineering and technical services for Skybus’ fleet over a period of 12 years.
• Minimal impact on FY08E earnings: We estimate that the loss of this contract will impact our estimate for the group net profit by less than 2%. Furthermore, the contract was concluded when the SGD/USD exchange rate was about 1.58. On the bad debt front, management highlighted that because operations only commenced in mid-2007, losses arising from bad debt are insignificant.
• Existing capacity to be redeployed to other customers: As a result, the spares provided by ST Aerospace to support Skybus on its Maintenance-by-The-Hour arrangement would be redeployed to support other customers of ST Aerospace.
• Management is confident of continual contract momentum: Management highlighted that it is confident of continual contract momentum from its Aerospace division given its strong track record. However, we believe that there could be potential headwinds ahead. Although management guided modest FY08 net earnings growth, Aerospace could still see margin pressure should commercial airlines continue to face margin compression. While we do not expect volume to fall off, MRO rates could come under pressure if airlines continue to be hurt from falling yields due higher input costs including fuels and higher capex costs. Maintain