Singapore Airlines — wings clipped
Singapore Airlines is an iconic, world-famous airline. These days however, it is a shadow of its past, thanks in large part to the pandemic that has grounded international travel to a practical halt. How far can Singapore Airlines recover in a post-pandemic world and should we invest in their shares?
Firstly, their FY20 numbers are not looking good. This is understandable given that the last quarter in that financial year is where the full brunt of border closures and halt in international travel happened.
Revenues inched 2.1% lower to S$15.976 billion. Operating profit took a huge dip (almost 100%) to S$59 million.
Financial position also took a turn for the worse. As expected, dividends payout also took a tumble.
The coming financial year is set to see even worse financial performance, given the the airline went a full year without much of the business resuming.
Secondly, even assuming that the industry recovers to pre-pandemic levels, the history of SIA’s financial performance indicate a volatile revenue business model.
The dip in 2016/17 revenue was due to intense competition from rival airlines that put a cap on price.
Airlines are naturally a cyclical business, where demand can be hit hard by externalities such as fuel prices, terrorism and natural disasters (pandemic). Further headwinds include the intense competition across the spectrum of product offerings from long-haul carriers to budget airlines. In short, this is a tough business to be in. FY20 was a tough year and FY21 is set to be tougher.
Tough times don’t last, tough people do.
SIA has a few things going for it.
It has the brand name for excellent service and quality in-flight experience. SIA is consistently ranked among the top airlines in the world many times a-running. Nevertheless, many of the other carriers are working hard to surmount this competitive advantage. SIA would do well to ensure they remain best-in-class when it comes to service and in-flight experience. Management have highlighted the imperative of accelerating digital transformation of the organisation to ensure service excellence and oeprational efficiency. This is a step in the right direction.
Below the premium category, SIA needs to work hard to gain market share within the regional and budget space. SilkAir and Scoot are easily trumped by other carriers in their respective spaces especially when it comes to affordability, no-frills offering of other budget carriers. Connectivity are also another area where they need to improve on.
Beyond product proposition, another key element for airlines’ success is its majority investor. This determines an airlines’ ability to weather through a crisis such as the current one. SIA is fortunate to have the backing of the Singapore government or rather its wealthy sovereign wealth fund in Temasek, who underwrites majority of SIA’s rights issue in an effort to shore up its liquidity position. While this is a huge advantage, other carriers do also have big backers. The gulf carriers for example have the backing of oil-rich Emiratis. In Europe, Lufthansa was bailed out by the German government. The US has a long-history of government bailouts for the major airlines, including in this crisis. Nevertheless, the public appetite for such bailouts seem to be on the wane. RyanAir even took to EU courts to challenge the Lufthansa’s bailout. In short, SIA’s shareholding structure should put creditors and shareholders a little more at ease knowing their strong financial backing should the need arise.
Beyond these competitive advantage, SIA should do a strategic review of its overall business to see how it can buttress its overall business better when dealing with such externalities.
One area that they can look at is enhancing its cargo handling capacities. Cargo’s contribution to its overall business is still miniscule. Given the explosion of e-commerce as a trend accelerated by the pandemic, SIA could do well if it has a higher share of the cargo market.
Another area they need to consider is having a larger footprint in large domestic markets. SIA needs to expand beyond serving the Singapore market. Its hub model with Singapore as a base can continue to work, but it needs to grow businesses outside of that model so that when such events like international travel grinds to a halt, these other businesses are not as affected. It can do this by having airlines or stakes in airlines that serve large domestic markets such as US, China, India or Indonesia. There are many synergies to be gained. SIA can bring its service excellence, operational efficiency, loyalty programmes to these businesses. In return, SIA can expand its business offering and diversify its revenue streams.
From a stock perspective, the stock price is at record lows. Given the worse financial numbers we are expecting for FY21, the stock may have some way to fall. However, positive vaccination rollouts around the world the whispers of reopening international borders in the summer this year may provide additional ballast to the stock price. If I was inclined to hold this stock, now would be a great entry point, though I would stagger the buying over the next few months to see how the price react to its FY results and global pandemic response.
All things considered, I would be inclined to hold this stock in a slightly overweight proportion in my portfolio. The competitive advantages that SIA holds should allow it to weather through the worst of storms and enable it to soar high when the good times come. Given that this is a hugely cyclical business, its proportion in my portfolio would naturally have to vary depending on the economic cycle. Given that we are at the start of a new cycle, this stock is an overweight call for now.
