The aviation sector was arguably among the worst-hit sectors in the Covid-19 pandemic. Flag carrier Singapore Airlines (SIA), regularly voted as one of the best airlines in the world, was not spared either. Following a series of evacuation flights to bring back students studying overseas and other stragglers, the airline grounded its fleet and put many aircraft into dry storage. Pilots who weren’t let go mostly flew cargo while cabin crew were redeployed to train stations and hospitals.
The once-bustling Changi Airport that moved 68.3 million passengers in 2019, fell silent. Entire terminals were shut with only the occasional security officer, cleaner and traveller roaming its cavernous departure and arrival halls. SIA went deep into the red and the Singapore government, via Temasek, launched a massive rescue package that will eventually hit $15 billion when fully exercised.
One year on, the airline remains loss-making. However, there are signs of a nascent recovery, which hopefully will put the company — once dubbed “The Flying Bank” for its earnings capability — back into the path of profitability.
In a sign of how much air activity has picked up, SIA on Nov 11 reported that its revenue for 1HFY2021 ended September increased by 73% y-o-y to $2.82 billion, thanks to improvements in both passenger and cargo traffic.
With more vaccinated travel lanes (VTL) being negotiated between countries, SIA is seeing a further pickup in its business. “As a general trend, we expect there will be increasing openings over time, simply because vaccination rates are going up,” said CEO Goh Choon Phong at the earnings briefing on Nov 12. “There is also a realisation the sentiment that border openings play an important part of creating economic activities for a country,” he adds.
However, SIA is still in the red. In 1HFY2021, it incurred a net loss of $837 million. But this is 75.9% narrower compared to the $3.46 billion loss in the same period last year, thanks to a combination of better operating performance and the absence of $1.63 billion in non-cash items recorded last year, which came largely from the impairment of aircraft assessed to be surplus to requirements.
While SIA has trimmed its total expenditure by 1.5% to $3.44 billion, fuel costs more than doubled to $810 million, mainly due to higher prices and greater volume consumed. Non-fuel expenditure also increased by 6.1% to $2.71 billion due to higher costs from mounting more flights.
Overall, SIA has also narrowed its operating cash deficit for the first half to $106 million — or an average of $18 million per month — from $1.72 billion last year, on the back of better operating performance.
As at end September, SIA has net current assets of $15.4 billion, with $12.53 billion in cash and cash equivalents, partly boosted by fundraising efforts over the last couple of years.
In September, SIA revealed it had used the final $0.6 billion of the $8.8 billion in gross proceeds raised from the 2020 rights issue.
The net proceeds of $6.2 billion from the issuance of additional mandatory convertible bonds (MCBs) in June have not been touched at all and SIA says the sum is expected to last till FY2023.
In addition to the cash at hand, SIA had said earlier it continues to retain access to $2.1 billion of committed lines of credit, all of which remain undrawn at present.
Strong demand for VTLs
In 1HFY2021, SIA’s passenger traffic (measured in revenue passenger-kilometres) grew fivefold y-o-y, with passenger capacity also growing fivefold y-o-y to reach 32% of pre-Covid-19 levels as of September.
The heavier traffic translated into passenger flown revenue of $752.9 million, up 385.8% y-o-y. The pickup spans the gamut from business to leisure to family travel, says Lee Lik Hsin, SIA’s executive vice-president for commercial. The better passenger numbers, unsurprisingly, can be attributed to a bigger number of VTLs that allow for quarantine-free travel, which represents a “meaningful restart of travel” to CEO Goh.
When VTL flights were made available, bookings increased by seven times, including those for premium cabins, which provide SIA higher operating margins versus economy class seats.
As of Nov 17, Singapore has VTLs with 13 countries, with plans for eight more, including an upcoming link with Kuala Lumpur, which before the pandemic was named the busiest air route in the world in 2019 by industry consultancy OAG.
According to travel booking site Expedia, in the first 24 hours since the announcement of the Singapore-Malaysia VTL, search volumes for flights from Singapore to Kuala Lumpur grew by 17 times on its site.
The bulk of the traffic is probably from Malaysians in Singapore eager to head back home after nearly two years. However, accommodation search interest for Kuala Lumpur also saw an increase of 60% compared to when restrictions were in effect, showing Singaporeans were eager to hop on to any plane for their next vacation, never mind how short the distance.
A check on SIA’s website revealed that on Nov 15, flights to KL were priced at $181 before the VTL launches on Nov 29 but have spiked to around $300 for a return trip, signalling strong pent-up demand for the route.
However, prices for trips to VTL destinations in the first quarter of 2022 are significantly lower, dropping back to $181 for Kuala Lumpur, as an example. A trip to South Korea, the next closest country with a VTL, will set a traveller back about $600 in March or April, compared to $1,000–$1,300 if one were to fly just after Nov 15 when VTL started.
When asked if these were priced to stimulate demand, Lee says that the pricing “is a function of demand”. “I would only say that customers should take advantage of whatever low prices there are out there.”
As of Nov 8, SIA revealed it received close to 160,000 VTL ticket bookings for the next three departure months. In preparation for this expected ramp-up in passenger traffic, SIA will take delivery of 15 aircraft by March 31, 2022, with low-cost carrier Scoot adding seven more to its fleet.
To be sure, SIA has some way to go before resuming its network of destinations to pre-Covid days but services on major routes are restarting quickly. For example, SIA will resume Airbus A380 flights to London from Nov 18 and to Sydney from Dec 1, completing the popular Kangaroo Route with this high-capacity aircraft type.
Flights will also be reinstated to Houston (via Manchester) on Dec 1, and a seasonal Singapore-Seattle-Vancouver service will be launched from Dec 2. Scoot has started non-stop services to Berlin, Germany, on Oct 19 and Incheon on Nov 15 and will fly to Davao City, the Phillippines, from Dec 1.
Meanwhile, nearly 80% of SIA’s fleet will be active in November, where 135 SIA and Scoot aircraft will be deployed. SIA also revealed that 92% of its pilots and 86% of its flight crew have been activated as of November, even as passenger capacity is seen to increase to 43% of pre-Covid levels in December.
Goh explains the high reactivation rate of its aircrew is to provide ample buffer for any network expansion which “would allow us to react very quickly to changes in the market and tap on any revenue opportunities that may arise”.
Supply crunch boosts air cargo
One bright spot shining for SIA throughout the pandemic is its cargo segment. In 1HFY2021, the segment posted record revenue of $1.875 billion, up 51.2% y-o-y, with the progressive resumption of passenger flights contributing to the increase in cargo capacity and loads carried.
With shipping lines struggling to cope with demand amid widespread constraints in handling capacity, many companies were forced to deliver their goods by air instead.
To be sure, the sturdy demand for air cargo is not limited to SIA. In October, global shipping firm DHL reported that “there is little to suggest that demand for air cargo services will dim any time soon. Indeed, all indicators point toward a hectic few months ahead”.
Referring to the International Air Transport Association’s (IATA) latest air cargo market analysis, DHL says that supply chain conditions “continue to be supportive of air cargo” when compared to other modes of transport.
IATA also references the current high cost and limited availability of container slots and boxes for shippers seeking to move cargo from Asia to North America and Europe as another boost for air cargo demand.
In a separate report in September, DHL noted in its Airfreight State of the Industry report that air freight rates were 77% higher in July than the 2019 baseline and 18% more than the 2020 baseline.
As manufacturers continue to replenish stocks by tapping air freight, rates are expected to remain high due to “huge demand growth against limited capacity.” With the year-end peak season coming, DHL expects demand to be pushed even higher.
At the SIA briefing, Lee said that “globally, the total availability of air freight is still far below what it was pre-Covid-19. Passenger services, which contribute a huge amount of capacity in the belly hold, still have not resumed to what it was like pre-Covid-19 at this time.”
When asked if SIA was worried about an oversupply once flights have normalised, Lee is of the view that the airline is “certainly not anywhere close to that situation”.
Rivals also gearing up
However, SIA is not the only carrier reporting a recovery, given that strong cargo demand is an industry-wide trend.
Middle Eastern carrier Emirates Airlines reported an 86% rise in revenue to US$5.9 billion ($7.99 billion) in its 1HFY2021 ended Sept 30 while net loss decreased y-o-y to US$1.6 billion from US$3.4 billion. Similar to SIA, the improvement was due to higher passenger numbers and continuously strong cargo business.
In a release, Emirates says it is “clearly on the path to recovery”, adding that the substantially improved results reflect recovery across all business segments as well as the easing of Covid-19 pandemic travel restrictions worldwide.
Emirates chairman and CEO Sheikh Ahmed bin Saeed Al Maktoum says the carrier saw operations and demand pick up as countries started to ease travel restrictions and vaccine rollout continued worldwide.
During the six months from March to September, Emirates took delivery of two new A380s and retired two older aircraft from its fleet, and worked to restore its network and connections through Dubai.
It said it “responded with agility whenever travel restrictions lifted to restart services or layer on additional flights,” highlighting its new services to Miami in July as well as activating codeshare and interline partnerships to expand connectivity options for customers.
By September 30, the airline was operating passenger and cargo services to 139 airports, using its entire Boeing 777 fleet and 37 A380s.
Will SIA’s stock fly?
With what has been happening, investors will ask if this is a good time to buy into SIA, given that the worst is already behind the airline and the only way seems to be up for its share price. From the bottom of $3.31 on Aug 3, 2020, SIA shares have gained 61.3% to close at $5.34 on Nov 17, valuing the company at $16.5 billion. Before the pandemic, SIA was trading at around $8–$9.
Morgan Stanley research analysts Wilson Ng and Derek Chang are not so optimistic. They acknowledge that there will likely be a stark improvement in earnings for travel-related stocks next year — albeit off a low base — although much of the recovery has already been priced in.
They note that stocks like SIA, casino operator Genting Singapore and hotel owners CDL Hospitality Trusts and Ascott Residence Trust, are trading at share prices averaging 14% below pre-Covid levels but two-year forward expected earnings have fallen by more.
“Put another way, the P/E multiples have expanded by 20%–30%. This is more so than other stocks suggesting that valuations are relatively unattractive”, the analysts wrote in their Nov 15 report.
For these stocks, Ng and Chang think that any further progress might trigger a near-term positive market reaction but they advise investors to leave more room for earnings to disappoint expectations which are already elevated.
Separately, DBS analysts said in a Nov 15 report: “We are turning more optimistic on travel-related plays, given greater visibility on Singapore’s reopening course and the restoration of connectivity in the region.”
For now, they are the most bullish on ST Engineering and Genting Singapore, given that they are primed for strong earnings rebound in 2HFY2022 and cheap valuations.
“We also favour Sats, but remain on the sidelines for SIA, whose longer-term prospects are already priced in, in our view,” the analysts add. They have a “hold” call and a $4.90 target price for SIA.
CGS-CIMB analyst Raymond Yap, in his Nov 12 note, agreed that prospects for the airline are “brighter” on the back of the VTLs and record revenue in its cargo segment. Yap, who has a “hold” call and a $5.81 price target on the stock, believes that the year-end peak for cargo may help further narrow losses in 3QFY2022.
Furthermore, he expects VTL schemes will likely make a bigger contribution, with more destinations coming into play in 4QFY2021.
He also notes that Australia, which he calls a “very important market for SIA”, has permitted its residents to travel overseas from Nov 1 and will reopen to vaccinated Singaporean travellers from Nov 21.
However, despite the optimistic travel outlook, Yap has widened his FY2022 core net loss forecast “as we assume a slower pace of capacity restoration and higher Brent cost forecast of US$73 per barrel vs US$70 per barrel previously”.
His profit forecast for FY2023 is downgraded to a loss and his forecast for FY2024 is slashed by 44% due to higher fuel cost assumptions.
Jet fuel is highlighted by Yap after the airline revealed it had exited a large portion of its hedges in the past six months. He thinks that as a result of this, the airline will be exposed to higher fuel cost volatility due to reduced hedge cover.
“We previously estimated that SIA had 100% fuel hedge cover for FY2022, 73% for FY2023 and 60% for FY2024, based on legacy contracts.”
SIA now has fuel hedge cover for 2HFY2022 of only 30% (at a Brent strike price of US$57 per barrel) and of 40% from 1QFY2023 to 1QFY2024 (at a strike price of US$60 per barrel), beyond which there are no further hedges.
While derivative profits of US$24 million will be booked in 2HFY2022 and US$208 million beyond that, Yap is of the view that the lower hedge cover “is a surprise development that may increase SIA’s fuel cost risk”.
This is especially important to note, especially as SIA has revealed that net fuel costs do go up as more activity resumes, and with the passenger capacity at 34% of pre-pandemic demand as of October, the airline will have many more flights to mount, which could drive up consumption and, in turn, costs.
SIA is clearly aware of the need to keep a close eye on potentially rising costs that might not necessarily be covered by a corresponding growth in revenue, however quick the pickup might be. Further flare-ups in infection that could lead to the possible shutting down travel once again, is also something that has to be kept in mind.
“We fully anticipate that during this period, things can still be volatile and that the profile could be patchy but we are fully prepared for that,” says Goh. And as of now, it’s all systems go for SIA.
