The quarter that ended December 2019 is one that Singapore Airlines’ CEO Goh Choon Phong will remember for quite some time. For that three-month period, Singapore’s flag carrier recorded its highest-ever revenue, passenger carriage, and at a record-high capacity to 137 destinations.
However, everything practically ground to a halt in the following quarter as governments slammed borders shut in a belated attempt to stop the Covid virus from being spread by air travellers.
As SIA has no domestic routes to speak of, the hit to Singapore’s flag carrier was harder compared to most other airlines. “You can imagine the stress on an organisational level,” recalls Goh on May 19.
At the height of the pandemic in April 2020, when Singapore went into its so-called “circuit breaker”, SIA flew only 11,000 passengers for that month, operating at just 3% of pre-Covid capacity to 18 destinations.
Just over two years on, SIA remains in the red. However, with total new debt and equity funding of some $22.4 billion, the airline is all ready to make a comeback and welcome onboard more passengers in what DBS Group Research analysts have described as “colossal pent-up” demand for travel.
For FY2022 ended March 2022, SIA managed to slash its losses by 78% to $962 million from $4.27 billion recorded for FY2021. With more passengers and cargo carried, revenue nearly doubled to $7.62 billion. Passenger revenue for the full year was up 309.6% y-o-y to $2.81 billion, while cargo — the steady business throughout the pandemic — continued to do well, with an increase of 60.2% y-o-y to $4.34 billion.
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The airline says it has been raising its passenger capacity in a “calibrated” manner, reaching 57% of pre-Covid levels as of end-April 2022, up from 24% in April 2021.
For the whole of FY2022, SIA carried 3.9 million passengers, up six-fold from the year before, with the pick-up particularly strong in the September 2021 to March 2022 period as more countries dropped travel restrictions and also with Singapore’s expansion of the so-called vaccinated travel lanes, dubbed a “game changer” by the airline.
Looming costs but sturdy balance sheet
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When asked at the results briefing on May 19 when SIA will return to profitability, CEO Goh did not give a firm date. However, he points out that its 2HFY2022 has turned an operating profit of $9.7 million, although overall net loss for 2HFY2022 was still $125 million.
More specifically, SIA’s 3QFY2022 had recorded earnings of $84.7 million, making it the first quarter since 1QFY2020 to be in the black for SIA. However, SIA then saw a $209.9 million loss in 4QFY2022, partly from lower cargo takings.
In line with the higher traffic volume, SIA’s FY2022 costs have increased by 30% y-o-y to $8.22 billion over FY2021. Fuel costs, which have netted SIA somewhat of a reputation, grew 115.5%, from $1.02 billion to $2.19 billion, because of both higher prices and volume consumed. This was partially offset by a swing from a fuel-hedging loss of $214 million in FY2021 to a gain of $78.2 million in FY2022.
The airline has to deal with two old external foes: the US dollar and fuel costs. “There’s no escaping higher fuel prices and a stronger US dollar dragging the expenditure line,” warns SIA’s executive vice president for finance and strategy, Tan Kai Ping.
The only place where SIA can find relief, says Tan, is in its fuel hedging programme. SIA has a fuel hedging position of 40% at an average price of US$60 per barrel till 1QFY2024 ending June 2023, compared to the average price of Singapore jet fuel of US$90.31 per barrel in FY2022.
With better-operating metrics, SIA was able to generate an operating cash surplus of $824 million for FY2022, an improvement of $3.2 billion over the preceding year.
As of March 31, 2022, SIA’s cash and bank balances reached $13.8 billion, up $6 billion from the preceding year, largely from the Mandatory Convertible Bond issue last June.
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On the other hand, total debt balances increased by $1.4 billion to $15.7 billion, mainly due to the issuance of a seven-year US$600 million ($810 million) bond in January 2022, as well as the increase in lease liabilities as a result of sale-and-leaseback activities.
Consequently, its debt-to-equity ratio fell from 0.9x to 0.7x. In addition to the cash on hand, SIA retains access to $2.1 billion of committed lines of credit, all of which remains undrawn.
Its book value per share, as at March 31, 2022, was $7.55, up from $5.36 in the preceding year. Given that the company remains in the red, no dividends for FY2022 have been declared.
Operating environment upturn
Nevertheless, SIA’s recovery reflects what is seen across the industry, with the International Air Transport Association (Iata) reporting that international passenger numbers have hit 42% of 2019 levels by March 2022. Iata expects air travel to return to pre-pandemic levels sooner than expected, with 2019 levels attained by 2023, a year ahead of its earlier forecast.
Nevertheless, Iata director-general Willie Walsh points out that there are two “gaps” in the Asia Pacific “recovery story”, namely, China and Japan. “So long as the Chinese government continues to maintain their zero-Covid approach, it is hard to see the country’s borders reopening. This will hold back the region’s full recovery,” he says.
As for SIA, the China “gap” is felt more by Scoot, which has a proportionately bigger pre-pandemic schedule to China than the main carrier.
SIA’s executive vice president for commercial, Lee Lik Hsin, acknowledges that the absence of China is felt. However, SIA is ramping up capacity to other destinations.
SIA expects passenger capacity to reach 61% of pre-Covid levels for 1QFY2023 and 67% by 2QFY2023. “This year’s growth is still going to be a very strong one, even without China,” says Lee.
Analysts’ takes
Despite the bright spots in SIA’s recovery, market analysts are rather mixed on their assessment of the company. On May 19, the day after the earnings were out, SIA shares closed at $5.38, down 0.92% for the day but up 7.39% year to date. The airline now has a market value of $16.02 billion.
Citibank’s Kaseedit Choonnawat is the most pessimistic, calling SIA a “sell” with a target price of $4.30. In his May 18 note, Choonnawat calls the 4QFY2022 losses “a step back” from the profitable 3QFY2022. While the 4QFY2022 earnings were “generally in line” with expectations, some buy-side investors were already anticipating that SIA could turn profitable and beat expectations for the quarter, he says.
Nevertheless, he expects SIA’s cargo yield to hold firm because of limited capacity and that pent-up demand from passengers should not be hampered by inflationary pressures. However, if fares go up further with add-ons like fuel surcharges, demand will be affected eventually. “Nonetheless, evidence so far has been in favour of premium cabins, according to Iata,” he says.
At CGS-CIMB, Raymond Yap has downgraded SIA from “add” to “hold”, but with a slightly raised target price of $5.92 from $5.88. He thinks demand prospects for 1QFY2023 look good, with Singapore easing restrictions and anecdotal evidence that ticket prices for SIA have risen “a lot”. Furthermore, cargo volumes may also pick up with the upcoming lifting of the Shanghai lockdown from June 1.
However, cost escalation, notably fuel and salaries, could dampen the upside, warns Yap. He notes that SIA is only 40% hedged at an average Brent strike price of US$60 per barrel from April 2022 to June 2023. As of May 19, Brent crude is trading at US$113 per barrel and Singapore jet fuel at US$133 per barrel, which are multi-year highs.
SIA has also committed to restoring pilot salaries fully by Dec 31, and to replacing cabin crew members that have resigned. In addition, Yap thinks the Singapore government may reduce cost support for SIA’s operations sometime this year.
On the other hand, Paul Yong and Jason Sum of DBS Group Research have the most optimistic take on SIA, with a “buy” rating and target price of $6.20. The drop in profit for 4QFY2022 was “largely in line with expectations” as the January to March period is a seasonally weaker quarter for cargo and that jet fuel prices spiked during the period.
Moving forward, further passenger and cargo yield compression is to be expected going forward, but the DBS analysts expect yields to remain above pre-pandemic levels on substantial pent-up travel demand, especially in the premium leisure segment, and protracted supply-chain bottlenecks. “Recovery prospects are turning brighter,” the DBS analysts say.
