After almost three years of losses, the airlines are finally turning a corner as they pull up from the woes of the pandemic years. On Dec 6, the International Air Transport Association (Iata) expects the global airline industry to return to make a profit of US$4.7 billion ($6.36 billion) this coming 2023 — the first time since the pre-pandemic year of 2019. The industry will end with a net loss of US$6.9 billion for the current year.
While the global economy is slowing down with inflationary pressures and broader uncertainties, Iata says there are reasons to be optimistic about 2023, with lower oil price inflation to help keep costs in check while pent-up demand continues to generate substantial revenue growth.
However, the industry is seen to be treading on thin ground. While 2023 might be a profitable year, Iata estimates the industry’s profit margin at just 0.6%. A slight increase in costs — or a dip in revenue — can potentially send the industry back into loss-making territory again. “Vigilance and flexibility will be key,” warns Willie Walsh, Iata’s director general.
Ahead of the curve
Bucking that trend is Singapore’s flag carrier Singapore Airlines (SIA). In contrast to Iata’s industry overview, SIA has ended this year with its financial report for the half year ended Sept 30 not merely back in the black but with a slew of record financial and operating metrics set along the way.
The airline’s massive $15 billion fund-raising, announced after midnight on March 27, 2020, is now a distant memory. With a gradual pick up in air travel, its FY2021 ended March 2021 loss of $4.2 billion narrowed to just $962 million the following year.
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The impact was immediately apparent with Singapore loosening entry requirements earlier this year. For 1QFY2023 ended June this year, the airline recorded a profit of $370.4 million, and in the next quarter, it grew further to hit $556.5 million (see chart 1) for 2QFY2023. Passenger capacity in the same quarter rose to 68% of pre-pandemic levels and is projected to go up to around 76% in the current 2HFY2023.
Chart 1: SIA Group net performance
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Source: SIA
In a sign of strengthening finances, SIA on Dec 8 redeemed $3.5 billion worth of mandatory convertible bonds (MCBs) at 110.408% of the principal amount, implying a total payout of $3.86 billion. This tranche was part of the $15 billion raised in 2020.
Tan Kai Ping, SIA’s executive vice president for finance and strategy, says that the early redemption was necessary as these MCBs were SIA’s “most expensive financing tool”. The redemption was also to limit further dilution of SIA’s share base if they were to be converted into shares.
In another sign of the airline’s improved balance sheet, it declared an interim dividend of 10 cents a share along with its 2QFY2023 earnings — its first payout since FY2020. The airline is “firmly on the recovery track after the most challenging period in our history,” SIA tells The Edge Singapore.
The airline pre-emptively ramped up its capacity ahead of its regional rivals. While this naturally meant increased costs, the airline would be well-placed to capture pent-up demand the moment restrictions are lifted in markets in East Asia, which lags behind other markets in the re-opening. “Whenever we see the demand surge, relative to the other Asia Pacific airlines, we are much ahead of their capacity deployment,” says CEO Goh Choon Phong at the airline’s 1HFY2023 briefing recently.
Besides the ongoing year-end holiday travel season, SIA expects forward sales to remain buoyant following the 2023 Lunar New Year. According to OCBC Credit Research analyst Ezien Hoo, pent-up demand for travel continues to be strong since the large-scale reopening of international borders.
With its business back on a much stronger footing, SIA has also worked up an appetite to expand. On Nov 29, it announced a plan to merge its 49%-held joint venture Vistara with Air India, which its joint venture partner Tata Group controls. To fund its 25.1% stake in the enlarged venture, SIA is ready to commit up to $1.24 billion.
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Air India, on its part, is apparently gearing up for aggressive expansion. According to a Dec 13 Reuters report, the airline is close to placing a massive order for 500 new planes worth some US$100 billion at list price.
Tata founded Air India in 1932 before it was nationalised in 1953. Early this year, Air India was back under Tata’s fold. Air India and Vistara are loss-making, but analysts believe that the combined entity can better compete and be more significant as a sum of parts. “While we expect SIA to report a loss from this business in the short-term, the merger opens a path towards a larger Indian market share for SIA,” says Hoo.
SIA’s track record of major overseas deals involving other airlines is somewhat spotty. With no domestic market to speak of, SIA’s orientation from day one has been international out of necessity. As the airline’s former CEO Cheong Choong Kong once said, SIA’s “ultimate objective is to become a global group of airline and airline-related companies.”
In 1999, it spent GBP600 million to acquire a 49% stake in Virgin Atlantic, only for Sept 11 to hit two years later and the investment was almost entirely written off. In 2012, SIA sold that stake for US$360 million to Delta Airlines.
In 2008, SIA offered US$920 million for a 24% stake in China Eastern Airlines, but the Shanghai-based airline’s shareholders rebuffed the deal. There was also the collapse of Australian airline Ansett back in 2000, dragging down its parent company Air New Zealand, in which SIA held a 25% stake that was eventually wiped off.
Other Singapore government-linked companies, ranging from Singapore Telecommunications to Sembcorp Industries, had mixed results from their ventures in India. Besides the post-pandemic recovery, India’s aviation market has a longer-term potential. Can SIA finally pull this off?
Sats diversifies and grows
Throughout the pandemic, ground handler Sats has been actively diversifying its business to the non-aviation market, growing its share of business supplying foodstuff to supermarkets and other customers.
With air travel back, the company has shown every intention to remain a key player in the aviation industry, with its “transformational” deal to acquire global cargo handler Worldwide Flight Services (WFS) for $1.8 billion. The deal, when completed, will make Sats the largest cargo handler in the world.
In a sense, Sats is trying to get the jump on the industry — even as its financials have yet to be entirely rebuilt to the pre-pandemic levels. Earnings for the whole FY2022 ended March came in at $20.4 million, but if government reliefs were excluded, Sats would have recorded a loss of $112.2 million for FY2022.
For the more recent 1HFY2023 ended Sept 30, Sats reported a loss of $32.5 million versus a $13.2 million profit in 1HFY2022. But if government reliefs were stripped out, Sats would have recorded a loss of $51.7 million, an improvement from the $65.5 million loss without government reliefs in 1HFY2022.
Nonetheless, with the continuing rebound in travel demand generating more revenue, Sats is on track to reduce its losses further (see chart 2) and generate more cash to fund the WFS acquisition, which involves a call on shareholders for up to $800 million, on top of term loans of $700 million and $320 million from existing cash.
Chart 2: Sats quarterly trends
Source: Sats
PhillipCapital’s Terence Chua writes in a Dec 7 note that Sats is a “prime beneficiary” of the recovery in aviation travel. He forecasts Sats to reach a break-even point by 2HFY2023 and expects it to resume paying out dividends by FY2024 as it reverses into profitability. “We view Sats as best in class with a defensive business model and superior growth profile due to its overseas expansion plans and the expansion of new concepts,” he adds.
Other analysts, like CGS-CIMB, flags the earnings dilutive nature of the deal. Aside from the term loan and the equity fundraising exercise, Sats will inherit EUR1 billion ($1.4 billion) of debt from WFS, says CGS-CIMB on Dec 12. Meanwhile, Sats faces a potential global economic slowdown that could impact cargo volumes.
Still, CGS-CIMB believes that WFS is a “strategic acquisition”, given the scarcity of cargo assets, such as warehouses. With complementary portfolios, there are cross-selling opportunities. The brokerage estimates that the combined group will generate about $750 million per annum in ebitda from 2024, allowing Sats to pare down its debt significantly over the next two years.
