SINGAPORE AIRLINES LIMITED

Started in 1947, Singapore Airlines Limited is Singapore’s flag carrier with its namesake being the carrier of choice of many air travellers. Together with their slogan “A Great Way to Fly” and the iconic Singapore Girl known globally, Singapore Airlines ranks among the top airliners as the world’s most awarded airlines (2015).

Other than their namesake airliner, the Singapore Airlines Group also has subsidiaries the likes of:

• SIA Engineering Company | 77.6% Interest: A maintenance, repair and overhaul (MRO) specialist.They are also one of the 30 that make up the Straits Times Index!
• SIA Cargo | 100% Subsidiary: Named the “Best Air Cargo Carrier in Asia”, the name of their game is in transporting cargos ranging from normal baggage to stuff like aerospace engines, race cars and even live horses.
• SilkAir | 100% Subsidiary: Full Service-Short Haul
• Scoot | 100% Subsidiary: Low Cost-Long Haul
• Tigerair | 100% Subsidiary: Low Cost-Short Haul, the newest of the lot with their addition to the Group in Oct 2014

Singapore Airlines is also part of Star Alliance, the world’s largest global airline alliance. An alliance that brings together networks, lounge access, check-in services, ticketing and many other perks for customers of airliners in the alliance.

STOCK INFORMATION

TICKER SYMBOL: C6L.SI
MARKET CAP: S$13.04 Billion (Updated 7 July 2015)
MARKET PRICE / SHARE: S$11.14 (Updated 7 July 2015)
INDUSTRY: Air Transportation

THE BUSINESS 

Now for the business end of the discussion, here is how Singapore Airlines Group makes money.

1. Airlines Operation (S$12.86 billion| 83% of FY2015 Rev)

The 4 passenger liners under the Singapore Airline Group consist of Singapore Airlines, SilkAir, Scoot and Tigerair. How they earn money is quite simple, transporting passengers from point A to point B for a fee (including all the stuff that you buy on board as well). But what you might not know is that this is a very tough industry. In FY2015, operating margins were close to 2.5% or just S$0.32 billion! Even so, this is undoubtedly the deciding segment when it comes to assessing profitability for the Group. Odds are that any huge profitability swings are the result of this segment. And to SIA’s credit, even in the face of intense competition, this segment has proved to be rather profitable for them (compared to some of their bleeding peers).

2. Engineering Services (S$0.44 billion | 3% of FY2015 Rev)

SIA Engineering Company Limited can be seen as the main player for this segment – more on them right here. Relative to the more volatile airlines and cargo operations, SIA’s engineering services can be described as a more defensive operation.

3. Cargo Operations (S$2.2 billion | 14% of FY2015 Rev)

This is just like airlines operation with the only exception being that instead of moving people from point A to point B, cargos get moved. But based on the past few year’s performance, SIA Cargo doesn’t seem to be a good place to be in when profitability is involved. Although things appear to be improving number-wise, excess capacity in the cargo market was still a key concern.

4. Others (S$0.04 billion | ~0% of FY2015 Rev)

This includes things like of pilot training, air charters and tour wholesaling.

KEY OPPORTUNITIES

1. Brand Equity

Think about one of the strongest brands in Asia and chances are that SIA comes to mind. Being in a cutthroat industry, you definitely need to have an extra something to stay ahead of the game. Basically, “why should passengers chose SIA among the hundreds of airliners out there?”.

Consistently delivering on quality with excellent customer service led to SIA having a brand value of close to US$2.9 billion (BrandFinance 2015), close to 22% of their market cap – that says something. They were said to be one of the pioneers to offer hot meals, free beverages, hot towels and personal in-flight entertainment systems on board. Another testament towards SIA’s branding efforts was that the Singapore Girl was so famous that it was produced by Madame Tussauds not once but twice in 1993 and 2015.

Oversimplifying things, this degree of brand equity enables SIA to command a price premium and avoid overly reactionary pricing behaviour (Kind of like how some luxury brands don’t have factory outlets). This contributing in no small part towards SIA’s almost remarkable consistency in profitability in such a cyclical industry. Although SIA’s OPM was lowered during the last few years they were still in the black, way better than the industry’s 5 year average of 0.28% (Reuters).

A far simpler test of brand equity is to ask the man on the street on what comes to mind and I think SIA would be proud if the guy replies, “it’s a great way to fly”.

2. Singapore Changi Airport Terminal 5

In 2015, it was announced that the proposed Terminal 5 would be bigger than Terminal 1 to 3 combined. To put things in perspective, at the moment Changi Airport has the capacity for 66 million passengers. By the time Terminal 5 starts operation in 2025 (initial expectations), capacity would hit 135 million – more than double!

With an initial capitalisation of S$3 billion towards the Changi Airport Development Fund, it appears that the Singapore Government is very serious on this project and confident that Singapore will continue to be a major hub for both Southeast Asia and the world. And this increase in demand of air travellers can only bode well for the flag carrier of Singapore – SIA.

3. Strong Balance Sheet with A LOT of cash

Total Assets (FY2015): S$23.92 billion
Total Liabilities (FY2015): S$10.99 billion
Total Equity (FY2015): S$12.93 billion | Shareholders Equity: S$12.46 billion

From the perspective of the airline industry, SIA’s Balance Sheet can be considered to be on the conservative side. And with the number of overleveraged players that caught fire over the years, this is definitely a good quality to have. And given SIA’s consistent profitability from this balance sheet, a lot of credit has to be given to their management. With a strong balance sheet, SIA is not reliant on debt (which might prove fatal when the downcycle comes) to fund their capital expenditures (young fleet age) contributing towards their lower costs in terms of fuel (hedge quite significantly on fuel prices to mitigate bad surprises). This business practice has led them to weather decades of downcycles better than their peers.

And with S$5.3 billion worth of Cash and Bank Balances on their books, how can you say that they aren’t conservative. On a per share basis, that’s close to 40% of their market price! Imagine the possibilities of that cash.

KEY RISKS

1. Air Travel is inherently a commoditised business with “non-normal” economies

With the past 4 years of the Group’s OPM in the range of 1.5-2.6%, it appeared as though the high single digit operating margins days were a thing of the past. And even though intense competition is an oft used reason for this phenomenon, it really holds true for the airline industry. At the end of the day, air travel can broadly be described as a commoditized industry. Even with such a strong brand name like Singapore Airlines, one would be able to mitigate but will not be able to complete eliminate the fact of operating in an industry as tough as this. Brand equity would go a distance with regards to the higher end of your customer base. However when money is tight, the mass market might opt for the economical option.

Another reason would be the positioning of many airliners as their country’s flag carrier. This means that they might not be operating purely for financial reasons. For example, some carriers might need to ply unprofitable routes as a form of ‘nation service’. This inherently leads to the issue of them being ‘too important to fail’. In many industries, it’s a matter of the survival of the fittest and the weak becomes a footnote in history. Because of this, air travel is considered by many nations to be a form of strategic asset so even when things go south, governments might come in with new funds and with a wave of a wand, the technically bankrupt airliner comes back to life (Even within Asia itself, fresh examples come to mind).

With such dynamics, it is a tough industry to be in. Even Warren Buffett thinks so.

2. Air Travel Segment may not marketed as well as possible to the masses

Looking at their airlines operation, choice-wise things were much simpler when they only had the duo of Singapore Airlines and SilkAir, both full service. Full service means that both offered stuff like in-flight entertainment, checked baggage, meals, and beverages already included the ticket price. The only difference that SilkAir was a short-haul operator which meant that it plied only routes with flight periods of ~3h or less.

But in recent years, due to the competition from low cost airliners like AirAsia and Jetstar Airways, the Singapore Airline Group also ventured into this segment through Scoot and Tigerair (both low cost carriers). However a key difference between them is be that one is a long-haul provider (Scoot flys to places like Australia, Japan and South Korea) while the other is a short-haul liner (Tigerair). However from the layman’s point of view there might not be much of a differentiation between these two low cost carriers resulting in some confusion for their marketing activities.

On a sidenote, to SIA’s credit, after acquiring Tigerair as their subsidiary, they have taken steps to stem the bleeding. Examples on how SIA rationalized operations include operating JVs on parallel routes (Scoot and Tigerair) to minimize competition. Tigerair was also refocused into a short haul operator by divesting their Tigerair Australia stake to Virgin Australia and a stake in its Philippine associate to Cebu Pacific. As reported on TheEdge Singapore (11 May 2015), this has led to a 4% yoy increase in their load factor to 79% close to their breakeven of 81.3%. Although they are still not in the black in this regard, this was a vast improvement from the previous year’s breakeven load factor of 89.2%! If you think that things are tough in the full service segment, brace yourself for more in the low cost segment!

3. Their huge size might be a factor in their not-so-huge growth

With rev growing at a CAGR of 1.7% from 2011 to 2015, Singapore Airlines Group might not be your go-to investment when you think of a growth company. This is just a function of bigger companies. Take for instance, if you are a company with S$1 billion in Rev, a $100 million improvement in your bottom line is very significant. Whereas for a S$10 billion company, S$100 million is just 1% of your rev!

Placing things in perspective, a decade ago in 2005, Rev was not that far off (percentage-wise) at S$13.3 billion.

TOP SHAREHOLDER (As at 3 June 2015)

1. Temasek Holdings (Private) Limited: 56.19%
2. DBS Nominees Pte Ltd: 10.91%
3. Citibank Nominees Singapore Pte Ltd: 8.88%

Largest Shareholder (Including Deemed Interest) – Temasek Holdings (Private) Limited: 56.21%

Shares Outstanding: 1,169,854,796

Financial Statements

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any companies mentioned.

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