Singapore Airlines (SIA) probably made the financial equivalent of a nose-dive followed by a near-vertical climb. Two years ago, no thanks to the pandemic, the flag carrier reported a staggering $3.5 billion loss for its 1HFY2021 ended Sept 30, 2020. News of layoffs, pay cuts and fundraisings to stem SIA’s losses also plastered the front pages.
As borders reopen and travel returns in a big way, the picture has changed two Novembers on (see Chart 1). On Nov 4, helped by an 11-fold surge in passenger traffic and higher airfares, SIA reported a strong set of 1HFY2023 earnings, setting five new records along the way. They are: a record half-yearly operating profit of $1.23 billion; record quarterly operating profit of $678 million; record quarterly passenger load factor of 86.6%; record quarterly revenue per available seat km of 10.3 cents; and last but not least, record quarterly group revenue of $4.5 billion.
Chart 1: SIA's operating performance
Source: Singapore Airlines
Earnings for 1HFY2023 also came in at $927 million, a reversal from the $837 million loss suffered a year ago. For 2QFY2023, SIA recorded earnings of $556.5 million, a 50.5% improvement over 1QFY2023. Revenue for the half-year reached $8.42 billion, up 197.7% y-o-y.
See also: SIA reports 2QFY2022-23 earnings of $557 million; declares dividend of 10 cents
“This performance validates all the preparation undertaken by the group to emerge stronger from the Covid-19 crisis,” said SIA’s executive vice president for finance and strategy, Tan Kai Ping, at the results briefing on Nov 7.
In line with the higher volume of traffic, costs more than doubled y-o-y from $3.45 billion to $7.18 billion in 1HFY2023, with a notable 233% y-o-y spike in fuel costs.
SIA has fuel hedges in place until the end of FY2024, with 40% of Brent hedged at US$60 ($84) per barrel till 1QFY2024, and 10% of Brent hedged on a declining wedge profile at US$80 per barrel from 2QFY2024 to 4QFY2024. SIA says that its average monthly jet fuel price before hedging was US$138.25 per barrel in 1HFY2023.
See also: SIA to adjust conversion prices of 1.625% convertible bonds due 2025 after interim dividend
SIA incurred higher wage expenses, landing, parking and overflying costs too. This was due to higher aircraft activity as more flights were mounted, more crew were brought back and more flight allowances were paid out.
The airline has also ramped up capacity ahead of expected demand, allowing the airline to capture pent-up demand from travellers (see Chart 2). “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.
Chart 2: SIA's capacity
Source: Singapore Airlines
As of the end of 2QFY2023, SIA was already utilising close to 100% of its resources, even when passenger capacity is only at 50%-60%. “This is so that all these resources can be kept operationally ready and can be deployed at shorter intervals,” adds Goh, who joined the briefing remotely as he was suffering from Covid.
However, SIA is also careful to temper forward expectations. “We would not expect yields to stay at the same elevated levels we were at in 2022,” says executive vice president of commercial Lee Lik Hsin.
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In any case, with the improved results, SIA announced an interim dividend of 10 cents per share, the first dividend it will be paying out in three years since the pandemic started.
When asked if the airline is confident enough to lay down a dividend policy, Goh says there is none stated for now. “When it is appropriate to do so, the board will look at how to resume the dividend payments,” he adds.
MCB redemptions
Nonetheless, in a sure sign that SIA is back on firmer financial footing, on Oct 25, it announced plans to redeem $3.5 billion worth of mandatory convertible bonds (MCBs) issued in 2020 as part of the massive rescue package. Besides the $3.5 billion MCBs issued in 2020, there is a rights issue of $5.3 million, and another tranche of bonds worth $6.2 billion issued in June 2021.
SIA had earlier announced the redemption will be made on Dec 8 at 110.408% of the principal amount, implying a total payout of $3.86 billion. The redemption will be funded using its internal cash reserves; and from the airline’s perspective, this drawdown of the cash is necessary because these MCBs were SIA’s “most expensive financing tool”, says Tan. Furthermore, any MCBs not redeemed by the maturity date will be converted to ordinary shares, resulting in a dilution of SIA’s shares.
When asked, Tan says there is no decision on when the June 2021 MCBs of some $6.2 billion will be redeemed. “I will just point out that they remain very flexible. They are still equity on our balance sheet,” he says. “There are still uncertainties in the macro environment, and also a lot of opportunities.”
Goh explains that for the airline, it’s “not just about handling the pandemic, it’s not just about preparing for this immediate recovery. It’s also about preparing the organisation so that we can continue to succeed in the future”.
Analysts’ reactions
Despite the stellar results, analysts have issued mixed calls on SIA. DBS Group Research’s Paul Yong and Jason Sum have kept their “buy” call and $6.60 target price on the stock, citing how recovery in SIA’s passenger volumes should outpace that of peers in the region. “SIA’s international passenger traffic has been recovering at a faster clip than its peers. We expect this trend to persist,” wrote the analysts in their Nov 8 note.
OCBC Investment Research’s Chu Peng maintains her “buy” call on the stock, but has raised her fair-value estimate from $5.84 to $6.28. She observes that SIA has already reinstated 73% and 67% of pre-Covid 19 destinations and capacity as of September, and that passenger capacity is expected to increase to about 76% of pre-Covid 19 levels in December. “[This] will hover around this level in March 2023, [and] travel demand is expected to remain strong as we head into the year-end peak travel season,” she says.
Chu adds that SIA’s forward sales show robust demand in the coming months leading up to the Lunar New Year period in 2023, and she expects tailwinds too from the recent relaxation of border controls in parts of East Asia, with demand to pick up in Hong Kong, Taipei and Japan.
On the other hand, UOB Kay Hian’s Roy Chen notes that SIA’s 1HFY2023 was slightly ahead of his projection at 50% of its full-year forecast. He has also raised his FY2023 earnings estimate by 24.2% to $2.3 billion from $1.85 billion previously, while his FY2024-FY2025 estimates remain intact.
However, Chen has kept his “hold” call on the stock, with a target price of $5.18, as he expects the earnings beyond 3QFY2023 ending Dec 31 to normalise as competition catches up and drives down yields.
Chen also notes that SIA’s cargo revenue fell 8.5% q-o-q to $1 billion in 2QFY2023, on the back of lower cargo load and lower cargo yields. As of end-2QFY2023, its cargo load factor was 57% — already close to pre-pandemic levels, while the quarter’s cargo yield of 75.4 cents per tonne-km was significantly above the level before the pandemic.
“The normalisation of cargo yields has already started and is expected to accelerate in 3QFY2023, though we expect the exceptional passenger business performance to more than offset any weakness in the cargo performance,” he says.
Investors have given a lukewarm reception to the results. SIA shares closed at $5.32 on Nov 9, down 0.35% from the close of Nov 4. At this level, the company is valued at $15.8 billion, and with the interim dividend, dividend yield stands at 1.88%.
