Flag carrier Singapore Airlines C6L is on track to finish the current fiscal year with yet another record as it soars back from pandemic-induced losses. However, earnings for the coming FY2025 ending March 2025 are seen to be lower as it no longer enjoys the extraordinary yields willingly paid by passengers eager to fly again after more than two years of pandemic restrictions.
In 1HFY2024 ended Sept 30, the group’s earnings rose 26.9% y-o-y to $1.44 billion and UOB Kay Hian’s Roy Chen is forecasting FY2024 ending March 2024 earnings to reach $2.72 billion. SIA achieved robust earnings growth due to strategic financial support during the pandemic. Since 2020, shareholders led by Temasek Holdings, have injected $15 billion to ensure operational readiness, retaining employed pilots, cabin crew and mechanics.
When travelling restrictions eased, SIA resumed flying quickly and capitalised on the pent-up demand in travel by mounting more flights and charging higher fares, leaving in its jet stream competitors that did not enjoy a similar level of state backing.
With the health crisis now over, flights have largely resumed for major markets, except China. Still, by the end of next March, SIA and Scoot will serve 23 destinations in China, compared to 25 before the pandemic. The airline expects to fully recover to pre-Covid-19 levels in FY2025.
In his Dec 11 note, UOB Kay Hian’s Roy Chen expects the airline to report earnings of just $1.62 billion in FY2025, no thanks to intense levels of competition back in full force. “We expect the negative impact from pax yields and airfare moderation to outweigh the impact from further air traffic recovery.”
Chen expects SIA’s earnings in FY2026 to further moderate to $1.09 billion, just above the pre-pandemic levels.
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There is a significant catalyst though.
China and Singapore have announced plans to allow bilateral 30-day visa-free.
Singaporeans can now travel to China visa-free for 15 days but Chinese nationals heading here need a visa.
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“We see the new mutual visa-free arrangement as a major positive for the Singapore aviation sector,” says Chen.
While the number of foreign visitors coming to Singapore has also been recovering, it is still less than 80% of the pre-pandemic levels. Chinese nationals, who used to be the largest source market for visitors with a fifth of the total in pre-pandemic 2019, are sorely missed. They are back at just 50% of the volume.
While Chen says the new visa-free arrangement can “turbocharge” the return, he cautions that it might be “overly optimistic” to expect an immediate recovery to pre-pandemic numbers due to China’s current weak economic situation. The pandemic has left a “scarring effect” both “financially and emotionally”. The renminbi, which has relatively weakened, is making it more expensive for Chinese nationals to travel.
Chen’s best guess is that the number of Chinese visitors to Singapore can return to pre-pandemic levels by 2024. “We are sanguine that the visa-free scheme with China will raise the sector’s growth prospect in the mid-to-long run,” he adds.
For now, Chen has kept his “hold” call on SIA with the same target price of $6.80, for its “not-so-cheap” valuation but a decent FY2024–FY2025 yield of 6%. His target price is based on its 1.26x FY2025 book value, pegged to 1 s.d. (standard deviation) above the long-term historical mean of 1.08x.
Chen explains that this valuation reflects SIA’s outstanding operation track record during the pandemic.
He recognises that there will be im- proved growth prospects from the new visa-free arrangement with China but warns that the exact financial impact is hard to assess at this juncture.
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On his part, SIA CEO Goh Choon Phong has always maintained a cautious stance even as he reported another set of record numbers at the company’s 1HFY2024 results last month.
“I think it remains to be seen how things pan out. We see a lot more capacity in the market because airlines are restoring their passenger fleet. Yes, there’s a lot more capacity but the overall macroeconomic situation across the globe is also quite uncertain at this point. We will simply respond as necessary to changes in the market,” Goh says.
The market has also somewhat exercised some caution in trading SIA shares. From the recent post-pandemic peak of $7.91 on June 15, SIA shares have since dropped to just $6.38 as of Dec 8, although this is still double that of $3.39 plumbed during the pandemic lows.
Fixing wings
Alongside the renewed vigour of SIA’s operations is its fleet upkeep, which helped generate earnings growth for its separately listed unit, SIA Engineering.
While SIA Engineering services other customers, some 60% of its revenue comes from SIA. “The growth and maintenance cycle of SIA’s fleet strongly impacts SIA Engineering’s core businesses,” says DBS Group Research.
In 1HFY2024 ended September, the number of flights handled increased 56% y-o-y, reaching 87% of the pre-pandemic levels. Chen of UOB Kay Hian expects the volume to increase further in the current 2HFY2024 and the coming FY2025 due to more frequent flights between Singapore and China.
The overall recovery across the aviation industry will benefit another local stock, Singapore Technologies Engineering S63 . Besides being a defence contractor, the company describes itself as the world’s largest third-party aircraft maintenance, repair and overhaul (MRO) provider under ST Engineering’s Commercial Aerospace business.
In its most recent 9MFY2023 ended Sept 30 business update, the business reported revenue of $2.84 billion, up 30% y-o-y.
Earlier this year, ST Engineering bolstered its MRO capabilities with the groundbreaking of a new facility at Changi Creek, located at the northern end of Changi Airport’s runway. When completed, the new facility, which covers 904,200 sq ft, will provide an extra 1.3 million man-hours annually, roughly equivalent to 10% of ST Engineering’s existing global airframe MRO capacity.
The facility is turning operational at the right time, according to a report by Oliver Wyman’s Global Fleet and MRO forecast for 2022 to 2023, fleet growth and MRO demand in Asia Pacific are projected to increase at a CAGR of 2.5% and 1.8% respectively over the next decade.
