Date of Report: October 21, 2024
Broker: CGS International
2QFY25 Earnings Preview
Singapore Airlines (SIA) is expected to report a profit after tax and minority interests (PATAMI) of approximately S$400 million to S$430 million for the second quarter of FY25 (July-September 2024). This represents a decrease of 5-12% quarter-on-quarter and around 40% year-on-year, driven by lower passenger load factors (PLF) and yield pressures. The forecast aligns with about 51% of the full-year projections, indicating a challenging outlook despite a robust performance in cargo services.
Passenger Yield and Competition
Passenger yields for SIA have continued to decline due to heightened competition, particularly from North Asian carriers. These carriers have reinstated their international seat capacities, including routes to Southeast Asia, which has led to a decrease in PLF, despite the peak summer travel period. With post-COVID pent-up demand dissipating, coupled with competitive pricing from Chinese airlines, SIA’s revenue per available seat kilometer (RASK) is expected to drop to 113% of pre-COVID levels, down from 124% during the same period last year.
Challenges with Engine Reliability
SIA has been addressing technical issues with its fleet, specifically the fuel nozzles on the Trent XWB-84 engines of its A350-900 aircraft. While SIA managed to replace these with minimal disruptions, its low-cost subsidiary, Scoot, faced extended issues with the PW1100 engines on its A320neo fleet, leading to prolonged maintenance and grounding of aircraft. Additionally, Scoot experienced reliability challenges with the Trent 1000 engines on its 787-8 and 787-9 planes, further impacting operational efficiency.
Positive Factors: Cargo Performance and Fuel Prices
Cargo operations have been a bright spot for SIA, with cargo load factors remaining stable above 57% over the last three quarters. Robust demand for cargo from North Asia to Europe and North America has driven revenue freight ton kilometer (RFTK) growth, which increased by 17% year-on-year in July-September 2024, continuing the positive trend from earlier quarters. Additionally, SIA benefited from lower spot jet fuel prices, averaging US$92 per barrel in the same period, compared to US$99 in the previous quarter and US$110 in the same period last year.
Vistara-Air India Merger
In November 2022, SIA announced plans to sell its 49% stake in Vistara to Air India, which is owned by Tata Sons. This strategic move allows SIA to acquire a 19.4% stake in the merged entity, potentially increasing to 25.1% over the next couple of years with an additional investment of S$880 million. Regulatory approvals from the Indian government and antitrust authorities have been secured, with the merger expected to be completed by the end of 2024. SIA anticipates recording a S$1.1 billion exceptional gain from this transaction in FY25.
Forex Impact and Hedging Strategies
SIA’s financials were impacted by forex movements, particularly due to the 5% depreciation of the US dollar against the Singapore dollar from S$1.35 to S$1.285 over the quarter. This is likely to result in a forex translation loss of approximately S$8 million. However, the company stands to benefit from lower costs associated with a weaker US dollar, as a significant portion of its operating costs are USD-denominated.
Sustainability and ESG Initiatives
SIA has committed to achieving net-zero carbon emissions by 2050. As part of its sustainability efforts, the airline has been investing in sustainable aviation fuels (SAF) and aims to have SAF comprise 5% of its total fuel consumption by 2030. In May 2024, SIA announced a purchase of 1,000 tonnes of SAF from Neste’s used cooking oil refinery in Singapore for use in FY25. The airline is also offering carbon offset credits to its corporate clients to mitigate the higher costs associated with SAF.
Financial Performance and Projections
SIA’s revenue for FY23 was S$17.8 billion, rising to S$19 billion in FY24. However, revenue growth is expected to moderate, with projections of S$19.3 billion in FY25, S$19.1 billion in FY26, and S$19.4 billion in FY27. Despite the robust revenue, net profit is forecasted to decline from S$2.7 billion in FY24 to S$2.7 billion in FY25, reflecting the ongoing challenges in passenger yields and operational costs.
Analyst Recommendations
CGS International has maintained a “Reduce” rating on SIA, with a target price of S$5.88, indicating a 9.5% downside from the current price of S$6.50. The analyst’s outlook is driven by the continued decline in passenger yields, competition, and operational challenges. However, the report highlights potential upsides from stronger-than-expected cargo performance and strategic benefits from the Vistara-Air India merger.
