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.

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.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/news/sector-focus/biomedical-life-science-sectors-focus-biopolis-turns-20-capitaland-revives-science?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Biomedical, life science sectors in focus as Biopolis turns 20; CapitaLand revives Science Park Drive</a>

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

https://s3.ap-southeast-1.amazonaws.com/www.theedgesingapore.com/public/usr/8lysuy/fa97f9-Chart-1-SIA.png

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/news/sector-focus/chip-industry-defies-optimists-it-conforms-historical-patterns?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Chip industry defies optimists as it conforms to historical patterns</a>

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.

To stay ahead of Singapore and the region’s corporate and economic trends, <a class='gtm_see_also_3_inread' style='text-decoration: underline;' href='/section/latest?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>click here for Latest Section</a>

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.

https://s3.ap-southeast-1.amazonaws.com/www.theedgesingapore.com/public/usr/8lysuy/441c58-NEW-SATS-1HFY23-Investors-Presentation-revised-pages-to-jpg-0012.jpg

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.

Singapore’s aviation sector eyes expansion and profits post-pandemic

Related News

Highlights

MSCI boss warns of climate risks

Related News

SATS gives notice of three years of consecutive losses

SATS establishes US$3 bil multicurrency debt issuance programme

Brokers’ Digest: StarHub, Nanofilm, ST Engineering, FHT, Sats