What’s Next For SIA After Record-Breaking Profits?

SIA

Singapore Airlines (SGX: C6L), or SIA, made the headlines after dishing out eye-watering staff bonuses of up to eight months as part of their annual profit-sharing bonus formula.

This was off the back of an exemplary set of results for its fiscal 2023 (FY2023) ending 31 March 2023.

Operational metrics such as load passenger factor (PLF) almost tripled year on year to reach a new high of 85.4% while financial metrics such as revenue and net profit soared.

Most impressive of all was that the group’s net profit created historical highs in the airline’s 76-year history.

Looking ahead, the global airline industry’s return to profitability remains unevenly distributed across different regions as Asia-Pacific carriers are projected to experience the largest recovery in terms of both capacity and demand compared with the previous year.

SIA issued a cautious guidance for the upcoming year (FY2024) while also outlining strategic initiatives to better navigate the uncertainty ahead.

We unpack some of these strategies to determine whether the airline can once again replicate its outstanding set of results.

Strong passenger figures

Besides issuing a generous payout to its employees, SIA also captured attention with the announcement of new perks such as free unlimited inflight Wi-Fi for its KrisFlyer members and the reintroduction of appetisers for its economy class meals.

These sound great for its employees and customers, but investors are likely concerned with corporate developments and whether travel recovery can be sustained.

The airline’s revenue breakdown showed that passenger revenue forms the bulk (around three-quarters) of group revenue.

Passenger revenue is in turn broken down into two segments – its full-service Singapore Airlines brand and low-cost carrier Scoot brand.

Even though the PLF of the latter is higher, the former still represents 87% of total revenue.

This suggests that the higher ticket spend of customers flying with Singapore Airlines is an important area of consideration compared to budget flyers on Scoot.

Therefore, discretionary spending trends will be something to watch for.

As of March 2023, leisure travel demand has been robust compared to the same period in 2019 as bookings were up 31%.

However, given the flag carrier’s focus on East Asia (which comprises economic powerhouse China), it makes sense to turn our sights to the country’s spending.

China’s outbound spend recovery across things, experiences, and luxury has yet to recover to 2019’s levels.

The weak Chinese recovery meant that excess pandemic savings were not channelled into travel-related consumption, forming a worrying trend.

On balance and over a longer horizon of more than a decade, additional passengers from Asia Pacific and Europe are expected to be the highest out of all regions.

This is good news for SIA given its large ticket sales to East Asia, South West Pacific, and Europe.

Cargo lags behind

Cargo had been the flag carrier’s saving grace during the COVID-19 pandemic when passenger contributions plunged due to international travel restrictions.

Cargo revenue made up more than half of all revenue in FY2021 and FY2022 as SIA capitalised on low industry cargo capacity by operating cargo-only flights to maximise cargo load.

With the pandemic largely behind us, inventory recalibration and softer demand mean that cargo will take a backseat.

This suggests that future performance will hinge heavily on passenger numbers.

Expenses remain reasonably contained

Moving onto its expenses, it is unsurprising that fuel costs form the largest slice of the pie due to higher average fuel prices and volume uplift.

Thankfully, the company’s hedging strategies enabled it to eke out hedging gains, though such gains should be recognised as volatile and uncertain.

The next largest expense item is staff costs comprising salaries and bonuses.

This is where the question of capital efficiency comes into play.

Despite paying out hefty bonuses for FY2023, staff costs only constituted 17% of its total revenue, which is lower than the 30% in FY2021.

Meanwhile, its record-breaking dividend announcement totalling S$0.38 per share is the highest in the past five years, surpassing even its FY2019 payout.

This brings its implied payout ratio to over 100%.

Thus, not only are employees rewarded for the airline’s outstanding financial performance, but shareholders are also not left out either.

A possible concern could be whether the airline is reinvesting sufficiently into its business after earmarking funds for employee and shareholder compensation.

For example, capital expenditure in the most recent year went down steeply, coming in at less than a third of pre-pandemic figures.

Nonetheless, the group charted its fleet renewal strategy and also expanded its network by mounting flights to more destinations to align capacity with demand projections.

It also unveiled a host of other initiatives including its multi-hub strategy focusing on the large Indian market, upholding product and service leadership, as well as other approaches to strengthen its foundation for the future.

Get Smart: Managing future expectations

The strong travel recovery trends bode well for Singapore’s flag carrier.

At the same time, investors may be well advised to temper future expectations as beating the record-breaking FY2023 results may prove to be a herculean task, even with travel tailwinds.

There could also be a chance where future profit guidance and thus dividends are revised downwards.

After all, there is a limit to how often any company can consecutively break historical records.

Investors can instead be heartened by SIA’s superior performance across operational and financial metrics when compared against not just Asia Pacific, but all other regions in the airline industry.

This is a testament to the blue-chip airline’s strong fundamentals which should position it well for the future.

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Disclosure: Tan Ke Xuan does not own shares in any of the companies mentioned.

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