On the requests of students concerning the recent SIA rights and MCB R, I have made a video to explain the technicalities of the rights issue. The last time I had SIA shares was more than 10 year ago While I have not been analyzing about SIA stock in particular, I do read about news related to the aviation industry.
As a matter of fact, the airline industry is a difficult sector to invest in. Many factors that can adversely affect an airline’s profitability are not within the control of the management. Recently, even the great investor like Warren Buffet also got rid of the entire stake of airline stocks in Berkshire Hathaway. The oil price and the emergence of low-cost carriers in recent years have sandwiched premium airlines into a relatively thin operating segment. To stand out in that segment, an airline has to have good service and a young fleet. While these traits that SIA has have won the praises of many passengers, they come with a heavy price. Good service is a reproducible trait that other airlines can mimic relatively easily. And, to always maintain a young fleet, it takes the airline to have good cash flow and fund management abilities. Out of the past 5 years, only one year in SIA’s financial reports showed positive free cash flow. Even that, the positive free cash flow in the FY 2016/2017 was not high compared to the negatives in the other years. Despite showing positive net profits for the past 4¾ years, it took just one last quarter in 2019/2020 to bring down the whole year profit into a negative region.
Peculiar to SIA, Singapore without a hinterland, it is almost impossible to operate effectively, let alone profitability. Now, with 96% of the fleet capacity grounded in the desert, it speaks for itself the expected profitability of SIA in the near term. Even with countries gradually lifting up their lockdowns, it would be a miracle for people to fly freely again in the next few months.
Then, there is difficulty in timing the jet fuel hedging and taking aircraft deliveries. With fuel taking up about one-third of its operating cost, it is not surprising that SIA hedges its fuel price to stabilize its operating cost. But with the crude oil slamming all the way from $70/barrel to the negative region within a quarter, it appeared extremely untimely even to hedge jet fuel at all. Like any other transport operators, once taken delivery, the assets have to work tirelessly to generate revenue. And, with the new aircraft like A380 unable to fly, the parking cost and depreciation are certainly going to put a further strain on its profitability at least in the near term.
In all, it takes a confluence of several favourable but largely uncontrollable factors for an airline to be profitable and free cash flow positive. Notwithstanding that, SIA is still the airline of my first choice.
Disclaimer – The above points are based on the writer’s opinion. They do not serve as an advice or recommendation for readers to buy into or sell the mentioned securities. Everyone should do his homework before he buys or sells any securities. All investments carry risks.
Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.