SINGY - Singapore Airlines: High Risk Opportunity As Asian Travel Surges

Summary

• Singapore Airlines Limited is likely set to benefit from easing of COVID-19 restrictions in Asia.
• Risks on COVID-19 infection waves exist through March 2023.
• Even with COVID-19 risks lower, we see capacity additions by competition as a significant risk to Singapore Airlines unit revenues.

While global uncertainty is increasing, airlines in Asia are ramping up to meet demand. It creates an opportunity for those interested in investing in Asian airline names. However, as I discuss in this report, that opportunity is not without risk.

A Higher Risk Recovery

Singapore Airlines Limited ( SINGF , SINGY ) serves a network primarily focused on Asia, and that shouldn't come as a surprise. Without including codeshare agreements, its network in North America is relatively thin. So, most of the performance has to come from demand in Asia, and that is also the case for the long-haul operations into North America and Europe. Singapore has a population of 5.5 million people, meaning it relies on flying people from its Asian network to fill the seats for its long-haul business.

The opportunity, without doubt, is that countries such as Japan and Australia started easing restrictions earlier this year. More recently, we saw the same in China that is attempting to step away from its zero-covid policy. That all feathers into a positive outlook for Singapore Airlines.

However, there are significant risks as well. In China, we are currently seeing an increase in infections. Around the Lunar New Year, we can expect another increase in infection numbers as people travel and connect more, and then we can expect a third wave when people return to work after the holidays. So, we do see that countries are opening up, and that pushes demand for air travel higher, but at the same time until somewhere in March we could see infection numbers increase. Quite literally, if China sneezes, the region catches a cold. Seventeen percent of the Changi Airport in Singapore is Chinese, primarily inbound tourism and work travelers. So, it provides an opportunity as well as a risk to the recovery for Singapore Airlines. Furthermore, in Asia, there is a lesser degree of constraints thrown up by pilot availability, and that means that as demand heats up we will see significant capacity increases by airlines in the region. That is set to push yields down, while high oil prices and inflation readings provide another pressure.

On the air freight market, rates are set to soften. So, we do see pressure on air freight and passenger yield, with higher Covid-19 infections running until March 2023 at least, and that does not quite provide for an appreciable risk profile.

Singapore Airlines Results Surge

Looking at the results , we see that Singapore Airlines has significantly improved its results. Revenues are almost three times as high compared to the same period last year, and quarter-over-quarter revenues improved by over 14%. At the same time, we do see that fuel cost have also risen significantly year-over-year and quarter-over-quarter. For the second quarter, we saw operating profits improve by 22%, where topline growth was offset by higher fuel costs as well as other cost items that relate to higher flight activity.

A positive is that Singapore Airlines has 40% of its fuel consumption for the second half of the year hedged at a price of $60 per barrel for Brent oil. The current price is $82.26 per barrel, so we should see a normalized price of roughly $73 per barrel, which should bring unit fuel costs down quarter-over-quarter.

The group saw its passenger load factor improve to 86.6%, which is higher than pre-pandemic levels, but load factors for cargo are now below pre-pandemic levels while yield is softening, albeit at significantly higher levels than we saw pre-pandemic.

Without doubt, the revenue recovery has been impressive at Singapore Airlines, and I would expect momentum to continue in the second half of the year. However, while bookings have been strong for the holiday period, the big question is whether the momentum will persist. Cargo demand is expected to be weaker due to high inflation and economic uncertainty, and we already are seeing the revenues for cargo fall as competition is heating up, and we are seeing the same phenomenon for passenger airfares.

Conclusion: A High-Risk Opportunity

Normally, with pent-up demand being released to the market, I would easily have rated Singapore Airlines shares a buy. However, while forward bookings are looking strong signaling a strong second half of the year for Singapore Airlines, we also do see the risks of at least three COVID-19 waves in China that could weaken demand. In an upbeat scenario, the lack of market constraints from supply side could further squeeze passenger and freight yields. As a result, I do see opportunity for shares of Singapore Airlines as the second half should be strong, but I also see a challenging path forward as passenger yields could be coming down quicker next year than we are seeing in other parts of the world. So, we could see capacity and connectivity improve, but that could be offset by softening unit revenues. If you add any potential weakness from China, a key market for Singapore Airlines, it is hard to see a strong buy case for the airline even though the opportunity is evident.

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