Sunday, May 27, 2012

Singapore Airlines - Turbulence Ahead?

In 2009, DBS Vickers gave a call that SIA was fully valued. This is interesting because earlier in 2008, we also covered this stock in a brief introduction when SIA was trading at  PE less than 10 but UOB Kayhian also gave a SELL call due to high fuel prices (yes, there were high fuel prices in 2008 and there are now still high fuel prices in 2012).  Almost four years have passed and the airlines landscape in Asia has changed a fair bit.  People or investors who don't usually fly will be interested to know how Singapore Airlines is doing.

Loss of S$38.2mil in 3 months ended 31 Mar 2012 - Fuel Prices to Blame

Well, the state carrier SIA has not reported a full-year loss since it went public almost 25 years ago.  So its quarter loss is perhaps indicative of the tough business operating environment it is in.  Persistently high fuel prices does not seem to go away soon and that does not bode well.  In 2004, fuel costs accounted for 27 percent and now accounts for 41 percent.  This is worrying given that fuel prices won't seem to be coming down soon.  Investors will probably want to keep one eye on OPEC and Middle East developments before deciding whether to plunge in.


Yes, there is the weak economic environment to blame.  But competition has also become a whole lot stiffer with many other airlines offering the same in-cabin luxury that previously was only exclusive to SIA.  SIA's passenger count has fallen 12 percent since 2008.  And this is despite the fact that the number of tourists to Singapore has jumped quite a fair bit since 2008.  This means that less people are flying SIA. Low cost carriers are to blame and perhaps explains SIA's venture in Tiger Airways.  So as if being hit by the competition for high end travellers, budget travellers are also being pulled away by the likes of JetStar and AirAsia that have a significant presence in Singapore.  SIA is starting a long-haul discount operator called Scoot but many observers are worried that this new carrier will only end up cannibalising SIA's own business.  Worrying?  You bet.

Turbulence Ahead

There probably needs to be a re-think of the strategy as SIA flies into turbulent weather. OCBC issued a hold call on SIA recently. SIA last traded at S$10.36.

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