SEVERAL analysts have reduced their target prices for Singapore Airlines : C6L 0% (SIA) following the airline&rsquo s results for the first half ended September, as they believe growth could peak in the coming year as international flight capacity continues to recover.

 

Rising fuel costs could also eat into earnings in coming quarters, even as revenue dynamics of its passenger airline business remain robust in the next six months, CGS-CIMB said in a report on Wednesday (Nov 8).

 

The research team reiterated its &ldquo reduce&rdquo call on the counter and cut its target price to S$5.47 from S$5.66. It now values SIA at 1.15 times its book value, up from 0.91 times previously.

 

Its new target implies a potential downside of 12.9 from the national carrier&rsquo s closing price of S$6.28 on Thursday, when SIA finished flat at market close.

 

UOB Kay Hian (UOBKH), however, is more optimistic. It upgraded its recommendation on the national carrier to &ldquo hold&rdquo with a higher target of S$6.80 from S$6.44 in a separate report on Thursday.

 

The research team noted that since its downgrade in June, SIA&rsquo s share price has corrected by almost 20 per cent, and its valuation is more benign now at current prices.

 

Both Nomura and OCBC Investment Research have a &ldquo buy&rdquo recommendation on SIA. Out of the research teams, Nomura was the most optimistic over SIA&rsquo s future share price performance. It has a target price of S$9.17, implying a potential upside of 46 per cent.

 

It noted that the stock currently trades at 6.8 times its earnings estimates for FY2024 and offers an attractive FY2024 dividend yield of 5.8 per cent.

 

Despite maintaining &ldquo buy&rdquo , OCBC reduced its fair value estimate on the counter to S$7.29 from S$7.81 after making minor adjustments to its forecast. The research team viewed SIA&rsquo s valuations as reasonable.

 

It remains confident in the group&rsquo s network and fleet development strategies but warned that yields could come under some pressure as international flight capacity continues to recover.

 

This means performance could peak in FY2024, following excellent results for the rest of FY2023, OCBC noted in its report on Wednesday.

 

Like OCBC, Phillips Securities lowered its target price on SIA to S$5.45 from S$6.80 and maintained its &ldquo reduce&rdquo call on the counter.

 

Its lower target took into account an ex-growth operating environment with yields and loads coming under pressure from increased competition and fading travel demand.

 

Looking ahead, UOBKH believes capacity supply-demand dynamics may stay tight for longer, which could lead to a slower rate of moderation of passenger yields, as delays in new aircraft deliveries and geared turbofan engine issues could limit the aviation sector&rsquo s capacity growth.

 

NATIONAL carrier Singapore Airlines : C6L 0% (SIA) understands that its first-mover advantage in ramping up capacity post-pandemic would eventually diminish, and it has been working on maintaining its industry leadership.

 

SIA chief executive Goh Choon Phong said that the airline group is &ldquo significantly ahead&rdquo of Asia-based carriers in terms of passenger capacity recovery, when asked at a media roundtable on Wednesday (Nov 8) about its lead over its closest competitor.

 

But he also understands that this first-mover advantage will diminish over time as other carriers add back their passenger capacity. 

 

Indeed, the lead in capacity that the airline group, including its budget arm Scoot, has over members of the Association of Asia Pacific Airlines collectively has narrowed from 40 percentage points in April 2022 to 11 percentage points in September this year.

 

The SIA group would be operating at 92 per cent of pre-pandemic levels by December, and is projected to achieve full recovery by March 2025.

 

SIA chief executive Goh Choon Phong says the airline group is &ldquo significantly ahead&rdquo of Asia-based carriers in terms of passenger capacity recovery. PHOTO: BT FILE

SIA&rsquo s prompt increase in passenger capacity has allowed it to capture pent-up demand when borders reopened. In contrast, other airlines struggled to add flights due to insufficient manpower and planes, which they had let go to stay afloat when the pandemic was raging.

 

The 60-year-old helmsman stressed that SIA wants to retain its industry leadership as it strives to emerge stronger from the pandemic, which struck the global commercial aviation in early 2020.

 

Thus, SIA is focusing on three aspects to strengthen its foundation for the future: service excellence, network connectivity and product leadership. The airline is counting on, for example, the new generation Boeing 777-9 for its edge over its peers, as the widebody aircraft would be fitted with &ldquo industry-leading&rdquo seats and cabin products.

 

The Boeing 777-9 delivery has been delayed due to supply chain issues, which are faced by airlines around the world. Recently, another issue has cropped up for the industry: Pratt & Whitney geared turbofan (GTF) engines have manufacturing flaws that could ground hundreds of Airbus planes.

 

Scoot has four GTF engines being affected, but its chief executive Leslie Thng, who was also at the roundtable, said it is still early to talk about the number of planes to be grounded and the impact on the budget airline.

 

He pointed out that Scoot has flexibility in terms of extending aircraft leases with lessors, and it is also scheduled to take delivery of new planes.

 

&ldquo I think what is equally important is that the whole SIA group believes in building resilience. So at Scoot level, we also invest in spare engines. Now (the) spare engines (do) help to manage some of these unexpected events.&rdquo

 

Goh added that SIA is in a better position than its peers to deal with the engine issues, because it has its own aircraft maintenance, repair and overhaul (MRO) subsidiary.

 

&ldquo We&rsquo re in a better position because of our own engineering company SIA Engineering : S59 -0.42%. And that&rsquo s the reason why you see that over the years&hellip SIA Engineering has been entering into JVs ( joint ventures) with just about all the engine manufacturers, which means that we have onshore ability to repair those engines. And you can imagine&hellip why that could be an advantage.&rdquo

 

SIA is focusing on three aspects to strengthen its foundation for the future: service excellence, network connectivity and product leadership.   PHOTO: BT FILE

Meanwhile, the Middle East conflicts are also on the radar of SIA as oil prices might surge to historical high levels. But Goh reiterated that hedging is used as an instrument to smooth out the price volatility of jet fuel, and not to speculate on oil price directions. 

 

SIA has hedged 36 per cent of its projected fuel consumption between October 2023 and March 2024, and around 10 per cent for the period between April 2024 and June 2025. 

 

Furthermore, the airline group has made contingency plans for route diversions should there be a need arising from the ongoing Israel-Hamas war in the Gulf region.

 

As for the China market which has yet to recover fully, the SIA chief is confident that demand will rebound, just like other regions whose borders reopened earlier than the North Asian country. He said an increase in bookings was observed after Singaporeans were allowed to travel visa-free again to China. 

 

The travel fair, which SIA and Scoot have organised to offer over 370,000 discounted tickets, has also attracted &ldquo overwhelming attendance&rdquo , including bookings to China, he said.

 

The group will serve 23 destinations in China by December, compared with 25 destinations before the pandemic.

 

When asked if staff would continue to receive a bumper bonus this financial year, Goh pointed out that this aspect of the remuneration is determined by a formula agreed with the labour union. The formula is largely based on the performance of SIA.

 

SIA rewarded eligible employees with a profit-sharing bonus of 6.65 months following the group&rsquo s record earnings of S$2.2 billion for the financial year to March 2023, and a maximum total of 1.5 months of ex-gratia bonus in recognition of their hard work and sacrifices during the pandemic.

 

While the airline group recently posted its highest-ever half-year earnings of S$1.4 billion (up 55.4 per cent), Goh pointed out that the airline industry&rsquo s profits are subject to volatility.

 

NATIONAL carrier Singapore Airlines (SIA) : C6L +0.64%expects healthy demand for air travel in the two quarters to March 2024. However, it has flagged that significant capacity restoration across the industry, especially in the Asia-Pacific region, could reduce passenger yields.

 

The airline group is ramping up its passenger capacity, which is expected to reach around 92 per cent of pre-pandemic levels in December 2023, and will achieve a full recovery by March 2025.

 

SIA gave an update on the group&rsquo s strategies and operations at an earnings briefing on Wednesday (Nov 8), a day after its half-year financial results were published.

 

Lee Lik Hsin, SIA&rsquo s chief commercial officer, said that a combination of factors is holding the group back from returning to full passenger capacity soon. The group has a smaller fleet size than before the pandemic, as it has modernised the fleet and decommissioned some older planes. 

 

Demand from the China market has also not fully recovered the group has not restored full capacity there. 

 

SIA and its budget arm Scoot will fly to 23 destinations in China by December, compared with 25 destinations before the pandemic. The robust demand in the recent quarter was sustained by the rebound in passenger traffic to North Asia, where borders were fully reopened this year, much later than in other regions. The group also restructured its network and stopped flying to destinations such as Wellington in New Zealand, thereby contributing to a lower capacity.

 

SIA&rsquo s group passenger network covered 119 destinations in 36 countries and territories. As at end-September, its full-service airline was serving 75 destinations, and Scoot, 67. Other airlines are also adding capacity, which could reduce passenger yields. In fact, SIA has already experienced the pressure in its latest results, Lee noted.

 

For the second quarter to September, group passenger yield was S$0.108 per km, marginally lower than S$0.119 for the year-ago period.

 

&ldquo I think that&hellip same pressure on yield is expected to continue into the third and fourth quarter (of the financial year to March 2024) as well. But overall, from a total demand perspective, in respect of filling our flights, we believe that the full financial year will still have a positive picture,&rdquo Lee added.

 

The group posted earnings of S$707.1 million for Q2, up 26.9 per cent year on year from S$556.5 million. The top line rose by 4.3 per cent to about S$4.7 billion from S$4.5 billion. Earnings per share stood at S$0.172, from S$0.086 in the year-ago period. Net asset value per share was S$5.83 as at end-September, lower than S$6.68 half a year ago, due to bond redemption, debt repayment and dividend payment.

 

Lee said that all regions have posted &ldquo good and high&rdquo load factors, except for China, where &ldquo we can get better load factors&rdquo . Load factor refers to the percentage of available seating capacity filled by paying passengers.

 

SIA has hedged 36 per cent of its projected fuel consumption between October 2023 and March 2024, and around 10 per cent for the period between April 2024 and June 2025. Net fuel expenditure was 13.6 per cent lower year on year in Q2, as fuel prices dropped 25.2 per cent on the year. 

 

SIA has declared an interim dividend of S$0.10 per share for the half-year period. 

SINGAPORE Airlines (SIA) : C6L -1.42% on Tuesday (Nov 7) posted 55.4-per-cent-higher net profit of S$1.4 billion for the first six months of its financial year ended Sep 30, from S$926.9 million a year earlier.

 

This comes on the back of an 8.9 per cent rise in revenue over the same period to S$9.2 billion, from S$8.4 billion last year.

 

The higher net profit came amid a 15.3 per cent year-on-year fall in net fuel costs to S$2.3 billion for the half-year period.

 

Earnings per share for the period stood at S$0.312, up from S$0.144 a year earlier.

 

SIA also declared an interim dividend of S$0.10 per share for the half year, equivalent to that paid out a year earlier. Shareholders who own shares in the company as at 5 pm on Dec 7, 2023 will be entitled to receive the interim dividend on Dec 22, 2023.

 

On Tuesday, the company also announced that it intends to redeem half the remaining mandatory convertible bonds (MCBs) that were issued in June 2021.

 

It noted that the accreted principal amount payable stood at S$1.7 billion, or 110.4 per cent of the principal amount of the MCBs. The redemption will be carried out on a pro-rata basis, and be paid out to eligible bondholders on Dec 26, 2023.

 

After the redemption, SIA will have redeemed a total of 75 per cent of the June 2021 MCBs.

 

In its first-half results, the carrier attributed its improved performance to robust demand for air travel into the northern summer travel season, with a rebound in passenger traffic to fully reopened markets such as China, Hong Kong, Japan and Taiwan.

 

It added that SIA and Scoot carried 17.4 million passengers in the six months up to Sep 30, up 52.3 per cent year on year. Over the same period, passenger traffic grew 38 per cent from a year earlier, outpacing capacity expansion of 29 per cent.

 

&ldquo As a result, the group passenger load factor (PLF) improved by 5.8 percentage points to 88.8 per cent, the highest ever half-yearly PLF,&rdquo it said.

 

Still, it attributed soft air freight demand to inventory overhang as well as geopolitical and macroeconomic headwinds.

 

While cargo load factor dipped 8.4 percentage points to 52.7 per cent year on year, cargo yields stood at 41.8 cents per load tonne-kilometre, 37 per cent above pre-pandemic levels.

 

For the rest of the year, SIA expects its capacity to reach an average of around 92 per cent of pre-pandemic levels in December 2023, before returning to pre-Covid capacity within FY2025 with the progressive ramp-up of services across its network.