A record plane-buying spree is poised to land Singapore Airlines (SIA) in unfamiliar territory.
South-east Asia's biggest carrier is expected to turn to a net-debt position as early as 2018 - for the first time in 13 years - as the company borrows money and sells bonds to meet capital expenditure needs, analysts say.
SIA, which has traditionally limited its debt load, would benefit from raising funds more cheaply through borrowings to improve return ratios and valuations,according to equity research firms including OCBC Investment Research and Crucial Perspective.
The airline, which has US$53 billion (S$74 billion) of aircraft on order, expanded a medium-term note programme by two-thirds to US$5 billion in April and said it intends to "proactively" take on more debt in future.
"I think it's good for shareholders," said Mr Desmond Soon, Asia head of investment management at Western Asset Management. A company that can borrow cheaply can have higher leverage, leading to an improved return on equity and thus better prospects for stockholders, Mr Soon said.
214 Number of planes SIA has on order
The carrier's five-year average return on equity - an indication of how efficient a company is at generating profits - is below that of Cathay Pacific Airways, according to data compiled by Bloomberg.
SIA's net debt may reach about $660 million by the end of March next year, a Feb 9 report by OCBC Investment Research's Eugene Chua shows. That compares with net cash of about $3.3 billion for the 12 months to March last year, Bloomberg-compiled data shows.
A net-debt position occurs when a company's debt exceeds its cash and equivalents. SIA shares rose 1.1 per cent to $10.36 as of 9.05am yesterday, extending this year's gains to about 7 per cent. It ended the day at $10.34. Cathay's stock has advanced 9.8 per cent this year.
"Historically there has been lot of criticism that Singapore Airlines' balance sheet is lazy" because of its cash pile, said Ms Corrine Png, chief executive officer of Crucial Perspective, a research firm focused on Asian transport equities. A "more efficient" capital structure will help its return on equity, which has been depressed because of the large cash balance, she said.
The Singapore carrier has the smallest debt-to-equity ratio among 11 major airlines on the MSCI Asia Pacific Index at 10.3 per cent, compared with 126 per cent for Cathay Pacific, data compiled by Bloomberg shows.
Capital expenditure at SIA will average US$4.3 billion annually for the five years through March 2022, based on company figures in an investor presentation in November. The spending will peak in the 12 months beginning April next year, when SIA intends to restart the world's longest non-stop flight using an ultralong-range version of Airbus' A350-900.
"Our capital expenditure will be rising as we take advantage of new growth opportunities to better position the SIA Group for the future," Mr Nick Ionides, a spokesman, said in an e-mail. "These investments will be financed by cash flows generated from operations, as well as by proactively taking on more debt in the coming years."
SIA has 214 planes on order, including 39 long-range aircraft from Boeing.