SIA share price slips as cost concerns overshadow record earnings

SINGAPORE – Singapore Airlines (SIA) shares took a hit on May 16 in the wake of investor concerns that rising costs will dent what has been a record-breaking period for the carrier.

The stock opened at $6.90 and climbed to $6.94 in intraday trade before sliding to close at $6.73, down eight cents or 1.2 per cent for the day with 20.6 million shares changing hands. 

Several analysts at a briefing on May 16 – a day after

the airline announced record full-year earnings

– noted the challenges ahead, and projected a fall in operating profit due to pricing and cost pressures.

They expect yields to ease as the air travel industry normalises and rivals lower fares to fill seats. Costs are expected to rise with more flight restorations and new airlines launching services.

SIA chief commercial officer Lee Lik Hsin told the briefing that passenger yields had fallen over the past six months while additional capacity at other carriers would exert further pressure, raising doubts among analysts that the airline could repeat the 24 per cent growth in net profit in this financial year.  

Greater pressure is expected on its low-cost carrier Scoot, where operations are largely regional. 

SIA chief executive Goh Choon Phong also said at the briefing that regional routes are seeing a greater injection of capacity and so more competitive pressure.

SIA’s operating profit rose $34 million to $2.6 billion in the 12 months to March 31, while Scoot’s operating profit fell $30 million to $118.1 million.

Mr Lee did not expect the global shortage of spare parts to affect SIA’s operations.

UOB Kay Hian analyst Roy Chen is maintaining a hold call on SIA and leaving the target price unchanged at $6.31.

Mr Chen expects earnings to moderate due to keener competition, continued pressure on both passenger and cargo yields, as well as rising costs. 

A DBS Bank analyst said that while SIA had said that forward bookings remained healthy, underpinned by demand for North Asia and South-east Asia, it also expects sustained pressure on margins, given the decline in passenger yields amid growing capacity in the region and cost increases.

The analyst said that while SIA recorded a 24 per cent jump in net profit to $2.7 billion, the core net income would have been around $2.5 billion, which is about 2 per cent shy of market estimates, if the one-off tax credit was excluded.

DBS has a hold call and a target price of $6.10.

Mr Goh said SIA has emerged stronger from Covid-19, noting that the firm continues to reap the benefits of its efforts over the past three years and has retained its first-mover advantage, despite rivals recovering from the pandemic. This is reflected in the group’s higher passenger load factor, operating profit, revenue and net profit. 

SIA will redeem the remaining 25 per cent of the mandatory convertible bonds issued in June 2021 on June 24, 2024. This should eliminate any concerns over share dilution, which could occur when bonds are converted to shares. 

Mr Goh said SIA is well-positioned, notwithstanding headwinds such as intensifying competition, rising costs, supply chain challenges, climate change and geopolitical tensions. 

Strategic initiatives executed many years back are bearing fruit, Mr Goh added, citing Scoot, which was set up in November 2011 and is now the leading low-cost carrier in Asia, carrying 12.7 million passengers in the 12 months to March 31, 2024.

He also pointed to SIA’s direct participation in India’s air travel sector, which was announced in 2013. 

Pending regulatory approvals, SIA will own a 25.1 per cent stake in the enlarged Air India Group, comprising Air India, Air India Express, AirAsia India and Vistara.

The enlarged group will fly to 53 domestic and 46 international destinations, with a fleet of 384 aircraft.

SIA is also growing adjacent businesses, leveraging its airline frequent flyer programme to become a lifestyle rewards scheme.

The programme had 8.8 million KrisFlyer members as at March 31, 2024, generating more than $1.2 billion in revenue.

The Straits Times understands that Scoot staff were told on May 16 that they would be getting a bonus of 5.98 months. This came a day after SIA staff were informed that they would receive a profit-sharing bonus of 7.94 months.