Reported by Tang See Kit
22 Feb 2023 09:37PM
SIA delivers strong Q3 results but analysts warn of challenges like rising competition, high fuel prices. This could mean “limited” upside to SIA’s share prices, analysts said.
SINGAPORE: The post-pandemic recovery for Singapore Airlines (SIA) continues with the airline turning in another strong quarterly report card, but analysts caution that challenges loom ahead in the form of rising competition, slowing economic growth and high fuel prices.
The national carrier on Tuesday (Feb 21) said its net profit for the third quarter ending Dec 31 came in at S$628 million, up 12.7 per cent from the previous quarter. Total revenue gained 8 per cent over the same period to S$4.85 billion.
This earnings surge came on the back of a continued strong recovery in air travel demand.
SIA said passenger capacity for the group reached 80 per cent of pre-pandemic levels in December 2022. When combined, SIA and Scoot carried 7.4 million passengers for the whole of third quarter, 17 per cent more than the previous three months.
Passenger load factors, which measure how well airlines are filling available seats, gained 0.8 percentage points to 87.4 per cent – the highest for any quarter – on the back of record load factors for both SIA and Scoot.
But competition is rising on this front, as other airlines race to resume more flights.
“Many Asian airlines – for example, Cathay Pacific, AirAsia, and the Chinese airlines – are looking to regain lost routes and capacities, which would mean increased competition and a decline in international passenger fares,” said Mr Shekhar Jaiswal, head of equity research at RHB Singapore.
The latter, he added, will put pressure on passenger yields or the average price paid by a passenger for each kilometre.
Another risk threatening to derail the recovery in passenger traffic is the state of the global economy.
Elevated interest rates for a longer period of time would increase the possibility of slower global growth – or worse, a recession – which will in turn hurt travel demand, said Mr Jaiswal.
The dark cloud over global growth also poses a threat for SIA’s cargo business, which is already seeing signs of a slowdown.
The airline, in its earnings report, said performance for its cargo segment moderated in the third quarter due to softening demand and an increase in bellyhold capacity. Yields were weaker on a quarter-on-quarter basis, although they remained elevated compared to pre-pandemic levels.
CGS-CIMB analyst Raymond Yap said the cargo business will “weaken at a faster rate” going forward.
This is due to factors such as a slowdown in demand for consumer goods amid rising inflation and the decongestion in shipping routes that has seen container freight rates falling back to pre-pandemic levels, he added.
Then, there is the risk of higher oil prices.
SIA has only hedged 40 per cent of its fuel requirements at an average Brent strike price of US$60 per barrel up to June this year, said Mr Yap, adding that the expiry of these fuel hedges is a downside risk.
Echoing a similar sentiment, Mr James Ooi, a market strategist at uSMART Securities, said: “Crude oil may surpass US$100 later this year, which could add further pressure on the airline’s expenditure.”
Describing SIA’s quarterly net profit as having “likely (passed) the peak”, Mr Yap expects the airline’s fourth-quarter net profit to dip to S$586 million.
“Still very robust, albeit below the near all-time peak of S$628 million in the third quarter,” he wrote in a note.
Mr Ooi is more optimistic and expects another record quarterly profit for SIA in the fourth quarter.
The prospects of further recovery in air travel “remain promising” for now, he said, citing the reopening of China and increasing international visitor arrivals into Singapore.
Latest figures showed the country welcoming 931,530 international travellers in January – a new record since the onset of the COVID-19 pandemic.
Still, that is way below the 1.5 million average in visitor numbers of 2019, indicating further room for growth, said Mr Ooi.
This article is intended for general circulation and educational purpose only and does not take into account of the specific investment objectives, financial situation or particular needs of any particular person. You should seek advice from a financial adviser regarding the suitability of the investment products mentioned. In the event you choose not to seek advice from a financial adviser, you should consider whether the investment product in question is suitable for you.
Past performance figures as well as any projection or forecast used in this article, are not necessarily indicative of future performance of any investment products. Your investment is subject to investment risk, including loss of income and capital invested. The value of the investment products and the income from them may fall or rise. No warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this article. Overseas investments carry additional financial, regulatory and legal risks, you should do the necessary checks and research on the investment beforehand.
The information contained in this article has been obtained from public sources which the uSMART Securities (Singapore) Pte Ltd (“uSMART”) has no reason to believe are unreliable and any research, analysis, forecast, projections, expectations and opinion (collectively “Analysis”) contained in this article are based on such information and are expressions of belief only. uSMART has not verified this information and no representation or warranty, express or implied, is made that such information or Analysis is accurate, complete or verified or should be relied upon as such. Any such information or Analysis contained in this presentation is subject to change, and uSMART, its directors, officers or employees shall not have any responsibility for omission from this article and to maintain the information or Analysis made available or to supply any corrections, updates or releases in connection therewith. uSMART, its directors, officers or employees be liable for any or damages which you may suffer or incur as a result of relying upon anything stated or omitted from this article.
Views, opinions, and/or any strategies described in this article may not be suitable for all investors. Assessments, projections, estimates, opinions, views and strategies are subject to change without notice. This article may contain optimistic statements regarding future events or performance of the market and investment products. You should make your own independent assessment of the relevance, accuracy, and adequacy of the information contained in this article. Any reference to or discussion of investment products in this article is purely for illustrative purposes only, is not intended to constitute legal, tax, or investment advice of any investment products, and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products mentioned. This article does not create any legally binding obligations on uSMART. uSMART, its directors, connected persons, officers or employees may from time to time have an interest in the investment products mentioned in this article.