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Saturday, 21 June 2008

I upped my stakes in Singapore Airlines on 12th June 2008

This is the only 'blue chip' company I had in my portfolio of 13 companies. The sheer amount of media coverage on any blue chip company actually does not warrant me to say anymore about it, but since I'm treating this as my diary, penning down my thoughts now would still be helpful to my learning experience when I review them several years down the road.


Given the slowing economic growth, escalating fuel cost, falling demand due to more expensive air tickets, it is almost taken for granted that the global airline industry is facing increasing dismal days ahead. It looks almost certain that Singapore Airlines, SIA, one of the most profitable airlines in the world, will also not be spared. If so, while many airlines are already cutting back flights to stem mounting losses, why is SIA still boosting flights?

I believe it has the capability to weather the storm and emerge stronger than ever before... and I have the reasons to believe, at least I think I have :)

Revenue strength
  1. Branding, SIA had put in great efforts to build up its brand that is synonymous with quality flying experience. This enables them to charge more per ticket then competing airlines. It is not surprising that they repeatedly got voted for best airline of some sort almost every year.
  2. Corporate travel contributed significantly to the bottom line of SIA, particularly the business class. It is not uncommon that business class seats sold out like hot cakes on popular routes. It is hence not surprising when SIA started to launch all-business class flights.
  3. Price insensitivity amongst client base. Most who choose to fly with SIA are either tourist who would rather pay more for the flying experience or businessman who's tickets are their companies' problem. Either way, unless the ticket becomes unreasonably expensive, they will continue to fly with SIA.
Cost management
  1. Managing Jet Fuel. Fuel cost made up about 36.5% of total expenditure. With the strong branding and relatively price insensitive client base, it is able to partially pass on the rising fuel cost via fuel surcharges, 3 times within 3 months. Coupled with somewhat successful fuel hedgeing (at about USD $100/BBL vs current $166/BBL) and positive currency translation for fuel paid in USD, SIA seems to be managing its fuel cost well.
  2. Newer planes with better fuel efficiency. SIA currently operates more fuel efficient Airbus A340, A380, Boeing 777 and disposing off less efficient Boeing 747-400. It is expecting to take delivery of Boeing 777-300ER and Airbus A330-300 later this year.
  3. Staff cost accounted for 16.6%, with pilots accounting significantly. It helps (from the business perspective) that SIA operates a flying school that churns out relatively cheap pilots bonded for about 7 years commencing from 1st officer.

Two major factors are threatening the profitability of SIA (others are talking about loss management). Firstly, the escalating fuel cost, if not managed properly, will definitely eat into earnings. But from my earlier post, I have reasons to believe that fuel price will not aim for the moon. It will come down, sooner or later. Secondly, the rising ticket prices are obviously hurting travel. but from the reasons above, SIA seems well positioned to ride out this storm.

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Blogger 8percentpa said...

Hihi, just giving my personal random thoughts on airlines. Historically, airlines have never earned their cost of capital. SIA seems to be the exception but its moat is far from solid.

Emirates has mimicked SIA's strategies pretty well and others are following, like Qatar Airways.

I guess the underlying problem is that there is simply too much competition. It used to be every country has its own airlines (most countries still have), now it's budget airlines fighting with traditional airlines.

Buffett invested in some airlines years ago and lost some money. It is really an industry that somehow manages to get into a lot of shit every few years. Terrorist attacks, SARS, fuel costs etc.

SIA has a stable business clientele, the Singapore based businessmen, but I wonder really how much is that contribution to its profits? In any case, no. of Singaporean businessmen is not growing since our population has stagnated, expat businessmen might increase, but that's a wild guess for anyone.

SIA may be a leader in this industry but as they say, when it's a world-class mgmt in a shitty business, usually the shitty business wins...

My very biased two cents. Cheers!

14 July 2008 at 22:51  
Blogger Market Uncle said...

Thanks for dropping by to give comments!

I would think that in every sector/industry/arena that can make money (i.e. earn returns above capital) will attract competition until one can earn nothing more. That's when weaker players get weeded out and the stronger ones stayed behind.

What I'm looking for is upside. In a sunset industry or equivalently a cut throat competitive one, almost all firms are struggling. I would believe most, if not all are trading at depressing levels because market view them collectively as trash.

Any company that can do relatively well will emerge stronger and better and hopefully see their share price appreciate many fold.

True that SIA is far from rock solid, but at least its relatively much better compared to many. Else it would not attractive many copy cats. But I'm looking for relative, not absolute strength.

As for businessmen, SIA drew not only true blue Singaporeans but foreigners as well.

You are right to point out the many risk bogged down airlines in general, fuel, terriorist attacks, diseases... but not to forget, other industries too have their fair amount of uncontrollable risks.

Its too early to tell whether I'm right or wrong. Time will tell in years to come.

Nonetheless, thanks for sharing your thoughts!

15 July 2008 at 21:58  
Anonymous cif5000 said...

One big problem with SIA is labour issue. We saw how the management and the pilots could not come to agreement in the news. The tussle is evergoing. However, in recent year(s)/months, the recruitment of pilots has gone up significantly. It used to be 4 batches a year and now it is one batch every month*. Is this a way for the management to put themselves in a more favorable position? If yes, shareholders can benefit from the short-term cost savings, but for the longer term, a dissatisfied workforce could be more damaging to the overall company.

*citation/reference needed

21 July 2008 at 10:26  
Blogger Market Uncle said...

Hi cif5000,
Yes, I do agree that labour issue will forever plague SIA, just like any other airlines.

Depending on how you see it, the fact that SIA run its own flying school and bond their pilots that manage to pass out for 7 years (if I'm not wrong), this imply they had ample supply to cheap pilots.

Captains take about 10 years of flying experience and so long as a fraction of those whose bonds ended are willing to stay for 'lower' pay, their supply of 'cheap' captains are also substantial.

Management of staff morale is important to SIA, as well, as other airlines and industries. I do have ONE (only one made it so far) friend who is a pilot with SIA and he's still pretty ok with the overall package, its not as if they are very lowly paid.

SIA draw potential pilot from regional countries and being able to base near their home countries is also one of the reasons to make them stay with SIA.

Labour cost now account for about 60% of fuel cost, substantial but no longer as significant. Anyway, SIA's cost management is one of its strengths, e.g. One article in the Edge compared them to Cathay. SIA's unit cost is 8.4 cents while Cathay is 2.32 HKD, or about 42 cents. (I've verified these figures with their latest FY 2007 annual report).

Whether or not they can survive in the next 10 years will very much depend on the current management. With their excellent track record, I'm pretty confident they can steer the ship through this storm.

21 July 2008 at 21:53  

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