Singapore Airlines: High Risk Opportunity As Asian Travel Surges

Asian airlines are gaining momentum to meet demand amid heightened global uncertainty. It is an opportunity for those interested in investing in Asian airlines. However, the opportunity is not without risk, as this report explains.

higher risk recovery

Singapore Airlines Limited (OTCPK:SINGF, OTCPK:SINGY) offers a network primarily focused on Asia, which should come as no surprise. Aside from codeshare agreements, the North American network is relatively thin. As such, most of the performance has to come from demand in Asia, and this also applies to long haul operations to North America and Europe. The population of Singapore is 5.5 million. That means it relies on people flying from its Asian network to fill long-haul seats.

The fact that countries such as Japan and Australia started easing restrictions earlier this year is definitely an opportunity. We recently saw the same thing in China, which is moving away from its zero-corona policy. It all adds up to a positive outlook for Singapore Airlines.

However, there are also significant risks. In China, the number of infected people is increasing. Around Chinese New Year, as people move and connect more, we can expect a further increase in the number of cases, and a third wave when people return to work after the holidays. So while the country is certainly opening up, which is boosting demand for air travel, at the same time, infection numbers could rise until sometime in March. If you do, the area will catch a cold. 17% of him at Changi Airport in Singapore are Chinese, mostly inbound and business travelers. As such, Singapore Airlines’ recovery presents opportunities and risks. Additionally, Asia is less constrained by pilot availability, meaning that as demand rises, we will see significant capacity increases by airlines in the region. However, rising oil prices and inflation pose additional pressures.

In the air freight market, rates are set to soften. So we can see Covid-19 spreading until at least March 2023, putting pressure on air cargo and passenger revenues.

Singapore Airlines performance soars

Looking at the results, we can see that the performance of Singapore Airlines has significantly improved. Earnings nearly tripled year-over-year, and quarterly earnings he improved more than 14%. At the same time, we can see that fuel costs have also increased significantly year-over-year and quarter-over-quarter. He improved operating profit 22% in the second quarter, but top-line growth was offset by higher fuel costs and other expense items related to increased flight activity.

On the positive side, Singapore Airlines has hedged 40% of its fuel consumption in the second half with a price of $60 a barrel for Brent oil. The current price is $82.26 per barrel, so the normalized price should be about $73 per barrel, and the fuel price should decline quarter by quarter.

The group confirmed that passenger load factor had improved to 86.6%, higher than pre-pandemic levels, but cargo load factor was below pre-pandemic levels, and although yields have softened, pre-pandemic It was a much higher level than

Undoubtedly, Singapore Airlines’ earnings recovery has been impressive and we expect this momentum to continue in the second half of the year. However, while holiday bookings are strong, the big question is whether that momentum will continue. Freight demand is expected to weaken due to high inflation and economic uncertainty. Cargo revenues are already declining due to increased competition, and we are seeing the same phenomenon in passenger airfares.

Bottom Line: A Risky Opportunity

Normally, I would rate Singapore Airlines stock as an easy buy once pent-up demand is released to the market. However, while futures bookings are strong, pointing to a strong second half of the year for Singapore Airlines, there is a risk that at least three waves of his COVID-19 in China could weaken demand. can also be seen. In a brighter scenario, the absence of market constraints from the supply side could further squeeze passenger and freight yields. As a result, we see an opportunity for Singapore Airlines’ share price, as we should see a solid second half, but we expect passenger yields to decline next year faster than the rest of the world, so we’re not going to see much going forward. I believe that the path to So capacity and connectivity gains are likely to be offset by softening unit revenues. Despite the obvious, it’s hard to see a strong airline buying case.

Editor’s Note: This article describes one or more securities that are not traded on any major US exchange. Please be aware of the risks associated with these stocks.