Founder & Managing Director, AIR Control Tower, AIR Control Tower

Neil Glynn

Founder & Managing Director, AIR Control Tower

AIR Control Tower

AIR Control Tower is an independent research and analysis platform. Its mission is to provide impactful insight and analysis across the global airline industry at a company and market level via detailed financial models to aid decision making for key stake holders at a time when risks have seldom, if ever, been higher and the global sector grapples with the imperative of funding de-carbonisation. Unique analysis forecasting global carrier-level earnings/cash flows, and restructuring/de-leveraging prospects, is designed to dynamically assess the health of the industry, predict surprises and identify potential requirements for third party support.

Insights on the global airline industry

Equity Bottom-Up

<ul>
<li>We expect Singapore Airlines to report a disappointing 4Q24 on 15 May, as earnings normalisation continues.</li>
<li>Inflationary pressure is a key theme at SIA, with it suffering one of the highest levels of inflation in the APAC region.</li>
<li>Our forecasts for FY25, which suggest further earnings normalisation, are c.20% below consensus at the operating level.</li>
</ul>


We expect Singapore Airlines to report a disappointing 4Q24 on 15 May, as earnings normalisation continues.
Inflationary pressure is a key theme at SIA, with it suffering one of the highest levels of inflation in the APAC region.
Our forecasts for FY25, which suggest further earnings normalisation, are c.20% below consensus at the operating level.


Singapore Airlines – 4Q Likely to Extend the Theme of Earnings Normalization as FY25 Comes into View

<ul>
<li>We cut our SIA operating profit by 9% to S$2.6bn in FY24 and by 17% to S$1.5bn in FY25 versus consensus of S$2.1bn.</li>
<li>SIA's cost control is under-examined and we publish a deep dive on a concerning level of inflation relative to key peers, which actually escalated in 3Q24.</li>
<li>Cargo broke even in peak season, and Scoot's margins present a conundrum as it may need to be further utilization to help SIA with cost management.</li>
</ul>


We cut our SIA operating profit by 9% to S$2.6bn in FY24 and by 17% to S$1.5bn in FY25 versus consensus of S$2.1bn.
SIA's cost control is under-examined and we publish a deep dive on a concerning level of inflation relative to key peers, which actually escalated in 3Q24.
Cargo broke even in peak season, and Scoot's margins present a conundrum as it may need to be further utilization to help SIA with cost management.


Singapore Airlines – Onset of Earnings Normalization to Heighten Focus on Efficiency

<ul>
<li>We publish a detailed update on the APAC airline sector, featuring ANA, Cathay Pacific, JAL, Korean Air, Qantas and Singapore Airlines, addressing cargo yield normalisation, and unit cost inflation.</li>
<li>We see 24% upside to consensus EBITDAR for JAL in FY24 to March 2024, and 24% downside risk at Singapore Airlines based on our detailed analysis and quarterly earnings bridges.</li>
<li>We expect earnings at most carriers to decline in calendar 2024 versus 2023 as the combination of cargo yield normalisation, fuel price pressure, and further capacity restoration prompt margin declines.</li>
</ul>


We publish a detailed update on the APAC airline sector, featuring ANA, Cathay Pacific, JAL, Korean Air, Qantas and Singapore Airlines, addressing cargo yield normalisation, and unit cost inflation.
We see 24% upside to consensus EBITDAR for JAL in FY24 to March 2024, and 24% downside risk at Singapore Airlines based on our detailed analysis and quarterly earnings bridges.
We expect earnings at most carriers to decline in calendar 2024 versus 2023 as the combination of cargo yield normalisation, fuel price pressure, and further capacity restoration prompt margin declines.


APAC Airline Sector – Cost Inflation Management Differentials Crucial as Cargo Yields Normalise

External broker reports(aggregated public sources), UOB Kay Hian

UOB Kay Hian

External broker reports(aggregated public sources)

Backed by the UOB Group, UOB Kay Hian is one of Asia’s largest brokerage firms. Headquartered in Singapore, we are supported by more than 80 branches worldwide including a growing network of offices across Southeast Asia, Greater China, the United Kingdom and North America. Our global footprint and strong international presence have enabled us to feel the pulse of key financial markets and deliver incisive intelligence across industry sectors and asset classes. Content available is external broker reports authored by a third party outside the Smartkarma network and has been aggregated by an online aggregator through publicly available sources and is displayed by Smartkarma in this format for user's convenience and general informational purposes only. Content does not constitute investment or financial advice and Smartkarma makes no representation or warranty regarding its accuracy or contents. Original third party author retains all copyright and other proprietary rights in the content. Access or use of third party links not controlled by Smartkarma are at the user's own risk.

<ul><li>Recent outperformance of SIA's share price is likely driven by fund flows.</li><li>While we appreciate SIA’s outstandingness among regional peers and expect upbeat 1QFY24 results, we caution that SIA’s valuation is very lofty, with its FY24F P/B of 1.58x (2.8 standard deviation above historical mean) matching the historical peak just before the global financial crisis (GFC).</li><li>The second leg of uprun started on 1 Jun 23, coinciding with the sharp share price decline of the three major Chinese Airlines triggered by the China Southern Airlines’ (CSA) surprising announcement (on 31 May 23) of raising up to 25.6% of new shares, which has underlined major risks of more EPS-dilutive equity raisings by the three major Chinese airlines.</li></ul>Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

Recent outperformance of SIA's share price is likely driven by fund flows.While we appreciate SIA’s outstandingness among regional peers and expect upbeat 1QFY24 results, we caution that SIA’s valuation is very lofty, with its FY24F P/B of 1.58x (2.8 standard deviation above historical mean) matching the historical peak just before the global financial crisis (GFC).The second leg of uprun started on 1 Jun 23, coinciding with the sharp share price decline of the three major Chinese Airlines triggered by the China Southern Airlines’ (CSA) surprising announcement (on 31 May 23) of raising up to 25.6% of new shares, which has underlined major risks of more EPS-dilutive equity raisings by the three major Chinese airlines.Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

Singapore Airlines - Recognised For Outstandingness, But Valuation Very Stretched

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

In the United States, as per FAA classifications, any airplane with a MTOW (Maximum Takeoff Weight) of 300,000 pounds (136,000kg) is classified as heavy".
The pilot will designate his plane as "heavy" when talking to the Aircraft Control Tower  when taking off and landing to make clear that the tower should maintain separation between it and other aircraft. Tonight's flight from Singapore to Frankfurt the pilot might say "Tower, this is Singapore 26 Heavy..."
The issue is that the larger the airplane, and the slower it is going, the more 'wake turbulence" is created. That "wake turbulence" primarily comes from two sources. The first is the "jet wash" (which is the moving air coming out of jet engines - it is chaotic, and of short duration) made famous for many in the movie Top Gun.  The second is "wingtip vortices" where as the wing is generating lift, air flows over the wing in a regular pattern, and at the wingtips and other points, it swirls. This is highly regular, stable, and actually will last for minutes. This is the more dangerous, despite its stability. It is most easily seen in the rain or in super high humidity environments.
<section class="figure">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/236/646/original/wingtip+turbulence+gig.gif?1634795021" class="editor-image img-responsive" data-smartkarma-image-id="236646"></figure>
</section>
Tower is supposed to give time between planes so as the one coming after avoids the residual turbulence which may exist.
After the big plane does the big thing, you avoid the area. 
When covid-19 suddenly hit travel in early 2020, airlines around the world were reasonably quick to reduce capacity, and costs, and to raise equity to get through what was going to be a lean period. Singapore Air raised S$8.8bn in summer of 2020, and promised a possible raise of another S$6.2bn in summer of 2021. It ended up raising that in June as discussed in <a href="https://www.smartkarma.com/insights/singapore-air-rights-mcbs-s-6-2bn-of-capital-suck" target="_blank" data-smartkarma-citation="insights:51906" rel="noopener">Singapore Air Rights MCBs - S$6.2bn of Capital Suck</a>.
As discussed in <a href="https://www.smartkarma.com/insights/singapore-air-the-rights-distribution-vol-is-your-friend" target="_blank" data-smartkarma-citation="insights:39991" rel="noopener">Singapore Air - The Rights Distribution - Vol Is Your Friend</a> last year, the Rights Shares and Rights Mandatory Convertible Bonds (MCBs) significantly diluted common shareholders so even if there was a V-shaped recovery in business prospects, there would not be a V-shaped recovery in earnings per share. And that was the best case. 
The worst case was worse. 
More below the fold.

In the United States, as per FAA classifications, any airplane with a MTOW (Maximum Takeoff Weight) of 300,000 pounds (136,000kg) is classified as heavy".
The pilot will designate his plane as "heavy" when talking to the Aircraft Control Tower  when taking off and landing to make clear that the tower should maintain separation between it and other aircraft. Tonight's flight from Singapore to Frankfurt the pilot might say "Tower, this is Singapore 26 Heavy..."
The issue is that the larger the airplane, and the slower it is going, the more 'wake turbulence" is created. That "wake turbulence" primarily comes from two sources. The first is the "jet wash" (which is the moving air coming out of jet engines - it is chaotic, and of short duration) made famous for many in the movie Top Gun.  The second is "wingtip vortices" where as the wing is generating lift, air flows over the wing in a regular pattern, and at the wingtips and other points, it swirls. This is highly regular, stable, and actually will last for minutes. This is the more dangerous, despite its stability. It is most easily seen in the rain or in super high humidity environments.



Tower is supposed to give time between planes so as the one coming after avoids the residual turbulence which may exist.
After the big plane does the big thing, you avoid the area. 
When covid-19 suddenly hit travel in early 2020, airlines around the world were reasonably quick to reduce capacity, and costs, and to raise equity to get through what was going to be a lean period. Singapore Air raised S$8.8bn in summer of 2020, and promised a possible raise of another S$6.2bn in summer of 2021. It ended up raising that in June as discussed in Singapore Air Rights MCBs - S$6.2bn of Capital Suck.
As discussed in Singapore Air - The Rights Distribution - Vol Is Your Friend last year, the Rights Shares and Rights Mandatory Convertible Bonds (MCBs) significantly diluted common shareholders so even if there was a V-shaped recovery in business prospects, there would not be a V-shaped recovery in earnings per share. And that was the best case. 
The worst case was worse. 
More below the fold. 

Singapore

SATS Limited provides integrated ground handling and in-flight catering services at Singapore Changi Airport.  The Company also provides aviation security, airline laundry, and airport cargo delivery management services.

ComfortDelGro Corporation Limited provides bus, taxi, car leasing and rental, automotive engineering, maintenance services, and diesel sales.  The Group also provides investment trading and operates vehicle inspection and assessment services, and advertising services.

SIA Engineering Co Ltd provides airframe and component overhaul services, line maintenance and technical ground handling services. The Company also manufactures aircraft cabin equipment, refurbishes aircraft galleys, repairs and overhauls hydromechanical aircraft equipment.

Hutchison Port Holdings Trust is a port investor, developer and operator. The Company is also involved in transportation related services and logistics operations, including container storage and repair, container tracking, general and bulk cargo tranfer, warehousing, marine shuttle services and other related services.

Singapore Post Limited is the national postal service provider in Singapore. The Company provides domestic and international postal and courier services including end-to-end integrated mail solutions covering data printing, letter-shopping, delivery and mailroom management, and others. Singapore Post also offers end-to-end e-commerce logistics solutions.

SBS Transit Limited provides public bus services, advertisement on its bus fleet, and bus chartering.

Samudera Shipping Line Limited owns and operates ocean-going ships and provides containerized feeder shipping services. Through its subsidiaries, the Company also owns and charters vessels, provides sea and air freight forwarding, and operates shipping agency and container freight station services.

Keppel Corporation Limited's core businesses are offshore and marine, infrastructure, property investment and development, telecommunications and transportation, energy, and engineering.

ST Engineering is a global technology, defence and engineering group with offices across Asia, Europe, the Middle East and the U.S., serving customers in more than 100 countries. The Group uses technology and innovation to solve real-world problems and improve lives through its diverse portfolio of businesses across the aerospace, smart city, defence and public security segments. Headquartered in Singapore, ST Engineering reported revenue of $7.9b in FY2019 and it ranks among the largest companies listed on the Singapore Exchange. It is a component stock of the FTSE Straits Times Index, MSCI Singapore, iEdge SG ESG Transparency Index and iEdge SG ESG Leaders Index.

Jardine Matheson Holdings Limited is a multinational enterprise with a portfolio of businesses focused on the Asia-Pacific region. The Group's activities include financial services, supermarkets, consumer marketing, engineering and construction, automobile trading, insurance broking, property investment, and hotels.

China Southern Airlines Company Limited provides commercial airline services throughout China, Southeast Asia and other parts of the world.  The Company also provides other airline related services including aircraft maintenance and air catering.

China Eastern Airlines Corporation Limited, together with its subsidiaries, operates in the civil aviation industry. It offers passenger, cargo, mail delivery, ground, cargo handling, and other extended transportation services.

ANA Holdings Inc provides a variety of air transportation-related services. The Company offers scheduled & unscheduled air passenger services and air courier services. ANA sells aircraft parts and provides travel arrangement & reservation services as well.

Air China Limited provides passenger, cargo, and airline-related services in China.  The Company is primarily based in Beijing and a major hub for domestic and international air transportation.  Air China's airline-related services include aircraft maintenance, repair, overhaul service, ground services, and in-flight catering services.

United Airlines Holdings Inc is an airline holding company.  The Company owns and operates airlines that transports persons, property and mail throughout the United States and abroad.

Southwest Airlines Co. is a domestic airline that provides primarily short-haul, high-frequency, point-to-point service.  The Company offers flights throughout the United States.

International Consolidated Airlines Group S.A. provides transportation services. The Company offers international and domestic air passenger and cargo transportation services. International Consolidated Airlines Group serves customers worldwide.

International Consolidated Airlines Group (IAG LN)

International Consolidated Airlines Group

LATAM Airlines Group S.A. is an airline that provides both domestic and international flight services.  The Company provides passenger and cargo services to destinations in Chile, South America, the Caribbean, Europe, North America, and the Pacific.  LATAM Airlines operates passenger aircraft and cargo freighters.

InterGlobe Aviation Limited provides passenger airlines services. The Company offers ground management, air transportation, terminal maintenance, and other services. InterGlobe Aviation conducts its business globally.

Turk Hava Yollari Anonim Ortakligi (THY), also known as Turkish Airlines, provides passenger and cargo air transportation services. The Company serves all domestic destinations as well as the Middle East, North America, Europe, Asia, North Africa and South Africa.

Singapore Airlines Limited provides air transportation, engineering, pilot training, air charter, and tour wholesaling services. The Company's airline operation covers Asia, Europe, the Americas, South West Pacific, and Africa.

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Singapore Airlines (SIA SP)

Singapore Airlines – 4Q Likely to Extend the Theme of Earnings Normalization as FY25 Comes into View

We highlight out expectation that 4Q24 will further emphasize SIA earnings are normalising down from peak levels and we highlight our FY25...

Neil Glynn

Singapore Airlines – Onset of Earnings Normalization to Heighten Focus on Efficiency

Deep dive on SIA cost control, which is lagging key APAC peers, and journey to "normalised" earnings as capacity restoration continues.

Neil Glynn

APAC Airline Sector – Cost Inflation Management Differentials Crucial as Cargo Yields Normalise

Deep dive on earnings prospects of the top tier ex-China APAC full service carriers illustrates marked differences in inflation management, and...

Neil Glynn

Singapore Airlines - Recognised For Outstandingness, But Valuation Very Stretched

While we appreciate SIA’s outstandingness among regional peers and expect upbeat 1QFY24 results, we caution that SIA’s valuation is very lofty

UOB Kay Hian

Singapore Airlines - Still "Heavy"

Singapore Air Shares and MCBs will remain "heavy". There may not be that much wake turbulence but I would give them a wide berth.

Travis Lundy

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