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Foolish Face-off: Singapore Airlines vs. International Airlines Group

Welcome to the Foolish Face-off! In here, we engage Singapore-listed companies in a friendly competition with their foreign counterparts. Previously, we have pitted Thai Beverage against SABMiller, compared Singapore Press Holdings with Pearson, and squared off Singapore Exchange with London Stock Exchange.

This time, we’ll be taking to the skies with Singapore Airlines (SGX: C6L) and International Airlines Group (LSE: IAG).

Introduction

SIA is perhaps one of the most internationally well-known companies from Singapore, aided by the familiar visual image of The Singapore Girl in their advertising campaigns. The airline has won innumerous awards over the years, with the most recent being the company’s 31st spot on FORTUNE Magazine’s Top 50 World’s Most Admired Companies. Last year, SIA flew to over 60 destinations and operated 133 aircrafts, carrying a total of 17.2m passengers.

While the airline business is one of the toughest in the world, SIA has managed to navigate rough waters pretty admirably. It has had no losses since 2003 and had cumulative profits of S$6.9b from 2007 to 2011. That’s no mean feat considering that the members of the International Air Transport Association (IATA) – of which SIA is one of the approximately 240 members – together clocked cumulative profits of US$7.7b (about S$9.6b) in roughly the same time frame.

IAG might not be a familiar name, but it is actually made up of two airlines – British Airways and Iberia. It was formed in Jan 2011 and has a fleet of 348 aircrafts flying to 200 destinations. Last year, it carried 51.7m passengers. As a reflection of the difficulties that airlines face throughout the world, IAG ran up a loss of £765m in 2012.

Prior to the merger, British Airways’ profit had fallen from £451m in 2006 to a loss of £375m in 2009. Number of passengers had also slid from 35.6m to 33m, even as their fleet total increased from 207 aircrafts to 245. Iberia was in a similar situation in profit trends as well.

SIA IAG
Market Cap S$12.5b £4.6b
Last 12 month Sales S$15.1b £14.7b
*IAG’s market cap and sales would be roughly equal to S$8.7b and S$27.9b

 

It is interesting to note that IAG is the sixth largest airline in the world based on revenue, but has a market value one-third smaller than SIA’s.

Round 1: Valuation

The Foolish Face-off’s first duel compares the companies’ valuations using Price-to-Earnings (PE), Price-to-Sales (PS) and Dividend Yield.

SIA IAG
PE 45.9 N.M.
PS 0.8 0.3
Dividend Yield 1.9% N.M.
Share Price S$10.64 250.9 pence
**N.M = Not meaningful. IAG has failed to make a profit in its last 12 months. IAG has yet to declare a dividend.

 

We can see that SIA is in a much better overall shape as it is profitable, at the very least. But we should still note SIA’s PE of 45.9 and dividend yield of 1.9%, all of which are poorer than the Straits Times Index’s (SGX: ^STI) PE of 13.3 and yield of 2.4%. In any case, Round 1 goes to SIA!

Winner: SIA

Round 2: Profitability

The second round of the face-off sees us looking at the companies’ profit margins and return on equity (ROE). Profit margins can tell us how well management is turning each dollar of sale into profits. Meanwhile, a higher return on equity (ROE) could indicate how efficiently the company can turn shareholder capital into profit. Generally, the higher the ROE, the more efficient the company.

SIA IAG
Operating Margins 1.8% N.M.
Net Margins 2.2% N.M.
Return on Equity 2.5% N.M.
*Based on last 12 months’ financial figures
**N.M. = Not meaningful. IAG has failed to make a profit in its last 12 months

 

We had shared a little about the operating difficulties that airlines face in the Introduction and the figures presented in the Profitability table shows just how tough it is to be an airline. SIA wins this round without question.

Winner: SIA

Round 3: Growth

In Round 3, we take a look at a company’s growth. Top and bottom-line growth will likely improve intrinsic value of a business for its shareholders. Meanwhile, dividend growth can also enrich a shareholder over time.

  SIA IAG
Revenue Growth CAGR -1.8% 7.3%
EPS Growth CAGR -36.0% N.M.
Dividend Growth CAGR -33.1% N.M.
*Financial figures for SIA are based on its last 5 completed financial years. For IAG, it is based on its last 4 completed financial years.
**N.M. = Not meaningful. IAG has failed to make a profit in its latest financial year. IAG has yet to declare a dividend.

 

IAG has managed to grow sales but can’t turn that growth into profit. SIA, on the other hand, has seen shrinking sales, profits and dividends. But, the Singapore company will take this round because it is still making money and returning it to shareholders.

Winner: SIA

Foolish Bottom Line

Final Score: 3-0 to SIA!

So it seems that SIA is the winner here after a cursory glance at the two companies. Its shares are expensive in relation to its earnings, it has tiny margins and its business seems to be shrinking. But, it is better than IAG on a relative basis.

Do note though, that there are other important considerations like their business prospects and capital structure that will have to be studied before making a definitive conclusion.

There’s an old joke that goes ‘What’s the easiest way to become a millionaire? Start as a billionaire and buy an airline’. While that might serve up a few chuckles, it is actually a pretty nifty reflection of the economic realities of airline companies. And in the case of SIA, it might just be ‘the best house in a bad block’.

If you’re interested to know more about other businesses, stay tuned for more of our Foolish Face-offs in the future.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.