Tug-of-Fools: SIA – The Bull Argument

250px-Bulle_und_Bär_FrankfurtPerhaps the thing that distinguish Singapore Airlines (SGX: C6L) from other airlines is the traditional costumes their air stewardesses don – the Sarong Kerbaya! It is often a sight to see them pulling their luggage across the walkway in the airport, reminding us of the long history of Singapore Airlines (SIA).

However, things have not really gone well for SIA. Strong competition brought about by emerging budget airlines, impending Europe debt crisis coupled with high fuel costs have made operating conditions challenging for the airline.

Nevertheless, SIA has taken a few important steps to ensure that there will be continued positive developments in the near future.

A switch in market positioning

SIA, best known for its premium services, has taken low-cost airlines head on with the launch of its own budget carrier, Scoot, and is expanding this line of its business across the region.

In addition to retaining its industry-leading position, SIA is moving towards a portfolio approach suitable for different business cycles, with Singapore Airlines and SilkAir at the premium end of the spectrum and Scoot an the low-cost end in partnership with Tiger Airways (SGX: J7X)..

With the low-cost carriers here to stay, it is wise for SIA to focus on this big strategy overhaul to capture a slice of the air-travel pie, especially when global conditions are challenging

Boosting Capital Expenditure

As competition heats up from the Middle East airlines and the low-cost carriers, SIA is stepping up its capital expenditure by 67% over the next five years by enhancing their luxury services, while keeping prices affordable.

SIA focus on innovation of new products such as flat beds and new entertainment systems to stay ahead of its main rivals. Furthermore, SIA has also been investing in upgrading IT systems where Singapore Airlines and SilkAir adopt a new inventory and reservations system followed by an upgrade of check-in systems.

Ordering more aircraft is also a priority for SIA as it turns to regional cities to tap growth. Within the SIA group, Scoot and SilkAir continued to add new destinations as business has been brisk with a good customer following.

The State is Strong

Despite all the negative impact from intense competition and challenging macro environment, Singapore Airlines has more to cheer about. It is the world’s most awarded airline and it is controlled by state investor Temasek Holdings which has a 55.9% stake (as of 31st March 2013).

In addition, SIA net cash balance stands at S$3.8b and this is set to increase after it agreed to divest a 49% stake in Virgin Atlantic for $360 million. With a huge cash hoard and reliable cash flows from its subsidiaries, SIA is more than capable of reviving growth through its regional network expansion and the venture into the low-cost segment.

That concludes the bull argument. You can read the bear argument here.

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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 James Yeo doesn’t own shares in any companies mentioned.