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3 Risks To Consider With Transportation Stocks

RisksThere are a number of passenger transportation stocks listed on the Singapore market. They include companies such as Singapore Airlines (SGX: C6L), Tiger Airways (SGX: J7X), SMRT Corporation (SGX: S53) and ComfortDelGro (SGX: C52). Let’s take a look at three risk factors investors should be aware of when investing in such companies.

Fuel Costs

In the case of Singapore Airlines (SIA). fuel costs accounted for some 40% of its expenditure. For Tigerair, it amounted to 44% of its expenditure.

Fuel price has been increasing steadily. As seen from here, the price of jet fuel has risen from US$0.39 per gallon in June 1998 to US$2.73 a gallon in May 2013. In other words, jet fuel prices have increased at a compound rate of almost 14% a year.

For SMRT, fuel costs took up 14% of its expenditure whereas for ComfortDelGro (CDG), fuel costs were 9% of its expenditure last year.

It can be seen that fuel costs affects airlines considerably and less so for land transport companies.

Staff Costs

Staff costs accounted for 16% of SIA’s expenditure while it took up 14% of Tigerair’s expenditure. For the land transport companies, staff costs amounted to 38% of SMRT’s expenditure while it was 35% of CDG’s expenditure.

It can be seen that staff costs impact land transportation companies more than air transportation companies.

Black Swan Events and Unexpected Events

The Black Swan theory was developed by Nassim Nicholas Taleb. A Black Swan is an event that comes as a surprise which no one has thought of before and has a major effect. A Black Swan event that people would want to forget about is the September 11 attacks. The stock price of SIA plunged 29% in nine trading days from 11 September 2001 to 24 September 2001 before recovering.

The April 2010 eruption of the Eyjafjallajökull volcano in Iceland disrupted air travel due to the volcanic ash. Other events that include spreading of diseases such as SARS and bird flu affect travel as well. During the SARS outbreak, people were averse to using public transport due to the close contact with other people.

Foolish Takeaway

Investors should always be wary of the profit margins of transport companies. The margins can be affected deeply by rising fuel and staff costs. If a company is fundamentally strong, a Black Swan event or any unexpected event that causes a share price fall may actually provide a great opportunity to purchase assets on the cheap.

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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 Sudhan P doesn’t own shares in any companies mentioned.