SIA’s One Flight Closer To Indian Skies


Back in September this year, Singapore’s flagship carrier Singapore Airlines (SGX: C6L) announced that it was entering into a joint-venture with Indian conglomerate Tata Sons Limited to establish a full-service airline based in New Delhi, India, subject to regulatory approvals from the country’s Foreign Investment Promotion Board (FIPB) and Directorate General of Civil Aviation.

Under the arrangement, SIA would own 49% of the US$100m joint-venture, while the rest would belong to Tata Sons.

This morning, SIA announced that it has cleared the FIPB’s hurdle as of 22 Nov 2013 and now awaits the green-light from the Directorate General of Civil Aviation before the joint-venture can get off and running.

When the September announcement was first made, the rational for the joint venture was due to the projected future high-growth rates for the Indian aviation industry.

In addition, the Indian government’s new rules that allowed foreign airlines to invest up to 49% in Indian carriers provided “an opportunity for SIA to participate directly in one of the fastest growing and largest aviation markets globally.”

SIA, a large-cap stock in Singapore that’s part of the Straits Times Index (SGX: ^STI), has woefully underperformed the rest of its large-cap peers. Over the past 5 years ended 18 Nov 2013, the STI has gained 83% while SIA’s share price actually dipped by 2%.

That’s not really a surprise when investors pull up the numbers for SIA’s corporate results in that period: from the financial year ended March 2008 till the last 12 months’, SIA’s profits have dropped by 76% from S$2.05b to S$493m as high fuel costs and competition from budget carriers dragged down the carrier’s bottom line.

If a business can’t do well over the long-term, its share price will eventually follow. Because of that, any avenue that allows SIA to participate in fast-growing aviation markets that can provide a meaningful boost to its financial performance should be welcome news for investors.

That said, the full-service joint-venture in India will be facing competition in India from budget carriers as well. Earlier in the year, Tata Sons had announced a three-party joint venture with AirAsia and Arun Bhatia to set up a budget carrier in India, which would likely receive a permit to fly within the next two months.

According to the Financial Times (link opens to an article that might require registered accounts), and as alluded to previously, budget carriers have steadily gnawed away at the market share of full-service airlines like SIA and Cathay Pacific.

It remains to be seen if SIA’s full-service Indian carrier can hold its ground against competition from budget carriers.

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