The Investing Pros and Cons With Singapore Airlines Ltd: The Negatives

When we’re looking at a company as a potential investment choice, it is important to take note of both the positives and negatives with the business.

Doing so helps ensure that we’re not missing out on anything important that could impact our investment.

With the above in mind, I want to run through some of the positives as well as negatives with Singapore Airlines Ltd (SGX: C6L) so that investors can have a useful investing overview. As one of the largest companies in Singapore’s stock market with a market capitalisation of S$11.8 billion, Singapore Airlines may be a company that many investors are curious about.

In this piece, I will be going through the negative aspects about Singapore Airlines. You can find the positive side of things about the company here.

High capital expenditure and fixed costs

Commercial planes are expensive machines that cost tens, if not hundreds of millions, to purchase. It is also not cheap to rent planes either.

But purchasing or renting a plane is just the beginning. An airline does not just operate planes – it has to market and sell air tickets, manage flights, maintain its planes and more. Most of the expenses related to these activitiesare fixed in nature.

Having a high level of fixed costs is a risk that a company must handle by having enough customer volumes. Unfortunately, since air ticket sales to passengers are generally driven by price, airlines may occasionally be forced to sell tickets at low prices that may not even cover fixed costs, thus leading to operating losses.

Significant level of uncontrollable risks

Business is essentially about managing risk and getting paid for doing so. To make profit, a business must be able to manage its risk at a cost that is lower than the revenue it brings in.

For risk to be manageable, it should preferably be within the control of management.

Unfortunately, the airline business is exposed to plenty of risks that are uncontrollable by management. These include fuel prices, weather conditions, the level of competition, currency risks, and also geopolitical risks.

The level of competition

There are always new companies trying to enter the airline industry. This is true despite the well-known challenges that the industry faces.

Full service carriers – the bulk of Singapore Airlines’ business – have always been operating in a tough environment. But the introduction of budget airlines to the industry has made it even tougher for full service carriers.

Budget airlines generally offer no-frill flights at a significant discount to the price of full-service flights. Though Singapore Airlines has its own budget airlines, namely, Scoot and Tigerair (the two will be merged in 2017), it does not solve the problem of competition.

A Foolish take

The above are a few of the investing-cons associated with Singapore Airlines. I may have missed out on other pertinent aspects of the company’s business, but I still hope the information presented here can be useful for any of you who are either investors in Singapore Airlines or potential investors in the company.

I’ve shared the link for the investing-pros of Singapore Airlines earlier, but here’s the link again.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.