Singapore Airlines Ltd’s Latest Earnings: Strategic Review of the Business Ahead

Yesterday, Singapore Airlines Ltd (SGX: C6L) reported its fourth quarter and full year earnings for its financial year ended 31 March 2017 (FY 2016/17).

The company needs no introduction given that it runs Singapore’s flagship airline. SIA also owns other airline brands such as SilkAir and Scoot. It has a majority stake in SIA Engineering Company Ltd (SGX: S59) as well.

You can catch up with the results from SIA’s previous quarter here.

Financial highlights

The following’s a quick take on some of SIA’s latest financial figures:

1. Revenue for the fourth quarter was $3.72 billion, largely unchanged from a year ago. For FY2016/17, SIA recorded $14.87 billion in revenue, down 2.4%.

2. For the fourth-quarter, SIA recorded a $138.3 million loss that’s attributable to shareholders. For FY2016/17, the airline company’s profit attributable to shareholders was $360.4 million, a 55% decline from a year ago.

3. For FY2016/17, SIA’s earnings per share (EPS) declined 56% to $0.303.

4. For FY2016/17, the company’s cash flow from operations was $2.53 billion and capital expenditure was $3.94 billion. The higher capex resulted in the airline operator posting negative free cash flow of $1.4 billion. This is a decline from the previous year when there was positive free cash flow of $96.5 million.

5. As of 31 March 2017, SIA had $3.38 billion in cash and equivalents and borrowings of $1.57 billion. This is a decline from a year ago when the group had $3.97 billion in cash and equivalents and borrowings of $1.35 billion.

SIA closed its fiscal year with lower revenue and a sharp fall in profit. The company’s bottom-line was dragged into the red by write-downs and other losses.

The company also posted negative free cash flow and took on more debt. To be sure, SIA still has a good net cash position. A strong balance sheet is important for the company as the airline industry has historically been a tough business.

The board of directors declared a final dividend of $0.11 per share, over 70% lower compared to the previous fiscal year’s final dividend of $0.35 per share. For FY2016/17, SIA is proposing to pay out $0.20 per share in dividend, down from FY2015/16’s dividend of $0.45.

Operational highlights

For FY2016/17, SIA said that revenue was down due to overcapacity in its major markets, which resulted in intense pressure on its passenger yields.

Operating profit for the parent airline was down 20.4% to $386 million in FY2016/17. SilkAir reported an 11% increase in operating profit to $101 million. Meanwhile, Budget Aviation Holdings (which houses SIA’s low-cost carrier operations) grew its operating profit to $67 million, up from $42 million a year ago. SIA Cargo managed to reverse its operating loss of $50 million in FY2015/16 into a profit of $3 million. Elsewhere, SIA Engineering posted a 31% decline in operating profit to $72 million.

As of 31 March 2017, the parent airline had a fleet of 106 passenger aircraft with an average age of seven years and eight months. SilkAir had 30 aircraft while the low-cost carrier arm had 35 aircraft.

What lies ahead

Regarding its outlook, this is what SIA shared in its earnings release:

“Intense competition arising from excess capacity in major markets, alongside geopolitical and economic uncertainty, continue to exert pressure on yields.

While the industry benefitted from a lower fuel cost environment in the past financial year, the average Singapore Jet Kerosene (MOPS) price rose from its low of USD37.9 per barrel in January 2016 to USD61.9 per barrel in March 2017. It is expected to remain volatile in the near term.

As fuel remains a significant portion of the Group’s expenditure, the Group continues to hedge its fuel requirements prudently. For the first quarter of the 2017-18 financial year, the Group has hedged 39.3% of its fuel requirement in MOPS at a weighted average price of USD65 per barrel. For the full financial year, the Group has hedged 20.6% of its fuel requirement in MOPS and 20.0% in Brent at weighted average prices of USD66 and USD53 per barrel, respectively.

Longer-dated Brent hedges with maturities extending to 2022 cover between 40% and 45% of the Group’s projected annual fuel consumption, at average prices ranging from USD53 to USD59 per barrel.

The addition of more modern, fuel-efficient aircraft with new-generation cabin products is enabling the Group to expand its network and enhance its competitiveness in both the full-service and low-cost market segments. With Scoot and Tiger Airways preparing to operate under the single Scoot brand, more synergies are expected within the budget segment, both operationally and strategically.”

SIA also announced the formation of a transformation office that will be tasked to look at the strategic initiatives of the company:

“The many strategic initiatives implemented to address structural changes in the industry are now showing positive results. Building on this foundation, the next phase of the SIA Group’s transformation has been launched.

A dedicated Transformation Office is conducting a wide-ranging review, encompassing network and fleet, product and service, and organisational structure and processes, to better position the Group for long-term sustainable growth across its portfolio of full-service and budget airline operations.

The review is aimed at identifying new revenue-generation opportunities and reshaping the business into one that continues to deliver high-quality products and services, though with a significantly improved cost base and higher levels of efficiency.”

Shares of SIA closed at $9.98 each today. At that price, SIA is valued at 33 times trailing earnings and has a trailing dividend yield of 2.0%.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.