Singapore Airlines Ltd (SGX: C6L) delivered a mixed set of results for the first quarter of its financial year 2018/19. Here are some of the key takeaways from its earnings update.
Operating financial performance
For the April-June quarter, the Singapore Airlines group reported an operating profit of S$193 million, 52.3% down from the prior year’s profit of S$405 million. However, last year’s profit included S$175 million of one-off items. Excluding these, operating profit would have been down 16.1%.
Revenue inched down by 0.5% to S$3,844 million. However, this was again largely due to the absence of the one-off items recorded in the corresponding period last year. Passenger and cargo revenue had in fact increased 5.1% and 6.0% respectively. This was driven by increase in passenger traffic and cargo yield.
Fuel cost the main reason for lower adjusted profits
The biggest reason for the steep decline in adjusted profits was due to the higher fuel costs. Net fuel cost increased by S$154 million or 16% more than last year.
The volatile fuel cost affects all airlines and it is not uncommon to see profit margins fluctuate due to the cost of oil. Expenditures, excluding fuel, was just 1.5% higher than last year partly due to the expansion of SilkAir and Scoot brands. Recently, Scoot announced that it would be increasing airfares to help mitigate the higher cost of fuel this year.
In the airline industry, there are some key metrics to measure the passenger load and how efficiently the company is using its airplane capacity.
Passenger load factor is a measure of how much of the airline’s capacity is utilised. Passenger carriage is the number of passengers per kilometer traveled and passenger yield is revenue per passenger per kilometer traveled. The passenger yield measures the pricing power of the airline.
Below is a table of the changes in these three metrics in the respective brands that Singapore Airlines group operates:
Source: Author’s compilation; Singapore Airlines Ltd FY18/19 Q1 earnings
From the chart above, we can see that the yield for all its consumer-facing brands declined. However, this was offset by larger passenger load and passenger load factor.
Source: Singapore Airlines Ltd FY18/19 Q1 Earnings Presentation
Operating profit for all four of its businesses declined. I feel the Scoot brand is still in the high-growth phase and investors should expect this subsidiary to grow in profitability only after the business matures further. Scoot recorded an impressive 16.1% improvement in its revenue to S$417.8 million during the quarter.
The group stated in its media release that it expects passenger traffic to grow in the next few months but expects cost pressures to remain, especially from higher fuel prices. Cargo demand in the near term should be steady in spite of the global trade tensions. But should it escalate, it could potentially have a long-term impact on air cargo demand. The group is on track to merge SilkAir with the Singapore Airlines brand in 2020.
The Foolish conclusion
Singapore Airlines delivered a mix set of results for the quarter. Despite higher passenger load and operational growth in revenue, its profits plunged due to lower passenger yield and higher fuel costs. At its current price of S$10.11 per share, it trades at a price-to-book ratio of 0.87, has an annualised price-to-earnings multiple of 21.4 and a dividend yield of 3.9%.
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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 Jeremy Chia doesn’t own shares in any companies mentioned.