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Singapore Airlines Ltd’s Latest Quarterly Earnings: Fuel Costs A Major Drain On Profits

Singapore Airlines Ltd (SGX: C6L) reported a downbeat set of earnings yesterday for its second quarter and its first half of the fiscal year ending 31 March 2019 (2018/2019).

Here are eight key highlights from its earnings release:-

1. Revenue for its first half of 2018/2019 increased by 2.5% from S$7.7 billion to S$7.9 billion, contributed by both growth in passenger flown revenue (up 5.8% year on year) as well as cargo flown revenue (up 7.4% year on year). For the second quarter of the fiscal year 2018/2019, revenue increased by 5.6% from S$3.8 billion to S$4.1 billion.

2. Operating profit, however, slumped by 34.7% from S$357 million a year ago to S$233 million in the latest quarter, due to significantly higher fuel costs as well as capacity expansion. Operating profit margin narrowed from 9.3% in 2017/2018’s second quarter to 5.7% in the reporting quarter as fuel costs ballooned by 24.3% to S$1.2 billion as a result of an increase in oil prices.

3. Group net profit fell from S$293 million a year ago to S$56 million in its current quarter, a fall of 81%. However, there was an exceptional loss of S$116 million due to the on-going writedown in Virgin Australia (an associated company) which was recognized by SIA Group. If we strip this expense out, net profit would have fallen by 41.3% instead.

4. As of 30 September 2018, the operating fleet for the parent airline (SIA brand) amounted to 110 passenger aircraft with an average age of six years. Expected capacity growth for 2018/2019 is estimated to be 5% year-on-year. Meanwhile, SilkAir has 32 aircraft in operation while Scoot has 44 aircraft. The expected fleet growth rates for SilkAir and Scoot were 4% and 16% year-on-year respectively.

5. Operational metrics for the SIA Group looked healthy, and are captured in the table below:-

Source: Author’s Compilation from SIA’s second-quarter 2018/2019 Press Release

From the above table, we can see that passenger and cargo loads have been increasing and load factors also remain higher year on year, except for a small dip for Singapore Airlines cargo operations. However, cargo and passenger yields saw declines for SIA passenger operations and Silkair, which were offset by yield increases for SIA Cargo operations and Scoot.

6. Divisional operating profit can be broken down as follows:-

Source: Singapore Airlines’ 2Q FY 2018/2019 Press Release

SilkAir and Scoot recorded operating losses for the quarter. The main reason was the increase in fuel costs as mentioned above, as well as expenses relating to fleet expansion. Though operational metrics were positive for both SilkAir and Scoot (higher passenger flown revenue), the increase was not sufficient to offset the large increases in fuel and other costs.

7. An interim dividend of S$0.08 was declared, down from S$0.10 last year. Total trailing 12 months dividend was S$0.38 (a final dividend of S$0.30 was declared for fiscal year 2017/2018), and trailing dividend yield is 4.0% based on SIA’s closing share price of S$9.42 as at 13 November 2018. Based on a trailing 12-month earnings per share of S$0.56, SIA trades at a price-earnings ratio of 16.8.

8. For SIA’s outlook, the group expects higher year-on-year bookings which will drive revenue growth. However, the group also flagged the risk of higher oil prices driving up fuel costs further, which may continue to erode profitability. Global trade tensions and increasing competition may also dampen its growth prospects. The group is undergoing a three-year transformation program to enhance operational efficiency and grow revenues. If these changes bear fruit, investors may see better numbers ahead.

Foolish Bottom Line

SIA is operating in a tough environment as it is buffeted by headwinds such as high fuel prices and a competitive environment.

Airlines are also subject to strict regulations and compliance with these regulations may increase expenses and crimp profits. SIA is, however, one of the better well-run airlines in the region and their astute management of the company should enable the company to continue to grow and thrive, notwithstanding the challenges it currently faces.

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The Motley Fool Singapore contributor Royston Yang contributed to this article. Royston does not own shares in the companies mentioned.

The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore writer Chin Hui Leong does not own shares in any of the companies mentioned.