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Does Singapore Airlines Ltd Have a Strong Business Model?

Singapore Airlines Ltd (SGX: C6L), or SIA, is Singapore’s flagship airline. Its business can be divided into two main segments: passenger and air cargo transportation. The group operates the following business divisions: Singapore Airlines, SilkAir, Scoot (under Budget Aviation), SIA Engineering Company Ltd (SGX: S59) (its maintenance, repair and overhaul arm), and others.

SIA recently announced a record level of annual revenue in its recent FY 2018-2019 earnings report, at S$16.3 billion. However, group net profit was 47.5% lower year on year despite the record revenue. Investors may wonder if the group has a strong and resilient business model in order to tackle the various challenges that have arisen in the airline industry in recent years. To determine this, we’ll look more closely at three of SIA’s metrics.

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Operating and net margins

Margins look to have fluctuated significantly and been somewhat erratic over the last five years. Another notable characteristic is that the net profit margin is low, averaging around 2% to 5% over the period.

These numbers imply that the cost structure for SIA is high, resulting in low operating and net margins. Furthermore, the fluctuations in margins seem to indicate that there are costs (such as fuel) that the group cannot properly control.

Free cash flow

Looking at SIA’s 5-year free cash flow (FCF) trend, there was only one year out of the five where the group generated positive free cash flow, and even then, it was minuscule at just S$97 million. Due to heavy capital expenditure requirements relating to the airline industry, such as the purchase of new aircraft, SIA has not been able to consistently generate FCF.


SIA’s dividend history has been erratic, with higher dividends declared in years when the group has enjoyed more profits, and reduced dividends when the group has been pressured by higher costs of competition. Though the group has been consistent in paying out dividends to shareholders, the inconsistency of the amounts paid is linked to the inability of the group to generate consistent FCF and should be a major concern for investors.

A strong brand, but not such a strong business

In conclusion, SIA sports a strong and reputable brand, but it somehow does not translate to more consistent profitability and FCF generation. The airline industry has a part to play in this, as the entrance of budget airlines has altered the competitive landscape for SIA. Industry regulations also make it tough for the airline as compliance may cause it to incur higher costs, while fuel costs (though hedged) are a wild card for investors.

In short, SIA may have a strong brand, but it does not qualify as a strong business in my opinion.

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