School holidays are here and people have taken to the skies and seas as pent-up demand for holidays causes a surge in bookings for air travel and cruises.
Singapore Airlines Limited (SGX: C6L), or SIA, is a big beneficiary of this trend.
Singapore’s flagship carrier has had its fair share of ups and downs over the last three years.
Back in 2020, the group was struggling as load factor plunged to an all-time low and the carrier had to raise money through a rights issue to strengthen its balance sheet.
But because management preserved SIA’s core capabilities and kept its staff well-trained, it was able to react much faster than other airlines in capturing pent-up demand.
The result?
The airline recently reported its highest-ever net profit in its 76-year history.
SIA’s share price has also soared to a five-year high of S$8.05 but has since settled back down to S$7.52, still up nearly 38% year-to-date.
Given the surge, investors may be curious to know if the airline can continue to do well moving forward.
Stabilising passenger numbers
Passenger numbers have been steadily heading up in the past two years as countries reopened their borders.
The carrier had seen passenger numbers rise steadily since vaccinated travel lanes were introduced back in August 2021.
Then, SIA’s passenger numbers started to surge in April 2022 when Singapore’s government eased restrictions, crossing the one million mark that month.
Since July 2022, however, growth in passenger numbers started to slow past the two million mark and as of May 2023, have hit a high of 2.87 million passengers.
March 2023 still saw a 205% year on year surge from 893,000 to 2.7 million but for May 2023, the increase was just 68.4% year on year.
As the months roll on and the prior year’s base becomes higher, SIA should see less and less of a strong year-on-year effect.
With China’s reopening in January, this may help to boost passenger numbers for the remainder of this year but may not result in a sharp jump anymore.
Financials are coming off a high base
Similarly, the pent-up demand for air travel had resulted in a strong surge in the group’s financial numbers.
The spike in numbers led to the airline breaking records in operating and net profit for its fiscal 2023 (FY2023).
However, for FY2024, these financials will come off a high base and may not top the prior year’s stellar performance.
With rising costs due to high inflation along with higher interest rates and elevated fuel prices, SIA needs to contend with many more headwinds than a year ago.
And as more airlines ramp up their capacity and compete for tourism dollars, SIA’s first-mover advantage may also slowly fade away over time.
Management missteps
CEO Goh Choon Phong also received “very strong feedback” recently over the use of paper boxes for economy class meals.
He admitted that the airline “could have done better” with this introduction and also regarding the removal of appetisers.
These paper boxes made the airline’s image appear “cheap” and the lack of appetisers also gave the impression that SIA’s branding was not as premium as claimed.
These missteps caused criticism and the CEO was candid about not reacting fast enough and promised to do better in future.
Valuation is back at the long-term average
Aside from the above, it’s also instructive to look at the airline’s valuation to determine where we are at this point.
Source: TIKR
The chart above shows the airline’s 12-year price-to-earnings (P/E) ratio and it has mostly hovered around 25 times P/E except for the 2020 to 2022 period when the group was incurring losses because of the pandemic.
Using FY2023’s earnings per share (EPS) of S$0.351, SIA’s trailing P/E ratio stood at around 21.6 times, not far from its long-term average.
Investors should note that the EPS could be elevated as it was caused by a surge in demand when borders reopened and may not be sustained in the medium term.
Hence, we should expect the P/E ratio to rise should the EPS fall in FY2024, bringing SIA closer to its long-term average P/E ratio.
Get Smart: Be cautious and observe the trend
It is a happy event to see SIA soaring once again.
The airline battened down the hatches during the crisis and has emerged victorious in capturing pent-up demand.
However, with many headwinds ahead and its valuation close to long-term averages, it seems the upside may be limited for now.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
