Singapore Airlines Shares May Not Have Much Lift Left

March 8, 2002
Singapore Democrats

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Singapore Airlines shares have been running hot over the past few months, but some investors say there may not be much lift left in the stock.

What’s more, the carrier is facing some setbacks. Among them: a deal with Virgin Atlantic that is increasingly looking like a dud, a potential contract to manage a restructured Ansett Australia that went nowhere, and, in the wake of Ansett’s collapse, the loss of an important source of passengers. Last weekend, Singapore Airlines’ chief executive, Cheong Choong Kong, said he planned to retire next year after almost three decades with the company.

Investors have brushed the bad news aside amid increasingly encouraging signals from the global economy. Many can’t get enough of the stock, which at S$14.70 (US$8.03) a share has almost doubled since its lows in September. But fund managers say this particular goose won’t be laying any more golden eggs.

“I’m following the arguments saying you should buy it, but I’m not terribly convinced,” says Edmund Harriss, investment manager at Investec Asset Management in Hong Kong. “The easy money has been made on these (airlines).” Soh Tze Kuan, a Southeast Asia fund manager at ING Investment Management, adds, “Most Asian airlines are currently fully valued, unless fundamentals improve significantly.”

Here’s what has caught the eye of many investors. Passengers are flying again. Freight loads at Singapore Airlines rose in January compared with the year earlier. If the U.S. economy really is recovering, it might create more demand for Singapore’s technology goods, which would in turn create more air-freight business. Best of all, “Singapore Airlines has a very strong balance sheet,” says Kevin O’Connor, a Hong Kong-based analyst at Deutsche Bank. “Very strong cash flows.”

In this accounting-sensitive environment, it sometimes seems that’s all that matters. But there are some worrying trends at the airline that could affect its results down the line:

The Kangaroo Route. For the uninitiated, that’s “passengers from Oz [Australia] and New Zealand, up through Singapore, and on to Europe,” says Mr. O’Connor. That group of passengers makes pretty steady traffic, he says. But the demise of Ansett means that Singapore Airlines isn’t necessarily benefiting. Earlier, Ansett, a fellow member of the Star Alliance of airlines, fed passengers into the Singapore Airlines system. With the demise of Ansett, Singapore Airlines lost much of that revenue stream.

Virgin Atlantic. In April 2000, Singapore Airlines bought a 49% stake in the airline for S$1.6 billion. At the time, many analysts said that was too much. At GBP 169 million (US$240.8 million), Virgin’s on-balance-sheet borrowing represented 123% of equity in 2001, says Mr. O’Connor. Off-balance-sheet debt for aircraft leasing is seven times that, he estimates. Mr. O’Connor reckons Virgin may require an additional cash injection from Singapore Airlines. A Singapore Airlines spokesman said the airline doesn’t comment on its equity position in other airlines unless it has “a specific reason for doing so.”

Because of likely new accounting rules, Virgin’s plight could make Singapore Airlines’ accounts look worse than anticipated.

Taking a conservative stance, Singapore Airlines has written down its stake in Virgin to less than S$100 million.

Under current Singapore accounting rules, if Singapore Airlines writes down its book value in Virgin to zero, it no longer has to recognize its share of Virgin’s loss on its books. But under new rules, it would have to recognize the loss if Singapore Airlines has guaranteed Virgin debt or if it has lent or advanced money to Virgin.

Ansett. Singapore Airlines tried to buy Ansett in 1999, but was edged out by Air New Zealand, in which Singapore Airlines then bought a 25% stake. An Ansett-driven loss at Air New Zealand helped drive down by 88% Singapore Airlines’ net profit for the six months ended in September.

Singapore Airlines dallied again with Ansett through Tesna, the Australian consortium that was set to buy Ansett. Singapore Airlines was talking with Tesna about managing the Australian carrier, but the plans fell through along with Singapore Airlines’ hopes for a lucrative management contract. Last month, the Tesna deal collapsed anyway.

These missteps haven’t done anything to deter Singapore Airlines from its often-stated goal of growth through alliances, mergers and acquisitions. “SIA’s small home base means there are limits to our potential for organic growth,” says a spokesman. “We therefore remain committed to our strategy.”

Changes at the top. The retirement next year of CEO Mr. Cheong is less of a worry. “Of all the airlines that are able to cope with changes in senior management, Singapore Airlines is in a good position,” says Mr. Harriss of Investec. Management style is very steady, analysts say, and there are plenty of strong candidates within the airline to succeed Mr. Cheong.

Safety issues. In October 2000, a Singapore Airlines jet tried to take off from the wrong runway in Taipei. It crashed into construction equipment and killed 83 people, ending a perfect safety record for the airline. (In 1997, a plane from the fleet of Singapore Airlines’ subsidiary, Silk Air, crashed in Indonesia, killing all 104 aboard). Taiwan authorities have yet to issue the final report on the cause of the Taipei crash.