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In order to get a comprehensive analysis on SIA's financial statement analysis , we compared SIA's 5 financial year ending(FYE) results with the industry's average and 2 of its main competitors Cathay Pacific Airways and Qantas Airways . Cathay has been trailing closely to SIA in terms of first class cabin service and profitability for years. Qantas has long been dominating the highly profitable Kangaroo route and is ranked 5th in the world by Skytrax's survey . Please refer to appendix for the actual figures for every analysis below.
Current Ratio: SIA's current ratio is more than 50% above industry average and its competitors showing SIA's strong liquidity position in meeting its short term obligations. However, with the aggressive acquisition of 19 A380s, its current ratio is expected to drop in the next few years. This might not be a concern as the A380s is expected to bring more benefits than costs to SIA which will be explained in the next section.
Operational Efficiency Analysis
Assets Turnover Ratio: SIA's recorded significantly lower asset turnover ratio compared to the industry average and its competitors, showing that SIA is relatively ineffective in utilising its assets in generating sales.
Receivables Turnover: With a lower receivables turnover ratio than the industry, SIA should consider reviewing its credit policies to ensure timely collection of imparted credit that is not earning interest for the firm.
Sales: SIA's revenue has been increasing for the last 2 years since FYE2005. However, this growth has slowed down from double digit growth to 8.6% recently. This is not a concern as SIA is still considered as one of the more profitable companies in the industry as shown in its Net Income and Operating profit ratios. With the new addition of A380s they will also be able to charge higher prices.
Return on Assets/Equity/Invested Capital: SIA's ROA is 4 times above industry average and significantly higher than its competitors. Its ROE and ROIC is also significantly higher than the industry. All 3 ratios have surpassed Cathay recently. This shows SIA management's capability in providing high returns for its shareholders now and the future.
Capital Structure Analysis (Solvency)
Debt to equity ratio: SIA's D/E ratio is significantly lower than the industry average and its competitors. It is financing its growth mainly with equity giving it a lower exposure to risks associated with interest rates.
Market Value Analysis
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Dividend yield: In addition to its high EPS. Dividend yield more than doubled from 3% to 6.5%.
PE Ratio: Despite the rising trend of SIA's stock over the past few years , its PE ratio is still relatively low compared to the industry average and Cathay's. This shows that there is still upside potential in the stock price. Various analyst reports have rated SIA's stock to outperform until its P/E ratio of 15X .
Economic Value Added: SIA's has a negative EVA. This might be due to its high dependency on financing through equity (92.64%) rather than debts. Financing by equity is highly costly and non tax deductible, thus the company could have had better EVA by taking advantage of the increased profits that financial leverage brings.
Company Risk Analysis
Altman's Z-Score: This is the test for predicting bankruptcy of a company. SIA scored 2.92 which categorizes it well above the category of unlikely to turn bankrupt', and well above its competitors.
Beta Coefficient: Its adjusted beta for FYE2007 is at 0.835 indicating its low volatility compared to the market.
In addition, SIA's other indicators such as Available Seat Km (ASK) , No. of destination cities, Revenue Passenger per Km (RPK) , Seat Capacity per employee have increased. These increased capacity and destinations indicates more upside for increase in revenue in the future.
All in all, the above analysis has shown that SIA is highly profitable, low risk and low volatility. Its FYE2007 results are impressive. Many of its ratios have made a turning point and surpassed Cathay in FYE2007. With the addition of A380, SIA's profitability is expected to improve further.
The world economy is growing at a solid 4¾% per annum and is expected to rise. Expanding global trade and improving domestic productivity contribute to rising wealth over the long term, which translates into improved demand for air services (RPK expected to grow 5% annually ). The industry shows huge potential for further growth. Generally, most airlines are reporting increasing profits, attracting new airlines to enter the industry .
As the level of affluence has increased, SIA's prices have become more affordable. With SIA's plans to increase its fleet size, the company will be in a good position to benefit from the growing demands for air travel.
Rosy outlook in the Asia Pacific region
Following a downturn in revenue in 2003, the Asia Pacific region has been showing healthy growth. Overall, air traffic in Asia-Pacific will increase at a rate 1.8 times higher than that of economic growth (GDP) in comparison to the multiplier of 1.6 for the world as a whole . This is largely a result from the increased economic activities in China and India. In Southeast Asia, RPK is projected to grow by 5.9% annually over the next 2 decades23, driven by the region's growing economic development and increased tourism demand. The airline industry in this region is forecasted to grow by 9.3%, to hit more than 830mil passengers by 2010 .
With approximately 47.8% of SIA's revenue coming from East Asia , they would benefit from the booming Asian market. SIA together with Temasek has recently acquired a total stake of 24% in China Eastern Airlines , China 3rd largest airline. This will widen the opportunities SIA have in one of the world's fastest-growing aviation markets, and take advantage of the increased air travel into China for the upcoming Beijing 2008 Olympic Games .
Benefits brought about by technological innovations
Increased efficiency of new aircraft and proposed super jumbo aircraft by Airbus and Boeing cater to the increasing demand from customers to travel further, with larger capacities per flight. They also burn less fuel and spend less time in maintenance, enabling airlines to achieve lower costs and higher utilization of their airplanes. Airlines are able to widen their profit margins, widening the gap between seat revenue and seat costs. E-ticketing enables airlines to process data more efficiently, reducing operating costs by more than 80%.
SIA has recently acquire larger airplanes like 9 Boeing 777-300ER and 19 fuel efficient Airbus A380 . As the kangaroo route is full all year round for SIA, being the first to receive A380 will allow SIA to expand their capacity ahead of its competitors such as Emirates and Qantas .
Rising Fuel prices
Fuel prices have more than doubled since 2004. Oil prices have been fluctuating, as demand of oil increase with the tight supply. This increase directly impacts the profit margin of the airlines since oil price volatility will cause operating expenses to rise disproportionately to its sales volume. However, as supply looks more optimistic over the years, oil prices are expected to reduce over the years.
SIA uses option and swap contracts to hedge the oil prices up to 18 months forward. Fuel surcharge is also used to pass on the cost of rising oil prices to the consumers so as not to upset profit margins.
Weakening of the US dollars
Inter-company trading is mostly done using USD. These companies are exposed to foreign exchange rate fluctuations especially with the weakening of USD against many currencies recently. The industry believes that the US government does not intend to strengthen the greenback in the near future in order to boost their exports.
SIA uses the policy of matching its receipt and payments in each currency to manage its foreign exchange exposure. As a majority of the operating costs are denominated and payable in USD, SIA usually faces a deficient in USD . Thus, the weakening of USD will reduce these operating expenses, improving their profit margins.
Threats posed by substitutes
Recently, low cost airlines, e.g. AirAsia and Jetstar Asia is introducing long haul low cost flights. This will pose as a challenge to large airlines who had since dominated the long haul routes. In addition, there are private jet services which are able to equal the service provided by top class airlines, although at a higher cost. However, they provide the convenience of availability and most importantly, eliminate the need to waste time for flight check in.
SIA bends on their differentiation strategy to attract the demand of the market with exclusive service quality that is incomparable to others.
Future of SIA
The future of a nation's airline is dependant on how supportive the government is in looking for new aviation pacts. The Singapore government has been aggressively trying to increase the number of Open skies agreement as evident from the recent UK Open Skies Agreement. On the whole, the airline industry is growing as the demand for their services are increasing. Furthermore, SIA accreditation is supported by the many awards they have won, and looking at how SIA is positioned, we can be sure that SIA will outshine their competitors.