Kate Lin: After 3 years of COVID, consumers are willing to pay more to travel more.
As airfares cost much higher, seats are still difficult to get.
Singapore Airlines (C6L) is therefore looking in good shape. By March, its passenger capacity reached 80% of its pre-pandemic level. Although the economic slowdown and global banking hiccup will weigh on spending appetite, meaning that business and leisure travelers are likely to be more cost-conscious, Morningstar analysts think the company shouldn’t have issues finding ways to hit pre-pandemic operating levels over the next 15 months.
Now, Singapore Airlines is in the late stage of its recovery, Investor focus is shifting to competition.
First, national carriers in the Middle East are targeting a similar customer segment as Singapore Airlines. For an airline from a city-state, without operating domestic routes is a clear disadvantage.
Secondly, its economy class segment is competing with low-cost carriers, which make up around 30% of the Asian market.
Singapore Airlines has its own budget airline brand, Scoot. But having Singapore as its home airport makes operation much costlier than its rival AirAsia from Malaysia.
A lot of readers are looking up this stock, but its shares is trading above Morningstar's fair value estimate.
For Morningstar, I am Kate Lin.
Bulls Say
- SIA is exiting the COVID-19 challenges in a much stronger position able to take market share.
- The joint venture with Tata should enable SIA to penetrate the rapidly growing Indian market, both domestic and international. We view this as a meaningful growth catalyst.
- Shipping bottlenecks globally will keep demand for airfreight high enabling SIA's cargo yields and load factor to stay higher for longer.
Bears Say
- The airline industry has been suffering from real ticket price decline for the past three decades. The process is unlikely to reverse once activity normalizes, and the competitive landscape is increasingly relentless for legacy carriers.
- COVID-19 is proving to be more stubborn and the virus variants will stall travel recovery.
- Its LCC endeavors, such as Scoot, will always find it hard to compete as Singapore is expensive relative to neighbors in Malaysia and Indonesia.
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