Is Airbus next after Singapore Airlines’ US$13.8 Billion Boeing order?

Singapore Airlines (SIA:SP) Fair value: S$11
Singapore Airlines (SIA:SP) Rating: Outperform

24 October 2017, Global – Following the signing of its US$13.8 Billion firm order for 39 Boeing aircraft, Singapore Airlines Group (SIA:SP)’s fleet structure [which has historically been balanced 50:50] will have more Boeing than Airbus planes.

This raises the probability that Singapore Airlines Group’s next aircraft order will likely be from Airbus, which could happen as early as February 2018 during the Singapore Airshow.

We estimate Singapore Airlines Group’s gross seat capacity will grow 14% per annum from 2017 to 2021 which is 2ppts higher than its average net seat capacity growth in the past 5 years. We expect Singapore Airlines Group to phase out at least 2% of its aircraft fleet going forward to reduce overcapacity risks. As its leased Airbus A330 aircraft are progressively phased out, Singapore Airlines Group will also have 7 aircraft types from the current 8. Fleet structure simplification will help improve its operating efficiency and reduce its unit cost.

Given its rising aircraft capex and low profit margins, we forecast Singapore Airlines Group to turn free cash flow negative and go into a small net debt position at the end of the current financial year FY18 (year to March) for the first time since FY04. Large special cash dividends are therefore less likely unless Singapore Airlines Group decides to divest SIA Engineering completely or partially.

 

SINGAPORE AIRLINES ORDERS 39 NEW GENERATION WIDEBODY AIRCRAFT FROM BOEING FOR ITS MEDIUM TO LONG-HAUL OPERATIONS

Singapore Airlines Group’s contract to purchase 39 Boeing aircraft (including 20 B777-9s and 19 B787-10s) based on list prices is US$13.8B but there is likely to be a significant discount for this order. Singapore Airlines Group also has another 6 options for each aircraft type. The letter of intent was first signed in February 2017.

The B777-9 aircraft are scheduled for delivery from FY22 (financial year to March) financial year and will be deployed primarily on long-haul routes while the B787-10 aircraft are scheduled for delivery from FY21 (year to March) and will be deployed on medium-range routes.

CURRENT AIRCRAFT FLEET IN SERVICE IS EQUALLY SPLIT BETWEEN AIRBUS AND BOEING

The Singapore Airlines Group (SIA:SP), comprising of Singapore Airlines, SilkAir, Scoot and SIA Cargo, has 188 aircraft in service currently with an equal number of Airbus (AIR:FP) and Boeing (BA:US) planes.

Chart: Singapore Airlines Group current aircraft fleet in service (188 planes)

Chart: Singapore Airlines Group current aircraft fleet in service (188 planes)

 

INCLUDING THE NEW BOEING AIRCRAFT ORDER WILL TILT SINGAPORE AIRLINES GROUP’S FLEET STRUCTURE IN FAVOUR OF BOEING, RAISING THE PROBABILITY THAT IT WILL ORDER MORE AIRBUS PLANES NEXT

Following the signing of its order for 39 Boeing (BA:US) aircraft overnight, Singapore Airlines Group will have a total of 203 aircraft on order, comprising of 110 Boeing aircraft, 17 more Boeing planes than the 93 Airbus aircraft it has on order.

Even after taking into account the 47 aircraft (comprising of 27 Airbus and 20 Boeing planes) on option, Singapore Airlines Group will still have 10 more Boeing aircraft than Airbus aircraft.

Chart: Singapore Airlines Group aircraft fleet on order (203 planes)

Chart: Singapore Airlines Group aircraft fleet on order (203 planes)

 

Chart: Singapore Airlines Group aircraft on option (47 planes)

Chart: Singapore Airlines Group aircraft on option (47 planes)

 

Singapore Airlines Group has historically maintained a balanced fleet structure with a similar number of Airbus and Boeing aircraft to enhance its bargaining position during aircraft procurement and for risk management. As such, we expect Singapore Airlines Group to place more Airbus aircraft orders, possibly as early as during the Singapore Airshow in February 2018.

 

SINGAPORE AIRLINES GROUP’S SEAT CAPACITY GROWTH WILL RISE UNLESS MORE EXISTING AIRCRAFT ARE PHASED OUT

Singapore Airlines Group has a strategy of keeping a young aircraft fleet and future-proofing with its new generation aircraft orders. Apart from their new cabins which should boost customer appeal, these planes are also more fuel efficient than the aircraft they replace and will help mitigate the earnings impact from a sudden surge in fuel prices. Singapore Airlines Group’s current average fleet age is only 6+ years, much lower than the global airline industry average fleet age of 12 years. As such, a meaningful portion of its aircraft orders are for the purpose of fleet replacement.

After taking into account its 39 Boeing aircraft order, Singapore Airlines Group’s gross seat capacity (before taking into account any aircraft retirements) will grow 14% per annum from 2017 to 2021 versus 12% per annum prior to the order. This is 2ppts higher than its average net seat capacity growth of 12% in the past 5 years but lower than its average 20% seat growth per annum between 2007 and 2011. We expect Singapore Airlines Group to phase out at least 2% of its aircraft fleet going forward to reduce overcapacity risks.

Chart: Singapore Airlines Group seat capacity growth (2007 to 2021)

Chart: Singapore Airlines Group seat capacity growth (2007 to 2021)

 

As its Airbus A330 aircraft (all on operating leases) are progressively phased out, Singapore Airlines Group will also have 7 aircraft types from the current 8. This fleet structure simplification will help improve its operating efficiency and reduce its unit cost.

LARGE SPECIAL CASH DIVIDENDS ARE UNLIKELY GIVEN RISING CAPEX

Given Singapore Airlines Group’s rising aircraft capex averaging S$6.1B per annum in the next 3 years and low profit margins, we forecast Singapore Airlines Group to turn free cash flow negative. We also expect Singapore Airlines Group to go into a small net debt position at the end of the current financial year FY18 (year to March) for the first time since FY04.

Large special cash dividends are therefore less likely unless Singapore Airlines Group decides to divest SIA Engineering completely or partially. See our previous report below for more details:

Singapore Airlines can unlock value by merging SIA Engineering w/ ST Aerospace to form MRO Powerhouse

 

Related Articles:


Singapore Airlines can unlock value by merging SIA Engineering w/ ST Aerospace to form MRO Powerhouse

Air France AF66 engine explosion to drive checks on A380s powered by GP7200 engines

Rising oil price impact analysis on all 33 listed airline equities in the Asia Pacific

Singapore Airlines (SIA:SP) 1QFY18 core profit improved markedly, stronger sales growth ahead

Airlines Social Media Influence 2017 – Social Butterflies or Media Wallflowers?

Singapore Airlines Initiation Research Report 2017: Will SIA be a “sexy” stock again?

 

Disclaimer: The contents of this website are strictly for information purposes only.  This website does not contain any investment, financial, tax, legal or insurance advice; you should always seek such advice only from professionals who are qualified, licensed and regulated in the respective relevant field.  Please read our Terms of Service before accessing or using this website.