Singapore Airlines Embraces Passenger Data Monetization to Escape Value Trap Label

Singapore Airlines (SIA:SP) Fair value: S$13
Singapore Airlines (SIA:SP) Rating: Outperform

23 January 2018, Singapore – The past decade has plagued Singapore Airlines (SIA) with fierce competition from the Middle Eastern, Chinese airlines on long haul routes as well as shorter route competition from Low-Cost Carriers. This resultant excess capacity has hit SIA’s profitability and share price performance. In the past five years (FY2013-FY2017), Singapore Airlines’ average annual net profit was only S$454 million, less than half of its average net profit of S$1.1B in the previous 10 years (FY2003-FY2012). SIA’s average net profit margin has also shrunk to 3.0% in the past 5 years versus 8.5% in the previous 10 years.

Chart: Singapore Airlines net profit and net profit margin in the past 20 years (FY1998 to FY2017)

Chart: Singapore Airlines net profit and net profit margin in the past 20 years (FY1998 to FY2017)

Chart: Singapore Airlines share price in the past 20 years (1998 to 2018)

Chart: Singapore Airlines share price in the past 20 years (1998 to 2018)

SINGAPORE AIRLINES IS NOW SEEN AS A VALUE TRAP, TRADING BELOW ITS “LIQUIDATION” VALUE

SIA remains highly respected as one of the world’s most prestigious airline brands but it has long been unable to grow its profitability to the extent that many equity investors now see it as a Value Trap. Singapore Airlines’ valuations have been range-bound at 0.9x to 1.0x Price/Book in recent years and is currently trading below its “liquidation” value of S$12.8 based on our estimates. Faced with an urgent need to revive its profitability, SIA is coming to realize that the solution has been sitting on its doorstep all this time; the collection and monetization of its highly valuable passenger data.

Chart: Singapore Airlines Price/Book valuation (2003 to 2018)

Chart: Singapore Airlines Price/Book valuation (2003 to 2018)

Chart: Singapore Airlines Limited – Estimated “liquidation” value

Chart: Singapore Airlines Limited – Estimated “liquidation” value

 

SUCCESSFUL PASSENGER DATA MONETIZATION CAN POTENTIALLY BOOST SINGAPORE AIRLINES’ NET PROFIT BY S$800 MILLION PER YEAR AND RAISE ITS FAIR VALUE  TO S$20 PER SHARE

We estimate that the collection and monetization of Inflight Passenger Data is worth US$100 billion additional revenue per year for the global airline industry, a number that will dramatically increase with advances in Internet of Things (IoT) technology. This could potentially boost the global airlines’ enterprise value by at least US$120 billion (based on the airlines’ current valuations) to as much as US$500 billion.

Singapore Airlines can potentially boost its revenue by S$2.3 billion per year, boosting its net profit by S$800 million per year (well ahead of its net profit of only S$360m in FY17), if it can successfully collect and monetize its Passenger Data based on our estimates. This will return Singapore Airlines to its glorious days of earning over S$1 billion net profit a year which would be a significant positive share price driver for SIA.

Investors will begin to value Singapore Airlines like a growth stock given its improved long-term revenue and earnings growth prospects. Valuing Singapore Airlines at 20x P/E would imply a fair value of S$20 per share. This is nearly double Singapore Airlines’ current share price of S$11.11!

See our previous 5th Dec 2017 report:

Airlines are sitting on US$100 Billion Inflight Big Data goldmine

 

Chart: Airlines are sitting on US$100 Billion Inflight Big Data Goldmine

Chart: Airlines are sitting on US$100 Billion Inflight Big Data Goldmine

 

PASSENGER DATA MONETIZATION IS KEY TO SINGAPORE AIRLINES’ REVIVAL AND ESCAPE FROM VALUE TRAP LABEL

Despite SIA being 55.6% owned by the Singapore government, it would be pointless to expect subsidies from a country that has long practiced what Singaporeans would describe as extreme fiscal discipline.

Furthermore, Changi Airport, not SIA is the crown jewel of Singapore’s aviation hub so attempts to subsidize SIA will antagonize the foreign airlines that Changi Airport works so hard to court.

Apart from the excess capacity brought about by the Middle Eastern, Chinese airlines and LCCs; there is the looming presence of previously vanquished rivals like Malaysia Airlines, Garuda Indonesia, Thai Airways who will eventually shape up and emerge hungrier than ever for market share.

Singapore Airlines is already efficiently run and has been undergoing cost cutting for years but there is only so much that can be cut before SIA’s premium branding is affected.

As for new revenue streams, Singapore’s tiny geographical size means there is no lucrative domestic market to exploit and limits its bargaining power with other countries for valuable air routes and airport landing slots. The only way forward is for Singapore Airlines to work towards monetizing its highly valuable passenger data.

 

SEVERAL HUNDRED MILLION DOLLARS EARMARKED FOR SINGAPORE AIRLINES’ DIGITALIZATION EFFORTS

Over the next five years, Singapore Airlines will be investing several hundred million dollars to digitalize its operations according to an interview of Singapore Airlines’ Senior Vice President (Sales & Marketing) and former Scoot CEO Campbell Wilson by The Business Times, which also reported that “One key part of its [SIA’s] ongoing digital revamp is building a holistic database on its passengers, from which it will leverage data analytics and algorithms to derive insights on each passenger. Such insights will enable the airline group to offer tailored products and services to individual consumers …”

BIG DATA HIRING SPREE AT SINGAPORE AIRLINES

Job listings on the Singapore Airlines website indicates that it is embarking on a Big Data hiring spree – 29 out of 43 Executive (Specialist) job listings and 7 out of 8 Managers job listings are for Information Technology and more specifically, these Information Technology job descriptions are pointing towards Big Data Collection and Monetization.

Chart: Big Data Hiring Spree at Singapore Airlines

Chart: Big Data Hiring Spree at Singapore Airlines

 

THE SINGAPORE GOVERNMENT HAS EMBRACED FINTECH SO WHY NOT AIRTECH?

Stephen Lee, SIA’s previous Chairman is currently a Director on Temasek Holdings’ Board while Peter Seah (SIA’s new Chairman) alongside Chew Choon Seng (SIA’s previous CEO) and Gautam Banerjee (SIA’s current Board Director) all sit on the Government of Singapore Investment Corporation’s Board of Directors. Rather than simply a means to exercise influence, the Singapore government sees its presence as an opportunity to transfer best practices across the Government Linked Companies (GLC).

Singapore being such a fervent supporter of FinTech as a growth driver, it is no surprise that the Singapore government will also encourage SIA to apply the lessons learnt from FinTech. Essentially, if FinTech is the harnessing of computing technology to create opportunity and profit in finance then shouldn’t the same concept also apply to airlines, i.e. AirTech?

AirTech Definition: The harnessing of computing technology to create opportunity and profit for Airlines (Yes, you heard it here first :-P)

Other Interesting Facts:

  • SIA’s new Chairman Peter Seah is also the Chairman of DBS which was named the world’s best digital bank by Euromoney in 2016
  • Goh Choon Phong who became SIA’s CEO in 2011 at the relatively young age of 48, graduated from MIT in 1990 with degrees in computer science, management science, cognitive science and almost did a PhD in Artificial Intelligence instead of working at SIA (Source: Airline Passenger Experience Association, Oct 2016)

INMARSAT GX AVIATION BROADBAND + NEW IFE + MYKRISWORLD + CHATBOT KRIS

Over the past few months, Singapore Airlines has introduced new products which, when analyzed together paints a picture of its efforts towards collecting highly valuable Inflight Passenger Data.

 

Inmarsat GX Aviation’s broadband connectivity system, offered through SITAONAIR

  • Already equipped on SIA’s 777-300ER & new A380s
  • Promises uninterrupted high-speed Inflight connectivity worldwide – powered by Global Xpress (GX), world’s first global Ka-band satellite network
  • On a 14-hour test flight (Toulouse-Singapore) onboard a new SIA A380, the passengers connected to Netflix, YouTube, Instagram, WhatsApp seamlessly with many passenger each using 2+ GB of data

 

New In-Flight Entertainment (IFE) systems

  • From 11.1-inch touchscreen monitors for ‘new economy class’ to 24-inch HD monitors for ‘new first class’
  • Enabled for internet connectivity, text and multimedia messaging

 

myKrisWorld new IFE interactive feature

  • Allows passengers to customize and save their Inflight music, movie preferences via their SIA app before subsequent flights
  • myKrisWorld is able to make content recommendation based on passenger preferences
  • We believe that myKrisWorld’s future applications will go beyond IFE to other passenger customizations and recommendations like food & beverages, inflight shopping, etc

 

Chatbot ‘Kris’

  • Currently only available on SIA’s Facebook page but will be later made available on SIA’s website as well
  • Developed by an in-house team, Kris has been trained to answer customer queries using Artificial Intelligence and is in constant learning mode
  • We believe that myKrisWorld and Chatbot ‘Kris’ will eventually be integrated and deployed on all SIA aircraft cabins in the future

 

Chart: Singapore Airlines Inflight Passenger Data Collection

Chart: Singapore Airlines Inflight Passenger Data Collection

 

SINGAPORE AIRLINES + GRAB EXTENSIVE PARTNERSHIP: MONETIZING & ACCUMULATING PRE-FLIGHT PASSENGER DATA AT THE SAME TIME

On Oct 2017, SIA announced that it will integrate its SingaporeAir mobile app with Grab, Southeast Asia’s leading ride-hailing and payments platform in six countries whereby SIA customers can book a Grab ride to the airport.

The SIA/Grab partnership would enable SIA to directly monetize some of its Pre-flight Passenger Data and at the same time, allow SIA to accumulate even more valuable passenger data.

Chart: Singapore Airlines + Grab Extensive Partnership

Chart: Singapore Airlines + Grab Extensive Partnership

 

WILL SIA’S PREMIUM PASSENGERS BE COMFORTABLE WITH PASSENGER DATA MONETIZATION ON A LARGE EFFECTIVE SCALE? 

Much of the global airline industry remains stuck in an earlier time, a situation fostered by government subsidies and protection and/or overly conservative management culture. Inflight shopping is largely unchanged from 20 years ago; seatbacks full of duty-free magazines and flight attendants pushing duty-free carts. Airlines’ websites still struggle to sell premium seats, extra baggage allowances and are unable to effectively sell hotel rooms or car rentals to their passengers. In fact, the airline industry has been so bad at passenger data monetization that many of their passengers probably don’t even know that the airlines have been trying unsuccessfully to monetize their data for years.

The ironic consequence of the airline industry’s historical ineptitude with Passenger Data Monetization is that there is no way of ascertaining for sure whether passengers will be comfortable with their data being collected and monetized effectively and on a large scale. But it stands to reason that passengers will get used to it since so much of today’s society is dominated by useful services whose ultimate aim is to collect and monetize our data, i.e. Android, Baidu, Bing, Facebook, Facebook Messenger, Gmail, Google Drive, Google Maps, Google News, Google Photos, Google Search, Instagram, Line, LinkedIn, Outlook, Pinterest, QQ, Snapchat, Tumblr, Twitter, Vimeo, WeChat, Weibo, WhatsApp, Yahoo, YouTube …… well, the list goes on.

Therefore, SIA must at least match the internet giants in terms of communicating to the public how its passenger data is collected and monetized as well as assurances that their passengers privacy will always be protected. However, SIA’s recent stumbles on the public relations front (failed attempt to implement a Credit Card Surcharge Fee in addition to its automatic inclusion of travel insurance for online bookings) indicate that SIA may not be communicating effectively with its passengers or even aware of how quickly public opinion can change in today’s digitized world.

 

THE ‘UNSPOKEN BARGAIN’ OF DATA MONETIZATION VERSUS SIA’S COST-CUTTING EFFORTS

Anecdotal evidence from airline review websites has for years, pointed towards the gradual decline of Singapore Airlines’ inflight food, wine and service standards because of cost-cutting. While SIA’s hardware has remained stellar, it has also lagged in the provision of ground services for First & Business Class passengers compared to Air France, Emirates, Etihad, Lufthansa.

The unspoken bargain of data monetization – users accept the monetization of their data in return for the provision of something valuable; for example, Facebook users know that their data is being collected and monetized but they cooperate because Facebook is so useful (almost essential for many users) and is being provided for free.

While we are not suggesting that SIA gives away its seats for free, it will serve SIA well to remember this unspoken bargain and make passengers feel that they are also sharing in the benefits of this data monetization. Reaping profit from passenger data monetization while cutting back on passenger benefits and adding on surcharges will most certainly provoke a backlash and undermine SIA’s data monetization goals.

 

SINGAPORE AIRLINES MUST BECOME AS MUCH OF A TECH COMPANY AS IT IS AN AIRLINE

SIA is off to a strong start but it must become as much of a tech company as it is an airline to successfully monetize Passenger Data and present itself as an essential partner to the internet giants.

SIA has a highly competent team but that is in the context of operating an airline and the tech industry moves at a much faster, almost unsentimental pace. SIA has already established a Transformation Office and Digital Innovation Unit but there may be extensive redundancies required to make space for more tech-focused staff and to reinvent its corporate culture. As to whether all this will be acceptable for a Government Linked Company (GLC) remains to be seen.

 

Note: Stocks with upside of more than 10% based on our fair value are assigned an Outperform rating. Stocks with downside of more than 10% based on our fair value are assigned an Underperform rating. Stocks with upside or downside of less than 10% based on our fair value are assigned an In-line rating. These are Crucial Perspective’s proprietary rating classifications and by no means serve as investment recommendations.

 

Related Reports:

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

Airlines are sitting on US$100 Billion Inflight Big Data goldmine

 

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