Singapore Airlines Financial Analysis

Royal Roads University, MGM

International Accounting Tools for Financial Health

 Singapore Airlines Financial Analysis

Company and Industry overview: Commented [RM1]: The aims, objectives and
roadmap of the report provided are not properly
developed.
This paper analyses the financial condition of Singapore Airlines compared to three

competitors, China Southern, Cathay Pacific and Qantas Airways. Singapore airlines is the

national flag carrier Singapore and has been operating for more than 50 years. With a fleet size

of 138 aircraft, the company has been consistently rated as the best airline in the world due to for

its innovation, service quality and customer satisfaction.

Typically, the airline industry has high capital and fixed costs, intense competition and

low profit margins (Hecker, 2005). Due to such a highly competitive environment, it is necessary

for airlines to reduce costs and increase operating efficiency. Airline companies use both

financial and operational performance indicators to measure their performance (Schefczyk, 1993;

Francis et al., 2005). Airlines use specific performance indicators to measure their health and

viability such as available seat kilometers, revenue per kilometer and load factor (Teker et al.,

2016). Based on these indicators, it can be seen that China Southern airline’s operational

efficiency is the highest amongst the four airlines, followed by Singapore airlines, Cathay Pacific

and Qantas respectively. All four airlines have a very high passenger load factor of about 83 per

cent, which is above the norm for most airlines. This means that all four airlines are highly

competitive and effective in selling seats and generating revenue.

Singapore Airlines China Southern Cathay Pacific Qantas

Available seat-km (million) 169,606.6 344,061.86 163,244 151,430
Revenue passenger-km (million) 140,838.1 284,920.82 134,397 127,492
Passenger load factor (%) 83.0 82.81 82.3 84.2
Table 1: Singapore Airlines 2018/19 Annual Report
Figure 1 Revenues, US$ Billion

Singapore airlines recorded its highest ever annual revenues of US$ 12.46 billion during

the financial year ended, as on march 31, 2019 with a 3.3% increase from the previous year.

(Singapore Airlines, 2019, p. 4) This was mainly attributable to a record increase in number of

passengers carried at 36 million or 7.2% higher compared to the last year. (Singapore Airlines,

2019, p. 5). However, it’s operating profit declined by a whopping 31.1% to US$ 787 million,

mainly due to the significant increase in global oil prices (Singapore Airlines, 2019, p. 43). Fuel

expenditure increased by 17.6% and accounted for two thirds of the increase in company’s total

expenditure (Singapore Airlines, 2019, p. 20).

Source: Singapore Airlines 2018/19 Annual Report

Critical Analysis of the Current Financial Health:

Financial analysis is crucial to the successful management of an airline company and

helps the company meet its strategic objectives (Kane, 2012; Morrell, 2007). Feng and Wang

(2000) indicated that financial metrics relating to profitability, liquidity and solvency are

important in assessing the efficiency of an airline.

Profitability:

Profitability ratios are used to measure the ability of a company to generate profits from

its sales, total assets and invested capital. They usually reflect the combined impact of a

company’s policies related to liquidity, debt and asset management (Brigham & Ehrhardt, 2017,

p. 114).
 2019 2018 2017 2016 Average
GROSS MARGIN %
Singapore Airlines 42.2% 44.5% 42.3% 39.7% 42.2%
China Southern 12.1% 10.4% 12.3% 16% 12.7%
Qantas 54.8% 58.3% 57.4% 55.6% 56.5%
Cathay Pacific 39.6% 40.5% 37.1% 39% 39.05%

EBITDA MARGIN %
Singapore Airlines 14.23% 17.41% 14.24% 16.55% 15.60%
China Southern 7.02% 3.07% 3.49% 6.44% 5.0%
Qantas 17.29% 18.15% 17.24% 17.85% 17.63%
Cathay Pacific 3.1% 9.16% 5.23% 6.14% 5.90%

NET PROFIT MARGIN %

Singapore Airlines 4.2% 5.6% 2.4% 5.2% 4.3%
China Southern 1.99% 2.07% 4.6% 4.3% 3.2%
Qantas 4.9% 5.7% 5.3% 6.3% 5.5%
Cathay Pacific 1.6% 2.1% -1.2% -0.6% 0.48%

Figure 2: Profitability margins

Singapore Airlines' gross margin, which shows how much profit a company makes on its

cost of sales (Weygandt et al., 2018, p. 74)-was 14 per cent lower than the best-performing

Qantas, but nevertheless a solid performance. The gross margin of Singapore airlines has not

changed significantly, indicating that the company has been able to control production costs to

approximately the same degree.

The EBITDA margin provides a better idea of the core performance of a company as it

minimises non-operating effects. In addition, the EBITDA margin is appropriate for comparisons

as it ignores the tax rates as airlines operating in different countries have very different tax rates.

Qantas clearly has the highest EBITDA margins. On average, Singapore airlines

produced respectable EBITDA margins but were down 3% points in 2019. Declined EBITDA

margins indicates that their control of expenses has reduced. According to Singapore Airline's

annual report (2019), their performance was negatively affected by a 21.6% rise in fuel prices.

However, their rates were still three times higher than those of Cathay Pacific and China

Southern airlines.
 In terms of net profit, Singapore Airlines ranked second after Qantas, which was only

0.7% higher. In comparison, Singapore Airlines' net profit margin was significantly higher than

the rest. The only exception was in 2017, when the ratio for net profits decreased mainly due to

high finance charges, high share of losses from subsidiaries and one-off revenue items, such as

compensation for aircraft delivery delays (Singapore Airlines, 2017).

2019 2018 2017 2016 Average

ROA %
Singapore Airlines 2.35 % 3.42 % 1.49 % 3.36 % 2.65 %
China Southern 0.95 % 1.28 % 2.82 % 2.61 % 1.92 %
Qantas 4.69 % 5.46 % 5.02 % 5.99 % 5.29 %
Cathay Pacific 1.05 % 1.24 % (0.69) % (0.33) % 0.32 %

ROE %
Singapore Airlines 4.96 % 6.53 % 2.79 % 6.36 % 5.16 %
China Southern 4.08 % 5.21 % 12.75 % 12.27 % 8.58 %
Qantas 24.12 % 26.16 % 25.09 % 30.65 % 26.70 %
Cathay Pacific 2.67 % 3.75 % (2.16) % (1.11) % 0.78 %

ROI operating %
Singapore Airlines 5.72 % 6.55 % 4.27 % 4.76 % 5.32 %
China Southern 5.73 % 7.49 % 5.57 % 7.07 % 6.46 %
Qantas 16.45 % 18.24 16.7 % 19.14 % 17.63 %
Cathay Pacific 1.13 % 2.59 % (1.72) % (0.44) % 0.39 %

TOTAL ASSET TURNOVER

Singapore Airlines 0.5 % 0.6 % 0.61 % 0.64 % 0.58 %
China Southern 0.56 % 0.62 % 0.61 % 0.59 % 0.59 %
Qantas 0.94 % 0.95 % 0.95 % 0.94 % 0.945 %
Cathay Pacific 0.53 % 0.59 % 0.53 % 0.53 % 0.55 %

Figure 3 Asset deployment profitability ratios

Return on assets evaluates the investment return on assets and is helpful for standardising

large and small businesses. In the airline industry, the total return on investment is lower because

it is highly capital intensive (Vasigh, 2017, p. 171). Qantas had the highest value for this ratio,

while Singapore Airlines' return on assets decreased during this period due to a significant rise in

operating costs, primarily fuel costs.

 The return on the equity ratio is considered to be the most significant of all the financial

ratios for investors in the company. Singapore Airlines has a low average return on equity over

the period analyzed compared to Qantas and Southern China. In addition, the ratio decreased in

2019, which signals that the airline is not using its resources effectively. Though, this ratio could

be misleading due to the financial structure of the company. For instance, Qantas, which is more

heavily financed by debt, has an artificially higher return on equity than Singapore Airlines,

which is financed by more equity.

Return on investment enables an analysis of the ability of a company to generate profits

for its shareholders. Singapore Airline's average return on investment was only 5.32 %, which

falls below the average industry return of 8.61 % ('Airline Industry,' 2019) and far behind

Qantas's impressive 17.63 % figure. The performance of the Singapore airline deteriorated

further in 2019.

The asset turnover ratio calculates the efficiency of a company to generate sales from its

assets. The total asset turnover ratio for capital-intensive industries is typically less than one

(Chang, 2013, p. 245). During the observed period, Qantas held the highest asset turnover ratio.

The other three airlines were quite equally efficient at using their assets.

However, the downward trend in in Singapore airline’s return on investment and asset

turnover ratios in 2019, need not be seen as a sign of company’s poor efficiency. There are

several situations such as, an asset-intensive business structure, the average age of assets,

variations in operating risks and the life-cycle of assets, that could distort interpretations of these

ratios (Petersen & Plenborg, 2012, p. 100). Further investigation revealed that Singapore Airlines

bought additional $45 million aircraft this year, encountered operational disruptions due to
Boeing 787 engine issues, and suspended Boeing 737 MAX fleet operations following two fatal

crashes (Singapore Airlines, 2019).

Payout ratio % Dividend yield %

Singapore Airlines 72.50 3.29
China Southern 25.11 1.05
Qantas 40.44 1.68
Cathay Pacific 29.85 3.23
Figure 4 Selected profitability ratios for investors in 2019

Payout ratio and dividend yield are ratios help the investors to assess the expected value

of the stock. Singapore Airlines paid the highest dividends in 2019, suggesting that the company

is well off financially. The airline industry has very low payout and dividend yield ratios due to

the industry's volatility and the need to reinvest in major capital projects (Morrell, 2019, p. 182).

Liquidity

The airline industry is notorious for its low level of liquidity, but Singapore Airlines has

substantially higher current and quick ratios than the peer group. This means that it has a lower

short-term liquidity risk (Lev & Sunder, 1979). Airline companies require sufficient liquidity to

survive as well as to be able to finance the delivery of airplanes. Lack of liquidity would not only

reduce future profitable investment opportunities, but could also eventually lead to bankruptcy

(Plenborg et al, 2012, 150).

LIQUIDITY RATIOS, 2019 Singapore Airlines China Southern Qantas Cathay Pacific

Quick ratio 0.63 0.13 0.42 0.44

Current ratio 0.75 0.18 0.49 0.48
Net Current Assets % of total assets (6.16) (25.64) (22.62) (13.78)
Receivables turnover 10.49 50.99 17.89 17.66
Average collection period 34.79 7.15 20.40 20.66
Property Plant & Equip Turnover 1.98 1.88 1.39 0.76

Payables Period 79.13 6.26 110.91 28.17

Figure 5 Liquidity ratios in 2019

 Singapore airlines has negative net current assets that may reflect future liquidity issues.

However, the decline in net current assets was mainly due to current lease liabilities and right-of-

use assets. (Singapore Airlines, 2019). While net current assets declined, non-current assets rose

through the purchase of new aircraft. Singapore Airlines cash generated from operations

amounted to SGD $3,108 million, indicating its ability to sustain and expand its operations.

Source: Singapore Airlines FY18/19 Annual Report

Singapore airlines has a high fixed assets turnover and low accounts payable turnover,

reflecting its capability to effectively operate the most modern aircraft fleet and provide cost-

effective services. Singapore Airline's receivable turnover is the lowest in relation to the peer

group. This means that Singapore Airlines will, on average, receive revenue from its customers

in 35 days. The massive differences between airlines are due to different arrangements with

credit card companies.

Solvency

Solvency ratios provide the greatest macro insight into an airline company as they help

assess the degree of risk associated with a company (Morrell, 2019, p. 59). The interest rate

coverage ratio indicates the potential risk to lenders that interest payments will not be met.

Singapore airlines had the highest ratio in 2019, which indicates the company's financial strength

for the future. The ratios of China Southern and Cathay Pacific were poor.

SOLVENCY RATIOS, 2019 Singapore Airlines China Southern Qantas Cathay Pacific
Interest Coverage 8.66 1.69 6.45 1.65
Long Term Debt/Equity 0.5 1.99 1.34 1.22
Total Debt/Equity 0.48 2.88 1.52 1.55
Figure 6 Solvency ratios in 2019

Singapore Airlines' debt-to - equity ratio is the lowest among peers, suggesting that it is

less debt-financed and more equity-funded. Singapore airline management is determined to keep

the leverage low (Singapore Airlines, 2019). Usually, airline companies have higher debt-to -

equity ratios because they lease airplanes from other airlines or leasing firms. Referring to this,

the figure above shows that China Southern Airline has the highest debt-to - equity ratio over the

analyzed period, which is undesirable. A higher debt to equity ratio increases the riskiness of a

company because they have to pay higher fixed interest obligations. Generally, the higher the

ratio, the greater the financial burden, that the business is perceived to have taken. Therefore, a

company should manage risk in such a way that it balances the use of debt and equity to

maximize profitability.

Overall financial status

Altman Z-score measures the risk of a company going bankrupt in the next two years

using various accounting and market measures (Bragg, 2018). Therefore, it is a comprehensive

default risk indicator associated with a company’s financial health. According to Altman (1968),
a Z-score of less than 1.81 signifies that bankruptcy is likely. A Z-score between 2.99 and 1.81 is

a “gray area” that signifies distress, but not severe enough to warrant bankruptcy. Higher Z-

scores indicate that a company has lower likelihood of bankruptcy. Based on 2019 data, none of

the four airlines showed a score greater than 1.81 which means all companies are at the risk for

bankruptcy. These airlines should immediately take significant measures to prevent bankruptcy

such as negotiation with creditors, debt settlement and debt restructuring. If preventative

measures are not taken in time, then the costs of bankruptcy are huge and affect all stakeholders

of the company (Altman et al., 2019, p. 162).

ALTMAN Z-SCORE 2019

Singapore Airlines 0.65
China Southern 0.41
Qantas 1.23
Cathay Pacific 0.60
Figure 7 Altman Z-scores

P/E RATIO Present Forward

Singapore Airlines 21.70 12.67
China Southern 24.41 9.49
Qantas 13.26 11.49
Cathay Pacific 11.62 12.32
Figure 8 P/E Ratios

The Price/Earnings ratio measures the value of the stock in relation to its selling or

market price. It also shows how the market values the future business prospects of a company.

Based on 2019 data, China Southern has the highest Price/Earnings ratio followed closely by

Singapore Airlines. This suggests that investors believe these two airline companies have high

growth potential. Whereas, Cathay Pacific’s Price/Eearning ratio is lowest compared to its peers,

which indicates that growth is expected to be slow or non-existent. There is no target value for

Price/Earnings ratio. The optimum depends not only comparison with the industry but also the

overall stock market (Vasigh, 2017)

Limitations:

Ratios analysis focuses only on financial measures and does not address issues like

product quality and customer service. Research indicates that financial indicators alone are

insufficient for measuring important business factors and assessing business performance (Neely,

1999). For example, bankruptcy of an airline company depends not only on financial factors but

also on social, economic and political reasons (Gudmundsson, 1999). According to Liedtka

(2002), non-financial indicators play an important role in financial success of an airline company

and provide critical data that financial indicators cannot provide. Non-financial indicators such

as such as quality, flexibility, value-creation and customer satisfaction are leading determinants

of the future performance of an airline company (CIMA, 2002; Khim et al., 2010). Airline

companies are using systems such as Quality Management Systems and European Foundation

for Quality Management (EFQM) to evaluate their performance.

Recommendations and Conclusions

Despite higher revenue, Singapore Airlines has generated lower profit margins. Because,

It is highly susceptible to changes in fuel prices like other airline companies. Therefore,

Singapore Airlines should reduce its operating expenses by focusing on cost management and

improving operational efficiency. It should take measures to improve fuel efficiency such as

lightening the load of the plane and installing blended winglets ("AERO - Blended winglets

improve performance," 2009). Singapore Airlines has good liquidity status, particularly as a

result of its healthy cash flow generation. Despite this, it was unable to cover its current

liabilities with its current assets. On the other hand, Singapore Airlines has maintained the lowest

financial leverage. In 2019, It ‘s balance sheet was weakened due to heavy capital expenditures.
However, the new aircraft, spares, and engines will hopefully improve the profitability of

company in years to come.

Singapore Airlines should continue with its portfolio approach through investments in

other airlines to achieve greater market share and profitability. Moreover, Singapore Airlines

should focus on improving its operational efficacy to ensure that it remains competitive in a

rapidly changing industry. Airline companies should reduce operating costs and increase

operating revenue simultaneously to achieve higher operational efficiency (Sjögren, 2016; Hong

& Zhang, 2010). Finally, Singapore Airline should focus not only on cost-efficiency but also

good performance on non-financial criteria to achieve their strategic objectives. This will also

increase growth opportunities and prepare Singapore Airlines for an even stronger future
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