Singapore Airlines (SGX:C6L), or SIA is a Singapore blue-chip. It’s also one of Singapore’s most widely respected blue-chips.
It’s a dominant airline carrier — taking advantage of Singapore’s global gateway between Western and Asian countries.
In fact, the iconic Singapore Girl dressed in her signature sarong kebaya puts SIA at the spotlight of global travel.
I find this Singapore blue-chip’s competitive advantage unmatched — superior, customer-oriented air flight service.
This is one of the few brands I’m proud of as a Singaporean.
I’m not oblivious to the fact that SIA will continue to operate. It is after all, one of Singapore’s most prized businesses.
This Singapore blue-chip continues to suffer a cash crunch
But what’s not so clear, though, is the upside of being an owner of a very “thin-margin” business.
My main concern, is SIA’s cash-strapped pockets.
A few weeks ago, SIA announced it will raise another S$2 billion from its airplane sale-and-leaseback deal.
That’s selling 11 of its airplanes to a buyer — a leasing company — then renting it back from the buyer.
“It’s a bad sign, isn’t it?” One of my subscribers asked me.
Now, a “sale-and-leaseback” deal is a quick way for SIA to “extract” cash from their assets.
Let me explain.
SIA immediately gets S$2 billion from its 11 airplane sale.
In the meantime, SIA slowly rents the airplanes from the buyer over the next 10, 20 or even 30 years.
Simply put, this not only allow SIA to get a cash injection, but delays paying over a long period of time.
Hopefully, long after the COVID pandemic ends.
But here’s the thing. Companies don’t typically do a sale-and-leaseback deal, unless they are in distress.
Or what finance experts always like to call a “liquidity crisis”.
How Singapore Airlines gets “pushed to a corner”
I’ve seen distressed companies do this before.
Remember Singapore’s utility darling?
It did a few sale-and-leaseback, including selling its HQ building to extract cash, before it collapsed.
Another was a commodity giant — it did a sale-and-leaseback of their five logistics properties for $730 million to Mapletree Logistics Trust.
I cannot imagine how this Singapore blue-chip can continue to survive if the COVID pandemic persists.
SIA has already fired all cylinders to raise money — stock market, bond market and bank loans.
There’s simply no other way to get money. Other than selling their assets.
That’s why a sale-and-leaseback deal is a “pushed to a corner” resort to raise money during hard times.
Think about someone desperate for cash — selling off gold and jewelry to a pawnshop.
Will this Singapore blue-chip shares get stuck lower in the bargain bin?
In SIA’s latest financial results for March 2021. I find its situation is terrible. And it’s frustrating for SIA.
The major airline carried 98% less passengers than it was a year ago.
Its revenues sunk 76% to just S$3.6 billion. And SIA recorded a massive S$4.2 billion loss.
And now, the airline giant has S$7.7 billion cash left to run its operations.
If you track SIA’s balance sheet. it has to pay off S$14 billion in debt.
Because of this, just a few days back, SIA announced that it’s also going to raise another S$6.2 billion through a “special” rights issue called a mandatory convertible bonds (MCB).
Cash will run out soon if SIA does not take off in time.
And with a “semi-lockdown” in Singapore, the Singapore-Hong Kong travel bubble delayed again, this is going to be a long and bumpy rude.
That’s why share price keeps going lower and lower. SIA’s shares fell 70%, from S$16 per share in 2010 to less than S$5 per share today (If Singapore Airlines get nationalized at this price, I’m sure many shareholders will be pissed).
I don’t think this Singapore blue-chip will default.
But SIA’s shares will get stuck lower and lower in the bargain bin.
The airlines industry is one tough business
Here’s the other thing. Even if air travel recovers, the airline industry is highly competitive with no moat.
Think about it, air travel is an “elastic good”. A small change in price leads to big changes in demand for a flight.
If you travel for holiday, and air ticket price drops — wouldn’t you rush to find that cheaper alternative, for the same standard of flight?
Many people would. I would.
Travelers are more sensitive to air ticket prices.
And they try to fly less when prices are high than when they are low.
This is how low-cost carriers easily disrupts big giants like SIA for the same flight routes.
That’s why the airline industry suffers from a near-perfect competition.
Even with a sale-and-leaseback deal, SIA will still have a tough time competing with aggressive low-cost carriers in the future.
That’s another huge problem.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
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