Delivery Delays Of Boeing 777 Will Limit Capacity And Compress Future Margins

Key Takeaways

• Boeing 777 delivery delays hinder capacity expansion, impacting growth plans and future revenue potential.
  
• Rising competition and nonfuel costs squeeze margins, pressuring pricing strategy and earnings sustainability.
  
• Strong passenger demand and strategic initiatives, including expansion, partnerships, and cost control measures, position Singapore Airlines for potential growth and competitive advantage in high-growth markets.

Catalysts

Together with subsidiaries, provides passenger and cargo air transportation services under the Singapore Airlines and Scoot brands in East Asia, the Americas, Europe, Southwest Pacific, West Asia, and Africa.

• The expected delays in Boeing 777 deliveries until 2026 could hamper growth plans by limiting capacity expansion, potentially impacting future revenue growth adversely.
  
• Increasing competition and added capacity in the market are leading to a softening of yields, which could compress future net margins as the airline faces pressure to lower ticket prices in both business and economy classes.
  
• The continuing rise in nonfuel costs, including airport charges, could further squeeze net margins, as operating expenses are projected to rise without a corresponding sufficient increase in revenues.
  
• Challenges in fuel cost management, including less favorable hedging positions compared to pre-COVID levels, could lead to increased fuel expenses and reduced earnings if fuel prices rise or remain volatile.
  
• Delays in fleet expansion and retrofitting with new product offerings might result in slower growth of premium revenue streams, impacting overall earnings potential and putting pressure on maintaining competitive advantage.

Singapore Airlines Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Singapore Airlines's revenue will grow by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.2% today to 5.8% in 3 years time.
• Analysts expect earnings to reach SGD 1.2 billion (and earnings per share of SGD 0.38) by about December 2027, down from SGD 2.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SGD 2.2 billion in earnings, and the most bearish expecting SGD 992 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.1x on those 2027 earnings, up from 9.6x today. This future PE is greater than the current PE for the SG Airlines industry at 11.3x.
• Analysts expect the number of shares outstanding to grow by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.76%, as per the Simply Wall St company report.

Singapore Airlines Future Earnings Per Share Growth

Risks

• Strong passenger demand, particularly in the Southeast Asia and India regions, suggests potential for continued revenue growth, as Singapore Airlines is well-positioned in these high-growth markets. (Revenue)
  
• Despite the moderation of profits, the operating and EBITDA margins remain strong, indicating effective cost control and operational efficiency, which could positively impact net margins over time. (Net Margins)
  
• The strategic expansion and enhancement of fleet and product offerings, including industry-leading product retrofits and the acquisition of modern aircraft, can enhance customer experience and potentially result in higher yields. (Revenue)
  
• Collaborations and joint ventures, such as those with Air India and Garuda, provide access to new markets and additional capacity, which could strengthen revenue streams and competitive positioning. (Revenue)
  
• Cost-saving measures, such as fuel hedging strategies and supply chain management for aircraft parts, can maintain cost efficiency and buffer against operational cost increases, potentially supporting earnings stability. (Earnings)

Valuation

• The analysts have a consensus price target of SGD 6.17 for Singapore Airlines based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD 7.0, and the most bearish reporting a price target of just SGD 5.25.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SGD 19.9 billion, earnings will come to SGD 1.2 billion, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 7.8%.
• Given the current share price of SGD 6.37, the analyst's price target of SGD 6.17 is 3.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.