UOB Kay Hian Private Limited
Date of Report: 17 June 2025

Singapore Airlines: Navigating Growth Opportunities Amid Market Shifts and Geopolitical Risks

Overview: Singapore Airlines Holds Steady Despite Market Headwinds

Singapore Airlines (SIA), Singapore’s flagship carrier, continues to demonstrate resilience and adaptability in a dynamic market environment. The airline, which was frequently ranked as the world’s best by industry magazines and rating agencies, maintains its HOLD rating. Despite recent operational gains, geopolitical tensions and fuel price volatility have influenced a cautious outlook.
Key highlights from the most recent update:

• Current share price: S\$6.87
• Target price: S\$6.63 (implying a -2.1% potential downside)
• Market capitalization: S\$20.41 billion
• Major shareholder: Temasek Holdings (53.6%)

May 2025 Operational Performance: Steady Passenger and Cargo Growth

SIA’s operating data for May 2025 was aligned with expectations and highlighted ongoing recovery and market share gains:

• Passenger Operations:
  • Passenger load rose 3.1% year-over-year to 109.0% of pre-pandemic (2019) levels.
  • Passenger capacity increased by 2.8% year-over-year, reaching 101.6% of 2019 benchmarks.
  • Group passenger load factor improved to 86.4%, well above the pre-pandemic level of 80.5%.
  • SIA and Scoot carried a combined 3.4 million passengers in May 2025, representing 6.3% year-over-year growth.
• Cargo Operations:
  • Cargo load grew 4.2% year-over-year to 90.3% of pre-pandemic levels.
  • Cargo capacity rose 2.9% year-over-year to 95.5% of 2019 levels.
  • Cargo load factor improved to 57.2%, up 0.7 percentage points year-over-year, though still below the 2019 level of 60.5%.
  • Front-loading activities and global trade uncertainties supported cargo volumes.
• Network Reach: The SIA Group’s passenger network spanned 128 destinations in May 2025, compared with 137 before the pandemic.

Financial Highlights: Stable Earnings with Cautious Growth Outlook

The financial outlook for SIA remains steady, with a focus on maintaining profitability while navigating market uncertainties.

Q1 FY26 Preview: Stable Earnings Anticipated

SIA is expected to post a core net profit of S\$400 million to S\$500 million for Q1 FY26, broadly comparable to the prior year’s S\$452 million. The core operating profit is forecast to rise 10-15% year-over-year, buoyed by lower jet fuel prices seen during the quarter. However, the net profit will be tempered by:

• The first full-quarter loss from associate Air India.
• Year-over-year decline in interest income.

The overall outlook remains stable, with Q1 FY26 expected to mirror the prior year’s performance.

Market Developments: Strategic Impacts and Opportunities

• Jetstar Asia’s Exit: Boost for SIA/Scoot
  Jetstar Asia, a key budget competitor, will cease operations at Changi Airport as of 31 July 2025 due to high costs and tough competition. SIA and Scoot stand to benefit by absorbing Jetstar’s 3% market share, retaining staff, and expanding into routes previously controlled by Jetstar. This supports SIA’s medium-term growth trajectory.
• Air India: Limited Impact from Recent Accident
  Air India, 25%-owned by SIA since its merger with Vistara, recently suffered a fatal B787-8 crash. While this is a setback, insurance is expected to cover most costs. Any negative sentiment is expected to be short-lived, and SIA’s investment case in Air India remains intact.

Risks: Geopolitical Tensions and Fuel Price Volatility

• Middle East tensions, especially after the 13 June 2025 conflict between Israel and Iran, have driven Brent crude and jet fuel prices up over 10% in a week.
• Further escalation could disrupt oil supply and drive fuel costs even higher, impacting operating margins.
• Other risks include:
  • Weaker macroeconomic conditions dampening air travel demand.
  • Higher US tariffs post-negotiations, potentially reducing global air cargo volume.

Earnings Revision and Valuation

Earnings forecasts for FY26-FY28 have been trimmed by 2-3% to S\$1.43 billion, S\$1.23 billion, and S\$1.30 billion, respectively. These adjustments account for higher fuel prices but also factor in a slightly more optimistic growth outlook due to Jetstar Asia’s market exit.
Valuation remains unchanged, with the target price maintained at S$6.63, representing 1.25x FY26 price-to-book (P/B) ratio—one standard deviation above SIA’s historical mean P/B of 1.07x.

Target Price Sensitivity Table

Jet Fuel Price Trends: A Key Variable for Earnings

Jet fuel prices have fluctuated sharply:

• Recent price index: 249 (Platts Jet Fuel Price Index, base year 2000 = 100).
• Quarterly averages ranged from 245 to 324 over the last two years.
• Fuel price volatility is expected to continue, directly influencing SIA’s cost structure and profitability.

Key Financial Ratios and Metrics

• EBITDA margin stabilizing around 20-21% through 2028.
• Net margin projected to moderate from 14.2% in FY25 to 6.1% by FY28.
• Return on equity (ROE) forecast to ease from 17.4% to around 7.9% by FY28.
• Net debt/equity expected to rise, from -6.9% in FY25 to 37.7% in FY28, indicating increased leverage.

Cash Flow, Balance Sheet, and Capital Management

• Operating cash flow is expected to decrease from S\$4.7 billion in FY25 to S\$2.3 billion in FY26, then rebound in subsequent years.
• Capital expenditure (capex) will increase to S\$4.1 billion in FY26, supporting fleet and network expansion.
• Dividend payments are projected to moderate alongside earnings, with yields declining from 5.8% in FY25 to 3.9% in FY28.

Conclusion: Navigating Growth with Caution

Singapore Airlines demonstrates strong fundamentals and strategic agility, leveraging market shifts such as Jetstar Asia’s exit while maintaining a prudent stance due to ongoing geopolitical and economic risks. The HOLD rating reflects a balanced view—steady operational performance and growth opportunities, offset by cost headwinds and market volatility. Investors should monitor fuel price trends, geopolitical developments, and SIA’s execution on new route expansions for future upside potential.