UOB Kay Hian
Date of Report: 30 July 2025

Singapore Airlines Faces Major Profit Miss in 1QFY26: Rising Costs, Air India Losses, and Yield Moderation Challenge Outlook

Overview: Singapore Airlines Hit by Triple Headwinds in 1QFY26

Singapore Airlines (SIA), Singapore’s flagship carrier and a perennial favorite in global airline rankings, reported a disappointing financial performance in 1QFY26. The group’s net profit plunged 58.8% year-over-year to S\$186 million, significantly below analyst expectations of S\$400–500 million. This result triggered a downgrade of SIA’s stock to SELL, with the target price cut to S\$6.03, a 14.4% downside from the current share price of S\$7.04.

Key Financial Highlights and Performance Metrics

Three Key Factors Behind the Earnings Miss

• Rising Non-Fuel Operating Expenses: Non-fuel opex per unit of capacity surged 4.7% year-over-year, driven by inflationary pressures. This was higher than anticipated, contributing to a 14% decline in operating profit, versus expectations of mid-teens growth.
• Drop in Interest Income: SIA faced a sharper-than-expected reduction in interest income, due to both lower cash balances and a decline in deposit interest rates.
• Air India’s Drag: SIA’s 25.1%-owned associate Air India became a significant earnings drag, swinging overall JV/associate contributions into negative territory. The reported loss was S\$122 million, compared with a positive contribution from JVs and associates in the prior year. Air India recorded a widened net loss of INR10,859 crore (S\$1,610 million) in FY25, and its financial outlook remains clouded by ongoing transformation efforts and recent operational setbacks.

Pax and Cargo Yield Moderation: Competitive Pressures and Industry Shifts

• Pax Yield: Passenger yield moderated 3.1% year-over-year in 1QFY26, broadly in line with expectations. Management expects further moderation for the remainder of the year, though at a slower pace, supported by healthy travel demand during the summer peak.
• Cargo Yield: Cargo yield dropped 4.5% year-over-year, underperforming analyst projections. The global cargo business faces increased competition, especially as some freighter airlines redeploy capacity due to changes in US import rules on Chinese e-commerce goods. SIA’s diversified cargo network may provide some resilience, but low- to mid-single-digit yield moderation is expected for the rest of FY26.

Strong Balance Sheet Amid Earnings Headwinds

Despite the profit miss, SIA maintained a net cash position of S\$2.19 billion at the end of 1QFY26, representing about 10% of its market capitalization. However, this figure does not account for the pending FY25 final dividend payment of 30 Singapore cents per share, which will go ex-dividend on 8 August 2025.

Financial Tables: Key Metrics and Multi-Year Outlook

Lowered Earnings Forecasts and Dividend Outlook

• Earnings forecasts for FY26–28 have been sharply reduced by 30%, 18%, and 21% respectively, reflecting higher operating costs and larger expected Air India losses. Updated core net profits are now S\$0.99b for FY26, S\$1.01b for FY27, and S\$1.03b for FY28.
• Dividend yield is projected to drop to 3.3% in FY26, even under a 70% payout assumption, at the upper end of SIA’s historic payout range.

Risks and Headwinds in Focus

• Persistent inflation and increased non-fuel expenses threaten margins.
• Macroeconomic weakness or adverse geopolitical developments could dampen air travel and cargo demand.
• Stiff competition may further compress yields, especially in the cargo segment.
• Air India’s turnaround remains uncertain, with ongoing losses expected to weigh on SIA’s associate earnings in the medium term. A S\$400 million loss from Air India has been pencilled in for FY26, with little visibility on improvement.

Valuation and Recommendation

SIA’s target price is revised downward to S\$6.03, based on 1.17x FY26F P/B (0.5 standard deviation above the long-term historical mean). The target price does not include the pending FY25 final dividend, which would raise the cum-dividend target to S\$6.33. The deteriorating earnings outlook for the remainder of the year is expected to exert further pressure on SIA’s stock performance.

Conclusion: Singapore Airlines Faces a Difficult FY26

Singapore Airlines enters FY26 facing a confluence of challenges: cost inflation, muted yields, and a significant drag from its Air India investment. While its balance sheet remains robust and demand for air travel is seasonally strong, the outlook is clouded by persistent cost pressures, competitive dynamics, and uncertain associate performance. Investors should brace for a period of earnings moderation and lower dividend payouts, as reflected in the current SELL recommendation and revised target price.