Industrials

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Singapore Airlines Ltd. likes to project a certain consistency. Its female flight attendants wear a uniform that hasn't significantly changed since the airline's founding. The shares have traded for several years at an almost fixed price of S$10 apiece. And its board hardly ever takes on a cent of net debt.

That's about to change, Abhishek Vishnoi of Bloomberg News reported Tuesday. Borrowings will exceed cash deposits by about S$568 million ($407 million) in the year through March 2018 and by S$2.59 billion the year after that, according to the median of analyst estimates compiled by Bloomberg -- enough to leave the carrier in a net debt position for the first time since 2004.

Turbulence Ahead
Singapore Air's net cash position hasn't dipped into debt since 2004
Source: Bloomberg, analyst estimates

The reason for this isn't hard to discern. Singapore Air is engaging in a major fleet upgrade, with more than 200 aircraft on order from Boeing Co. and Airbus SE, worth about $54 billion at current list prices (although major customers can expect a substantial discount).

Hey Big Spender
Singapore Air's capital expenditure is set to soar
Source: Bloomberg, company reports

Such orders play out over the very long term, but capital spending still has to rise to fund them. Singapore Air forecasts a S$5.45 billion capex bill in fiscal 2019, almost double last year's level. Expenditure will remain elevated, by recent standards, for the foreseeable future.

Many investors will argue it's long overdue for SIA to let its hair down a little. The tax advantages that debt enjoys over equity mean companies that refuse even moderate doses of the stuff are turning down one of the closest things financial markets have to a free lunch. Sticking cash in the bank is a particularly poor use of capital, especially when borrowing costs remain low. Even after the sharp fall in bond prices since late last year, the yield on a Bloomberg-Barclays index of global debentures is just 1.59 percent.

Furthermore, investing against the cycle has worked spectacularly well for SIA in the past. By getting its hands on the most fuel-efficient new jets at the hefty discounts available to early customers, Singapore's flag carrier has often managed to reduce its operating costs well below what you'd expect from such a high-class outfit. Its previous dip into net debt in the early 2000s helped it build the fleet that briefly turned it into the world's biggest carrier by market value late in the decade.

All this assumes, however, that what SIA is confronting this time is a cyclical, and not a secular, shift. That could prove a mistake.

Borrowing to invest makes sense if you're confident you're leveraging up to ride out a weak patch and grab share in a growing market. But if you're under pressure from competitors with long-term structural advantages, it can be a distinctly shaky game.

Low Flying
Singapore Air's passenger yield fell to financial-crisis levels last year
Source: Company presentations
Note: RPK = revenue passenger kilometer, the number of passengers carried multiplied by the distance flown. Data not available for 2011 and 2012 fiscal years.

That's the situation confronting SIA. State-controlled carriers in China and the Gulf are threatening the group's traditional dominance of the long-haul market, while AirAsia Bhd. is undermining it on regional routes. Last August, yield -- a measure of passenger revenue per kilometer flown -- touched its lowest level since the financial crisis at Singapore Air's brand-name carrier.

Meanwhile, the competition isn't standing still and letting Singapore buy all the fuel-efficient planes. China's big three carriers are busy investing in the same A350s and 737 MAX models SIA is purchasing, while the 39 A320neos it's buying seems piddling next to the 404 AirAsia has on order.

Cash Discount
Most of the airlines holding more cash than debt are low-cost carriers
Source: Bloomberg

Net cash positions are unusual on airline balance sheets, but among low-cost carriers they're rather common. That stands to reason: If you expect to walk the tightrope of narrow margins, it makes sense to have a safety net.

By discarding Singapore Air's cash pile, Chief Executive Officer Goh Choon Phong is betting he won't be needing that security in the years ahead. Investors in the storied carrier had better hope he's right.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Yield numbers for SIA's short-haul SilkAir and discount Scoot and Tiger brands aren't available over comparable periods.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net