sia fa report

7/29/2019 SIA FA Report

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Report on Singapore International Airlines Financial Situation

G3TEAM 02SINGAPORE MANAGEMENT UNIVERSITY

FINANCIAL ACCOUNTING

Prepared For: Professor Evelyn Gay

Prepared By:

Chee Jian Hui Jonathan Noel

Charissa Tang Shu Wen

An The Dung

Cheah Pei Rong

Koh Wee Heng Lionel

Word Count: 4994


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EXECUTIVE SUMMARYThe main purpose of this report is to provide an unbiased analysis on the financial position of SIA Group(SIA). An analysis of SIAs Financial Statements across 3 financial periods was done, from 2008 -09 to 2010-11. Assessment methods utilized in this report includes vertical and horizontal analysis, analysis of financiaratios and comparisons with two of SIAs competitors Qantas Airway and Malaysia Airlines.

We begin with a short introduction to SIA. SIA is the worlds second largest airline by market value and

commands a strong brand image. It is renowned for its quality of service and innovations in the airline industryHowever, its position in the airline industry is far from certain, facing threats from rising fuel prices, naturadisasters and anti-competition lawsuits. SIA has attempted to mitigate the threats, by diversifying acrossdifferent geographical regions and ensuring effective fleet management. At the same time, SIA has alsoexpanded its market-base to target increasing demand for cheap flights within Australia-Asia region bylaunching Scoot, a new subsidiary budget airline.

Analyzing SIAs income statement reveals that SIA was deeply affected by the global financial crisis in FY2009-2010, with a significant drop in revenue, though it had largely recovered by FY 2010-2011. Contributionsto revenue remained the same throughout the 3 FYs, majority of which came from its airline operations. Therewas a similar drop in expenses in FY 2009-2010, as SIA saw reduced passenger loads and hence reducedflights. Nonetheless, SIAs net profit margin and earnings per share remained high, showing that the company

remained profitable throughout the 3 FYs. In comparison, Qantas had a much lower EPS and net profit marginSIAs return on assets on average was much higher than Qantas, showing that its efforts in ensuring effectivefleet management were paying off.

The balance sheet reveals a slightly worrying trend due to the continuing decrease in non-current assets. Asan airline company, majority of SIAs non-current assets are aircrafts, spares and spare engines and these arevital to SIAs operations. However, this decrease could be due to optimization of the fleet as well as moreeffective fleet management. Besides, SIAs large cash balance and healthy cash flow would allow it to easilyfinance future investments into PPE. Total liabilities have reduced over the 3 FYs, led by a decrease in noncurrent assets. The decrease in liabilities was more than the decrease in total assets, hence improving SIAsdebt ratio and putting it ahead of its competitors. Cu rrent liabilities rose, due to an increase in sales inadvance of carriage, representing advance tickets bought by passengers. To reduce its total liabilities and

further finance its operations, SIA issued shares across all three FYs, increasing share capital.

Overall cash flow was positive, driven by positive cash from operations and financing activities. This indicatesthat SIA is continuously expanding with cash from operations and financing.

SIA not only enjoys a good reputation with its customers, but also among its shareholders due to its highdividends payouts and high profit margins. At the same time, SIAs high EPS makes it attractive to potentiainvestors. Its financial performance over the three FYs have shown that SIA is well-prepared to face futurechallenges such as intense global competition, and also the uncertainties associated with the current financiaconditions and natural disasters. We believe that SIA will continue to enjoy healthy growth and stand at thefront line of the airline industry.


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TABLE OF CONTENTS

1. INTRODUCTION ........................................................................................................................................................3

1.1 Objective....................................................................................................................................................................... 3

1.2 Background of SIA Group .......................................................................................................................................... 3

1.3 Principal Activities and Geographical Coverage ..................................................................................................... 31.4 Impact of Industry on Success of Business ............................................................................................................. 3

1.4a SWOT Analysis .......................................................................................................................................................... 3

1.4b SWOT Analysis Selected Details ................................................................................................................................ 4

1.4b Porters 5 forces ........................................................................................................................................................ 5

1.5 Selection of competitors ............................................................................................................................................. 6

2. INCOME STATEMENT ANALYSIS......................................................................................................................8

2.1 Revenue Recognition and capitalization policies ....................................................................................................8

2.2 Revenue Analysis ........................................................................................................................................................ 8

2.3 Revenue Comparisons ............................................................................................................................................... 92.4 Expenses Comparisons.............................................................................................................................................. 9

2.5 Net profit margin ........................................................................................................................................................ 10

2.6 Earnings Per Share ................................................................................................................................................... 10

3. BALANCE SHEET ................................................................................................................................................. 11

3.1 ASSETS...................................................................................................................................................................... 11

3.1.1 Breakdown of Balance Sheet.................................................................................................................................. 11

3.1.2 Current Ratio and working capital ......................................................................................................................... 11

3.1.3 Trade and other receivables ................................................................................................................................... 12

3.1.4 Receivable Turnover and Average Sales Period ...................................................................................................... 12

3.1.5 PPE & Depreciation ................................................................................................................................................ 13

3.1.6 Intangible Assets .................................................................................................................................................... 16

3.2 LIABILITIES................................................................................................................................................................ 18

3.2.1 Breakdown of liabilities .......................................................................................................................................... 18

3.2.2 Trade and other payables ...................................................................................................................................... 19

3.2.3 Interest loans and borrowings ............................................................................................................................... 19

3.2.4 Lease Commitments ............................................................................................................................................... 20

3.2.5 Debt Ratios, Quick Ratios & DE ratio...................................................................................................................... 20

3.3 OWNERS EQUITY ................................................................................................................................................... 22

3.3.1 Shareholders Equity.............................................................................................................................................. 22

3.3.2 Return on common equity (ROE) ............................................................................................................................ 22

3.3.3 P/E Ratio ................................................................................................................................................................ 23

3.3.4 Net Asset Value and dividends ............................................................................................................................... 24

4. Cash Flow ................................................................................................................................................................ 26

4.1 Cash Flow Overview ................................................................................................................................................. 26

4.2 Operating Cash Flows (CFO) .................................................................................................................................. 26

4.3 CFO Ratios................................................................................................................................................................. 26

4.4 Investing Cash Flows (CFI) ...................................................................................................................................... 27


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4.5 Financing Cash Flows (CFF) ................................................................................................................................... 27

5. CONCLUSION ......................................................................................................................................................... 29

5. APPENDIX ................................................................................................................................................................ 30

APPENDIX 5.1- Introduction .......................................................................................................................................... 30

5.1.1 Principal Activities and Geographical Coverage .............................................................................................. 30

5.1.2 More SWOT Analysis Details ........................................................................................................................... 30

APPENDIX 5.2- Income Statement Analysis ............................................................................................................... 31

2.1 Revenue Recognition Policies Summary .............................................................................................................. 31

APPENDIX 5.3 - Balance Sheet Analysis .................................................................................................................... 32

5.3.1 SIAs Depreciation Policies Summary............................................................................................................... 32

APPENDIX 5.4- Summary of Financial Ratios Used .................................................................................................. 33

5.4.1 Table of Financial Ratios used for SIA .............................................................................................................. 33

APPENDIX 5.5 - Excerpts from SIAs Annual Report ................................................................................................. 35

5.5.1 Annual Report Excerpts for 2010-2011 ........................................................................................................... 35


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1. INTRODUCTION

1.1 ObjectiveThis report aims to provide an unbiased financial analysis of Singapore Airlines Group (SIA). We would beanalyzing SIAs Financial Statements across the span of 3 financial periods. We begin with an introduction andsimple examination of the Group, followed by an in-depth financial assessment using financial ratios, vertical

and horizontal analysis, as well as comparisons with SIAs competitors Qantas, Malaysia Airlines.

1.2 Background of SIA GroupSIA started out as part of Malaysia-SIA Ltd in 1947, before being incorporated as a wholly-owned subsidiary ofthe Singapore government through Temasek Holdings (Pte) Ltd on 28 January 1972 as a public company withlimited liability. Since then, SIA has come a long way to become one of the worlds most successful airlineswith the youngest and fastest-growing fleets in the world.

1.3 Principal Activities and Geographical CoverageSIA Group engages in four reportable operating segments, namely airline operations, cargo operations,engineering services and other. The group covers 103 destinations in 39 countries including Asia Pacific,Europe and the Americas. The group's subsidiaries include SIA Cargo, SIA Engineering Company (SIAEC),

and SilkAir.

1.4 Impact of Industry on Success of BusinessTo analyze the impact of the industry on the success of SIAs business, we would be using the SWOT analysisas well as the Potters 5 forces.

1.4a SWOT Analysis

Diagram 1.4: SWOT Analysis


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1.4b SWOT Analysis Selected Details

STRENGTHS:

Strong brand imageSIA Groups branding is one of the most successful in the airline industry. The Singapore Girl icon isinternationally recognizable, while their cabin staff are famous for quality of service.

Industry-leading innovationsSIA has developed a reputation for being an industry trendsetter and has introduced industry-leadinginnovations, including the following:

First to fly the A380 First to operate the worlds largest non-stop flight between Singapore and Los Angeles and New York

The airline has won numerous industry and travel awards such as the Conde Nast Traveller's "Best GlobalAirline" award for 21 consecutive years.

Investigations by competition authorities and civil class actionsThe companys involvement in legal proceedings will drain its financial resources. Some of the litigationinvolves claims for compensation related to actual or alleged price-fixing; while the others include civil classactions in regards to cargo investigations by competition authorities. SIA involvement in such claims affects itsreputation, adds additional costs and valuable time.

Declining Market ShareThough SIA displayed strong financial performance in the fiscal year ended March 2011, it recorded a declinein its performance over the past five years. Its compound annual growth rate (CAGR) in revenue was 0.052during 2007-2011. This was below the S&P 500 companies average* of 12.74%. SIAs underperformancecould be attributed to a weak competitive position.

OPPORTUNITIES:

Strategic Initiatives

Using technologies, strategic acquisitions help the company in achieving its goal in a short period of time. InMay 2011, with an aim to serve a largely untapped new market and cater to the growing demand budget flighttravel, SIA announce plans to establish Scoot, a new low-fare airline with no-frills, operating on medium andlong-haul routes which was expected to begin operations by mid 2012. This subsidiary will enable the companyto gain a larger market share.

Growing Travel and TourismThe company's business is strongly related to the performance of global travel and tourism sector. Accordingto World Travel and Tourism Council (WTTC), global travel and tourism is projected to grow by more than 4%.Revenues from global travel and tourism are projected to double by 2018 over 2008. This growing travel andtourism could help the company in strengthening its business further.

THREATS:

Competitive PressuresSIA faces stiff competition from other competitor airlines, such as Malaysian Airlines, Qantas as well as fromlow cost airlines. The company faces challenges in pricing, quality, services, and related issues. Failure tomaintain and enhance its competitive position could adversely affect its business and prospects. Competitivepressure could lead to reduction in sales and lead to a negative impact on its sales.


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Volatility in Fuel PricesThe company's growth could be restricted by rising fuel prices, which is forcing airline companies to review theroutes they operate. The fuel prices reached an average of $88.2 per barrel in 2010 from $70.28 per barrel in2008. This resulted in the companys handling lesser flights than the originally scheduled flights. SIAsexpenses climbed up due to escalating prices of jet fuel, which continues to be the airlines biggest operatingexpense. The volatility in fuel prices could affect the profit margin of the company, as it would find difficulty inpassing on the increased fuel prices to passengers in the form of price hike or surcharge in a contracting airlinemarket.

Regulatory ChangesRecent regulatory changes could be detrimental to the group's operations in the coming future. In 2012, theEuropean Union Emissions Trading Scheme (EU ETS), which was introduced to deal with carbon emissions,was extended to airline industry. As per this scheme, airlines will have to pay 15% of the polluting rights agreedto them in 2012. This figure could increase to 18% between 2013 and 2020. This scheme is expected to costthe aviation sector approximately E3.5 billion ($4.4 billion) and this could increase passenger fares by up to5.2% on key long haul routes. Non-compliance with this scheme could attract substantial fines with thepossibility of being denied the rights to land in any of the 27 EU nations.

Risk relating to natural calamities

The results of operations of SIA are threatened due to natural disasters. For instance, in 2010, theEyjafjallajokull volcano in Iceland erupted, causing significant disruption to European air travel. Due to this, theaviation industry lost $1.8 billion revenues and more than 10 million passengers were stranded in airportsworldwide. During FY2011, SIA' operations were impacted by snowstorms in parts of Europe and the US eastcoast, and earthquakes in New Zealand and Japan. These natural calamities could have an impact on thegroup's operations resulting in strain in its financial condition and cash flows.

1.4b Porters 5 forcesUsing Porters 5 forces, we analyze the threats that SIA face internally and externally. We thus have a betterunderstanding of the type of industry that SIA is in. We deduce that competition is high and that SIA have to beinnovative in all expects to fend off competitions from its major competitors such as Malaysia Airways, Qantas,Cathay Pacific and Emirates.


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Diagram 1.4b Porters 5 Forces

1.5 Selection of competitorsWe have decided to benchmark SIA against Qantas Airways and Malaysia Airlines. The considerations given

to this assessment includes geographical segregation in which Malaysia Airlines is the closest proximity.Malaysia Airlines is also a direct competitor of SIA. Qantas on the other hand, allows us to benchmark SIA atan international level.

Besides geographical segregation, other factors that come into consideration include fleet size, outreach ofdestinations, number of subsidiaries and revenue. It would be unwise for us to pit SIA against the giants ofairline companies such as Delta Airline or United Airlines. Below is a table showing the comparisons betweenour selected competitors and SIA.

Rivalry High

There are many other airlinesout there and predominantly,

every offers the same servicetravel.

Supplier Power - Low

SIA's suppliers have littlepower to dictate theprice of the aircraftsbeing manufactured.

Substitution High

Due to the many low budgetcarriers around, most people

would fly to Asia/Oceaniaregions using budget flights

Buyer Power Low

Due to the many differentmajor airlines such as

Cathay Pacific flying to thesame destinations, SIA is not

able to dictate prices.

New Entrant low

High cost involved in settingup an airline company and

involve many legalprocedures.


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2. INCOME STATEMENT ANALYSIS

2.1 Revenue Recognition and capitalization policies1

SIA recognizes passenger sales as the income from operation when the transportation is provided to thecustomers. However, unlike Malaysia Airlines and Qantas, SIA recognizes unused tickets as revenue at theend of two years. This is based on their past experience and record of the group. In contrast, Malaysia Airlinesrecognized the unused tickets after 1 year, while Qantas deferred revenue is recognized as revenue usingestimates based on the terms and conditions of the ticket.

2.2 Revenue Analysis

SIA Groups revenue stream comes from global air freight, carriage of passengers and cargo, and from theperformance of its subsidiaries.

Diagram 2.2 SIAs Revenue

The graph above illustrates SIAs revenues from 2008 through 2011. There was a significant decline inrevenue of 20.56% in FY 2009-2010, which can be largely attributed to the effects of the global financial crisis.

As economies walked out of the recession, SIAs revenue recovered back to 90.84% of the amount earnedbefore the crisis. It was quite a remarkable recovery as FY2010-2011 was a year that was disrupted fromvarious natural disasters.

1Revenue Recognition Policies are found in Appendix 5.2

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

2008-2009 2009-2010 2010-2011

Revenue(in$million)

Financial Year

SIA's Revenue


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The two pie charts above show the components of SIAs revenue for 2 FY. As seen, contributions of revenuefrom the different operations have remained fairly similar, during and after the financial crisis. This indicatesthat the different operations and services are equally affected in times of prosperity and difficulty. SIA cannotrely on one particular entity to bring in and maintain its revenue levels when the airline industry declines.

2.3 Revenue Comparisons

By comparing SIAs revenues with its competitors, we understand SIAs performance in relation to the industry-whether it was more adversely affected than others and if its growth after the crisis was on par with the otherairlines.

The table below shows that SIAs revenue recovered at a rate similar to Malaysia Airlines, almost 6% fasterthan the international airline Qantas. It reveals that regional markets were not as adversely affected, and alsothe strength of the growing Asia Pacific market.

2.4 Expenses Comparisons

The expenses of the airline industry are largely fixed. The costs of an aircraft flight do not vary significantly withthe number of passengers carried and, as a result, a relatively small change in the number of passengers or inpricing could have a disproportionate effect on an airlines operating and financial results. Accordingly, a minorshortfall in expected revenue levels could harm our business.

76%

18%

3%3% 0%

Revenue Breakdown:

2009-2010

Airline Operations

Cargo operations

Engineering Services

Airport Terminal and

food operations

Others

77%

19%

3%1%

Revenue Breakdown:

2010-2011

Airline Operations

Cargo operations

Engineering Services

Others


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2.5 Net profit margin

2011 2010 2009

SIA 7.91% 2.20% 7.17%

Qantas 1.67% 0.84% 0.85%

In general, SIA enjoy a healthy profit margin compared with Qantas Airlines and the airlines industrys averageof 3-4%. Theres a sharp decrease of 4.97% in profit margin from 2009 to 2010, which is probably due to thefinancial crisis, cost and operation cutting throughout the corporate world. However, SIAs profit margin hasgained back the momentum to increase back to 7.91% in 2011. Over the span of 2 years, there is a increase of10.32% in the profit margin of SIA from 2009 (7.17%) to 2011 (7.91%).

2.6 Earnings Per Share

Earnings per share (EPS) is a good indicator of a companys profitability. SIA basic EPS jumped 2.0% from

89.6 cents in 2008-09 to 91.4 cents in 2010-11, ignoring the steep dive that took place in FY 2009-10.

Comparing SIA to Qantas, we see that Qantas had an exceptionally good year in 2010-11, achieving a 121.6%

increase in EPS from 6.53 cents in 2008-09 to 14.47 cents in 2010-11. However, SIAs EPS as a whole far

surpasses that of Qantas, which makes SIAs share more attractive to investors.

Return on assets (ROA) represents the companys ability to use assets to generate profit. SIAs ROA remainedabout the same during FY 2008-09 and 2010-2011, with only a small difference. This could possibly mean thatSIA is unable to improve its efficiency in utilizing its resources or that it had reached its peak efficiency, thoughthat it unlikely. On the other hand, Qantas ROA improved significantly from FY 2008-09 to FY 2010-11, risingby 294.4%, suggesting that Qantas was able to efficiently utilize resources within the period. However, a

quantitative comparison between the 2 airlines reveals that SIAs ROA is better than Qantas, though Qantasseems to be trying to improve.


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3. BALANCE SHEET

3.1 ASSETS

3.1.1 Breakdown of Balance Sheet

SIAs assets are made up of74.6% non-current and 25.4% current asset.

Total assets decreased by 1.10% over the period from 2009 2011, due to the 17.89% decrease in non-current assets. Current assets grew 43.04% over the same period. The balance sheet indicates that the majorcontributor to SIAs current assets are cash and bank balances with an increase of 93.20% over the period of3 years while the majority of its non-current assets are in aircraft, spares and spare engines whichcontributed 4717% of the total assets. SIA cut back on their non-current assets after the 2009 global recessionyear.

Only a small percentage of SIAs total assets are derived from its joint partner companies and subsidiary

companies. Due to the economic uncertainty, SIA have also cut its investments from 2009 2011 due to theweak Euro and unpredictable economy. To curb with the rising costs of fuel, SIA is looking to ways toaccommodate 25% more people in an equivalent-sized aircraft and to operate about 20% more hours on anaverage legacy airplane.

3.1.2 Current Ratio and working capital


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The current ratio is the companys ability to pay short-term liabilities with short term assets. SIAs ratioincreased from 2009 2011, and it has the sharpest increase as among the 3 airlines. This increase can beattributed to the large increase of 43.04% of current assets. SIA has a relatively strong current ratio.

3.1.3 Trade and other receivables

From 2010 to 2011, SIA experienced a growth in trade and other receivables. This shows that the company is

in a healthy financial position and is growing in terms of economic activity. As 2009 was a relatively bad yearfor the whole economy, there was an obvious drop in trade and other receivables in 2010. The high spike inreceivables in 2009 could also be attributed to the fact that other companies are purchasing services from SIAon account due to the economic crunch at that point of time.

There was a 31% decrease in change bad debt allowance from 2009 to 2011. This shows that SIA is muchmore confident in collecting its receivables. Bad debt percentage is low and has been decreasing yearly from2.4% to 1.74%.

3.1.4 Receivable Turnover and Average Sales Period

Receivable turnover measures how quickly SIA can turn its receivables into cash. A higher the value, the fasterSIA is able to recover receivables.


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We can see that SIA is generally effective in recovering receivables. From 2009 to 2011, it improved by 12.5%,though there was a small dip in 2010. The Days-Sales-in-Receivable was reduced from 40.2 to 35.7 dayswhich is an improvement of 4.5 days or 11.1%.

Diagram 3.1.4 SIAs Receivable Turnover

3.1.5 PPE & Depreciation

0

5

10

15

20

25

30

35

40

45

2009 2010 2011

Receivable

Turnover

Days Sales-in-

Receivables


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Diagram 3.1.5 SIAs PPE & Depreciation

The graph above shows the amount of PPE held by SIA, illustrating that the absolute amount of PPE hasdropped over the past 3 FYs. As a percentage of total assets, PPE held has also decreased, as summarized inthe table below.

As an airline company, SIA is expected to hold large amounts of PPE, which comprises mainly of aircrafts,spares, and spare engines. It is not surprising to see over 56% of total assets being composed of PPE.

Comparing PPE as a percentage held of Total Assets, SIA is the only company that has seen an overalldecline in PPE over the past 3 FYs. SIA initially had a comparable amount of PPE held, but that percentagehas fallen below what is held by the other 2 airlines.

Components of PPE

$12,500.00

$13,000.00

$13,500.00

$14,000.00

$14,500.00

$15,000.00

$15,500.00

$16,000.00

$16,500.00

2010-2011 2009-2010 2008-2009

Amount($inmill

ions)

Financial Year

Total PPE


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Aircraft, spares, and spare engines is the main component of SIAs PPE, standing at 47.17% of Total Assets, a

significant asset on the Balance Sheet. However, there was a decline in the percentage amount of aircraft,spares, and spare engines held in 2010-2011, as with the decline in total PPE as mentioned earlier. Thatdecline in PPE can be largely attributed to a decrease in aircraft, spares and spare engines a 11.23% dropfrom FY 2008 - 2009.

As a vital component for airlines daily and future operations, the decline in PPE raises questions. Was SIAunable to purchase new PPE? Was PPE sold off or simply allowed to depreciate?

The financial report provides some plausible answers. Increases in the Groups cash and bank balances werethe cause for the 2.3% increase in total assets for FY 2010-2011 from FY 2009-2010. Internally generatedcash flow increased by 83%. These indicate that SIA was not facing cash flow difficulties and could afford topurchase PPE. However, capital expenditure fell by 21.6%. This means that expenditure on extending PPEs

capacity and useful lives had fell, and could be the reason behind the decline in the value of PPE. In all, thereport suggests that the decline in PPE was likely not due to inability to finance new PPE or maintain capitalspending.

Depreciation Policies2

SIA adopts the straight line depreciation method, which also used by its competitors, Qantas and MalaysiaAirlines. Annual reviews of the fleet also check and ensure that the depreciation expense allocated to eachaircraft under the straight line basis can accurately represent rates of depreciation.

2Summary of SIAs depreciation policies are in Appendix 5.3

$-

$2,000.00

$4,000.00

$6,000.00

$8,000.00

$10,000.00

$12,000.00

$14,000.00

2010-2011 2009-2010 2008-2009

Amount($inmillions)

Financial Year

PPE

Aircraft, spares and spare engines

Land and buildings

Others


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The carrying amount of the Groups aircraft fleet as of 31 March 2011 was $11,111.9 million.

The table below shows the depreciation periods and estimated residual values for SIAs assets.

*Narrow body aircraftSIA has designated a shorter depreciation period for the Groups fleet than its competitors in general, butassigned similar residual value percentages. A shorter depreciation period translates into larger annualdepreciation values. The implication is that a larger annual depreciation expense will be claimed. Aconceivable reason for a shorter period can be that SIA refreshes its aircraft more frequently than otherairlines.

3.1.6 Intangible Assets

The notes to financial statements highlight 4 intangible assets: (a) Goodwill arising on consolidation; (b)

Computer software; (c) Licenses; and (d) Deferred Engine Development Costs (participation in aircraft enginedevelopment projects). Computer software, licenses and deferred engine development costs are amortised ona straight line basis over estimated useful lives of 1-5, 3, and 20 years respectively. There are also otherintangibles mentioned in the notes, including brands, customer relationships, and advance and progresspayments.


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There was a significant decrease in intangible assets held in FY 2009-2010, but a small increase in amountheld in the following year, mainly attributed to an increase in deferred aircraft engine costs.

SIAs intangible assets are held less than those of other airlines in the industry. Disclosure of intangible assetsvaries for all 3 companies. Qantas has a more similar classification of intangible assets with SIA, except

without deferred engine costs and advance and progress payments, but includes airport landing slots into thelist. Malaysia Airlines classifies only computer software and landing slots as intangible assets. SIA thus differsfrom the other 2 airlines in its exclusion of airport landing slots as an intangible asset. In general, SIA has asmaller percentage of intangible assets as compared to its competitors.


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3.2 LIABILITIES

3.2.1 Breakdown of liabilities

Since 2009, SIA has reduced its total liabilities by 2.77%, with a sharp dip in 2010, mostly due to the financialdownturn. The overall reduction is attributed to a significant decrease of 13.6% in non-current liabilities, mostsignificantly in the deferred accounts and long-term liabilities and provisions. Provisions are split into currentand non-current liabilities, and include provisions for warrant claims, as well as upgrade costs and return costsfor leased aircraft.

While a reduction in total liabilities is mostly good for a company, it would be of major concern if thecorresponding total assets should decrease as much and this has been explored above. Total assets havedecreased by 2.57% across the same period, which means that SIAs claim to its assets has increased, and itsdebt-ratio has improved. Below is a table comparing SIAs debt ratio to that of Malaysia Airlines and Qantas

Airways.

Compared to its competitors, SIA has a very healthy debt ratio.

Although total liabilities and non-current liabilities decreased, current liabilities rose by 5.30% in the sameperiod. However, this increase is of little concern as it was accompanied by a rise of 43.04% in current assets,which improved the companys current ratio. Most of the increase in current liabilities came from the steadyincrease in sales in advance of carriage, which is actually good for SIA, since it represents ticket sales.

Another area that contributed to the increase was provisions.


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SIAs performance over the last three periods has been excellent, showing an increasing current ratio, while itscompetitors have faltered; especially Malaysia Airlines which is unable to meet at least of its currentliabilities.

Bank borrowings decreased to 0 after the 2009-2010 period, showing that SIA is able to fund its operationsand activities from its income and investments.

3.2.2 Trade and other payables

SIA

QANTAS

Over the last three financial periods, SIA has reduced liabilities owing to trade and other creditors by about20.10%. This is perhaps due to optimization of its fleet and better fleet management and reduction in fuelconsumption. However, there has been a sharp increase in notes payable, mostly attributed to the purchase ofnew aircraft and to make up for the lack of any purchase in 2010.

Comparing SIAs liabilities to Qantas in this area, we note that Qantas has been steadily decreasing itspayables, and this could be due to a less aggressive fleet expansion policy as compared to SIA.

3.2.3 Interest loans and borrowings

The loans as of 31 March 2011 pertain to credit revolving facility and are unsecured, bearing a fixed interest

rate of 2.5% per annum.

SIAs loan amount has reduced significantly since 2009 by 96.14%.

Moreover, the vast majority of SIAs loan is denominated in USD, which is beneficial to the Group since theSGD has been appreciating against the USD. This enables SIA to repay the loan at lower term (real amount).


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3.2.4 Lease Commitments

The finance lease commitments of SIA have decreased steadily overtime, from $548.5 million in 2009 to$481.6 million in 2011. This is attributable to the financial crisis in 2008, when most firms were cutting costsand not maximizing operational capacity. Besides, most of SIAs lease commitments are long term, whichimplies continuing debt obligations.

3.2.5 Debt Ratios, Quick Ratios & DE ratio

SIA debt ratios were stable from 20092011 averaging at 0.40, about 40% lower than the Qantas debt ratios(0.70). On the other hand, there was a steady increase in SIAs Quick Ratios of 30% over the span of 3 FY.This could generally viewed as a good sign for SIA as it implies SIAs liquidity has increased steadily, preparingitself for future challenges. In contrast, Qantas Quick ratios remained approximately the same from 2009 to2011 at 0.85, which is considerably lower than SIAs Quick Ratio. However, it may not be bad for Qantas, as itsuggests the Group could be maximizing its Cash and Cash equivalent for operations.

Debt to Equity Ratio

SIA has a healthy debt-to-equity ratio, which provides it more capacity to borrow from external finance due tolower risk to potential lenders. It also allows SIA to display a larger variation in ROE, thus maximizing ROE inprofitable years.


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3.3 OWNERS EQUITY

3.3.1 Shareholders Equity

SIAs share capital has risen through the years despite profits taking a hit during the financial crisis. Thisindicates that SIA is continually expanding its business operations, and the companys confidence inrecovering from the downturn. It is probable that SIA issued shares to increase liquidity and to pay off itsliabilities, as evidenced by the steady increase in quick ratios.

SIA issued 10.8 million shares throughout the 3 financial periods upon exercise of options granted under theEmployee Share Option Plan. In 2010-2011, shares were also issued for RSP (Restricted Share Plan) andPSP (Performance Share Plan). None were issued duing the financial downturn, indicating that SIA does notreward its directors and key executives when profits are low, adhering to the principle of only remunerating topmanagement when there is strong financial performance.

3.3.2 Return on common equity (ROE)

$-

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

$1,400.00

$1,600.00

$1,800.00

$2,000.00

2008-2009 2009-2010 2010-2011

A

mt($inmillions)

Financial Year

Shareholders' Equity

Share Capital

Net Profits

Treasury Shares


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SIAs ROE improved from 0.39 cents to 8 cents per dollar of shareholder investment from 2009 2011. On theother hand, Qantass ROE has declined from 5.5 cents to 3.5 cents per dollar from 2009 2011. The increasein share capital accompanied with higher ROE ratios indicates that SIA is performance in the recent FY wasexcellent, generating higher profits than Qantas and from previous years.

3.3.3 P/E Ratio

SIAs PE ratio fluctuated greatly during the period from 2009 to 2011, with a sudden spike in 2010, followed bya gradual increase in 2011. The spike in 2010 was due to the low EPS that year and the surprising increase inshare price at the end of that financial period. The more gradual increase in 2011 was mostly due to theincrease in share price, since there was almost no change at all in the EPS. Comparing SIAs stock price to theSTI during the period if 2009 to 2011, we find that SIAs shares generally under-performed as compared to themarket, increasing at a slower rate than the index.

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

3/

31/2009

4/

30/2009

5/

31/2009

6/

30/2009

7/

31/2009

8/

31/2009

9/

30/2009

10/

31/2009

11/

30/2009

12/

31/2009

1/

31/2010

2/

28/2010

3/

31/2010

4/

30/2010

5/

31/2010

6/

30/2010

7/

31/2010

8/

31/2010

9/

30/2010

10/

31/2010

11/

30/2010

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31/2010

1/

31/2011

2/

28/2011

3/

31/2011

SIA v STI %Change

SIA Percentage

STI Percentage


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3.3.4 Net Asset Value and dividends

The price to book ratios of SIA is on an upward trend, which means that market value is higher than bookvalue, implying that the shareholders increasingly value SIA as a world class airline.

SIAs dividend payout in 2009-2010 dropped significantly. Compared to the other 2 years where SIA paid 4%of earnings as normal dividends, the amount fell to 0.79% in 2009-2010. This shows that SIA is not pressuredto maintain its dividend payout ratio so as to assure investors and to give an impression of better prospects.


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Dividend payout is largely dependent on profits. As such, SIAs dividend payout ratio can accurately reflect theearnings of the company and thus can serve as a good indicator for investors as they look to the ratio as inindication of SIAs performance for the year.

From the graph below, we can deduce that SIA is generous in paying out dividends when it has strong financiaperformance.

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

FY 10/11 FY 09/10 FY 08/09 FY 07/08

Total Dividends Per Share

Total Dividends Per Share


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4. Cash Flow

4.1 Cash Flow OverviewCash offers protection against hard times and gives firms the liquidity needed to act on sudden investmentopportunities. However, maintaining a high level of cash beyond what the firm needs to cover current liabilitiesand emergency use might be indicative of poor management. If the firm could be earning more by investing the

money in a different venture or expanding the business, then having idle cash is a strategic blunder.

SIA had an overall positive cash flow over the period from 2009 to 2011, driven by positive CFO and CFF. Thisindicates that SIA is continually expanding with cash from operations and financing.

4.2 Operating Cash Flows (CFO)

SIA' cash flow from operations has been increasing for the past few years. Cash from SIAs operating activitiesincreased by 17.95% from S$1,966 million in FY2010 to S$3,285 million in FY2011. Such a robust cash flowfrom operations indicates proper decisions of SIA' management, lending to greater stability to the group'soperations and allows for further growth.

4.3 CFO Ratios

CFO Ratios are arguably the most important indicators of a business. After all, some companies may be on theverge of bankruptcy even when they report a great profit because of the low or negative cash flow. As SIA is aservice company, we will not focus on the cash flow margin, which equals to operating cash flow over netsales, but instead will calculate the CFO/net profit ratios compare with that of Qantas Airlines.

*CFO/net profit = Operating cash flow/ net profit


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4.4 Investing Cash Flows (CFI)

SIA had negative cash flows from investing activities from 2009 to 2011. This was because most of itsinvestments are in capital expenditure which constitutes mostly PPE. However, investing cash flows improvedby 63.9% over the same period. Besides SIAs investments in PPE, the other investment that contributed to itsnegative cash flow was the purchase of short term investments.

4.5 Financing Cash Flows (CFF)

There are two ways to raising capital; debt or equity. For the past two periods, SIA had a negative CFF. Wecan thus infer that SIA made a loss in its financing activities. To know how the company has utilized itsfinances, a deeper study on the cash flow statement is required.

Studying the cash flow statement, we realize that there are several outliers which contributed mainly to theimpact of the net cash flow from financing activities. These were the dividends paid out and the proceeds fromissuance of bonds. Although there are other financing activities such as interest paid or proceeds fromborrowings, we will not be looking at them as they have little impact on the overall result.

The above table shows that the positive value of the financing cash flow in period 2011 2010 is attributed tothe $800million proceeds from issuance of bonds while the negative values in the other 2 periods is attributedto the large dividend payouts.

From the CFF we can deduce that SIA was having considerably better performances in the FY 2011 2010 aswell as 2008 2007.


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5. CONCLUSION

As a leading regional airline located at the heart of emerging markets, SIA has a strong brand image and

recognized quality service. Moreover, it enjoys a good reputation with customers and also its shareholders as

SIA pays high dividends. At the same time, SIAs high EPS makes it attractive to potential investors.

Although we have highlighted some concerns regarding its declining PPE in the short run, we do not foreseemajor problems in the near future as SIA has the ability to finance future investments into PPE through its

robust cash flows. This strong cash flow also enables SIA to finance long term investments to improve its

operational capacity. With a large cash balance and low debt ratio, SIA is well-prepared to face future

challenges such as intense global competition, and also the uncertainties associated with the current financial

conditions and natural disasters.

Yet, SIA is not one to rest on its laurels. Targeting increasing demand for cheap flights within Australia-Asia

region, SIA launched a new subsidiary budget airline, Scoot. This marks SIAs foray into a new market.

In conclusion, we believe that SIA will continue to enjoy healthy growth and stand at the front line of the

industry.


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5. APPENDIX

APPENDIX 5.1- Introduction

5.1.1 Principal Activities and Geographical Coverage

The airline operations of the group include passenger air transportation, which is operated through Singapore

Airlines and its wholly-owned subsidiary Silk Air. As of March 31, 2011, SIA Group operates a total of 126

passenger aircraft, of which SIA operates 108 and SilkAir operates the remaining 18.

The cargo operations segment is involved in air cargo transportation and related activities. The segment is

operated through Singapore Airlines Cargo (SIA Cargo), with a fleet size of 11 freighters.

The engineering services segment comprises the operations of SIA Engineering Company, a leading aircraft

maintenance, repair and overhaul company. It provides total maintenance solutions to a client base of

international airlines. It also manufactures aircraft cabin equipment, refurbishes aircraft galleys, provides

technical and non-technical handling services and repair and overhaul of hydro-mechanical aircraft equipment.The other segment includes services such as training of pilots, air charters and tour wholesaling.

5.1.2 More SWOT Analysis Details

Codeshare Partnerships

SIA has strong code-sharing partnerships with various airline companies globally, through which it enhanced

its network and service portfolio, thus benefiting its customers. Maintaining and expanding these alliances will

provide a great growth opportunity for the company by diversifying its product and service offerings and

reaching out to wider geographical locations. Partnerships and alliances such as these provide better reach for

the companys offerings, which in turn, drives its top line performance.

Effective fleet management

SIA operates a modern fleet, which increases fuel efficiency and safety and lowers carbon emissions. Majority

of its fleet is relatively young, which helps the company in minimizing its transportation costs. In addition, SIAs

extended range of Boeing aircraft holds industry-leading levels of comfort and service to their passengers in

their longest transcontinental routes. With such a strong operational fleet, the company maintains a competitive

position in the market.


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APPENDIX 5.2- Income Statement Analysis

2.1 Revenue Recognition Policies Summary

SIA

Passenger sales are recognised as operating revenue when the transportation is provided. The

value of unused tickets is included as sales in advance of carriage on the statement of financial

position and recognised as revenue at the end of two years. This is estimated based on

historical trends and experiences of the Group whereby ticket uplift occurs mainly within the first

two years.

The carrying amount of the Groups and the Companys sales in advance of carriage at 31

March 2011 was $1,459.8 million (2010: $1,338.0 million) and $1,421.1 million (2010: $1,301.9

million) respectively.

Malaysia

Airlines

Passenger ticket and cargo airway bill sales including the related administration fees and

various surcharges are recognised as revenue, net of discount, in the profit or loss when the

transportation services are rendered. The value of unutilised tickets is included in current

liabilities as sales in advance of carriage.

Tickets, other service fees and surcharges that remain unutilised after 12 months subsequent to

their respective date of issue are recognised in the profit or loss as unavailed credits on sales in

advance of carriage.

Revenue from other services such as airport handling and engineering services, are recognisedin the profit or loss when services are rendered.

Qantas

Passenger and freight revenue is measured at the fair value of the consideration received, net

of sales discount, passenger and freight interline/IATA commission and Goods and Services

Tax. Tours and travel revenue is measured at the net amount of commission retained by the

Qantas Group.

Passenger, freight and tours and travel revenue is recognised when passengers or freight areuplifted or when tours and travel air tickets and land content are utilised. Unused tickets are

recognised as revenue using estimates based on the terms and conditions of the ticket.

Passenger recoveries (including fuel surcharge on passenger tickets) are included in net

passenger revenue. Freight fuel surcharge is included in net freight revenue.


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APPENDIX 5.3 - Balance Sheet Analysis

5.3.1 SIAs Depreciation Policies Summary

Aircraft Fleet Impairment of Aircraft

Depreciated on straight line basis

Calculated at rates such that cost is

written down to estimated residual

values at the end of their operational

lives

Operational lives and residual values of

aircraft, if estimated, are based on the

Groups past experience and are in

accordance with the industry. The operational lives and residual values

are reviewed annually.

Derecognised as asset upon disposal or

when no future economic benefits are

expected from its use or disposal

Recognized when aircraft when actual

circumstances indicate that the aircraft may

be impaired and

When carrying value exceeds recoverable

amount of the aircraft

Estimates made regarding the fair market

value of the aircraft when determiningrecoverable amounts are based on an

independent appraisal for fleet with similar

operational lives


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APPENDIX 5.4- Summary of Financial Ratios Used

5.4.1 Table of Financial Ratios used for SIA

Ratio 2010-2011 2009-2010 2008-2009

Ability to pay Current Liabilities

Current Ratio

1..57 1.45 1.16

Quick Ratio

1.51 1.35 1.07

Cash Conversion Cycle

Receivable Turnover

10.56 9.43 10.77

Days-sales-in Receivables

34.55 - -

Ability to pay long term debt

Debt Ratio

0.41 0.39 0.42

Debt-to-equity Ratio

0.69 0.64 0.71

Profitability Ratios

Net Profit Margin

0.08 0.02 0.07

Return on Total Assets

0.05 0.015 -


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Return on Ordinary Equity

0.08 0.020

PE Ratio

15.30 84.44 11.11

Analyse Share Investments

Dividend Yield

0.10 0.079 0.04

Book value per ordinary share

12.11

Price to book Ratio

1.15

Cash Flow Ratios

CFO/Net Profit

2.86 7.03 1.45


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APPENDIX 5.5 - Excerpts from SIAs Annual Report

5.5.1 Annual Report Excerpts for 2010-2011

The complete accounts can be found in the attached excel sheet. Relevant financial review highlights and

notes to the financial statement have been excerpted here.


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sia fa report

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