To The Moon

Singapore Airlines' (SIA) share price has been trending upward recently due to optimism from China reopening. On January 8th 2023, China announced the reopening of its borders to international arrivals without quarantine, as long as they present a negative PCR test result 48 hours before departure. This move has led to an increase in SIA’s share price in the past week.

However, at this price, SIA is no longer attractive, even if 3QFY23 earnings is expected to be strong driven by high passenger demand and a decrease in jet fuel prices. Earnings are expected to normalize in the post-pandemic period after all the hypes from pent-up demand.

Passenger traffic growth on track, but traffic boost from China uncertain

The growth in passenger traffic has been a key factor in SIA 2QFY23 earnings, and the company is well-positioned to continue to grow its passenger capacity and traffic due to its agility. However, it is uncertain when flights to China will resume due to China's Covid-19 policy.

Vulnerable Cargo business 

Moreover, there is an increased risk to Singapore Airlines' cargo business due to the possibility of an upcoming recession. The cargo traffic has recorded three consecutive months of YoY declines from June to September 2022. Though the exact geographical breakdown of the cargo route is not known, it is believed that the decline is linked to a softening PMI in the US, which is a proxy for the health of the global economy, and Singapore's manufacturing PMI has also moderated in 2022. According to the Institute for Supply Management's data, the production PMI and new order PMI peaked in mid-2021, followed by a downtrend to 52.3 and 49.2 respectively in October 2022, which is below the healthy threshold of 50. Furthermore, Singapore’s manufacturing PMI has fallen below 50.0 for two consecutive months in September and October 2022, to 49.9 and 49.7 respectively. From mid-2021 to September 2022, the YoY % growth of SIA's cargo traffic has decelerated from 58% to negative 14%.

Learn fron Warren Buffett

Warren Buffett, a renowned investor and the CEO of Berkshire Hathaway, has been vocal about his dislike for airline stocks. In the past, he has stated that the airline industry is a "death trap" for investors due to its highly cyclical nature, heavy regulation and volatility in fuel prices. Airlines are also susceptible to external events such as natural disasters, terrorist attacks and pandemics, which can greatly disrupt their operations and cause financial losses. Furthermore, the industry is known for intense price competition, which can lead to low profit margins and difficulty in differentiating between companies. I think there is a lot of wisdom that we can learn from him.

In conclusion, I do think that the surge in SIAshare price is over-optimistic. As Singaporean, I am proud of our national airline, but as investors I will be very cautious of this company. Do your dd and Stay safe Tigers!

@Daily_Discussion @TigerStars