Growing non-aviation revenue streams will be key for Sats in near to mid-term

AS THE pandemic brought the travel industry to a screeching halt in H1 2020, the International Air Transport Association (Iata) was hopeful that international travel would start picking up again by the second half of the year.

But with the recovery proving slower than anticipated, ground-handler and caterer Sats Ltd will need to focus on growing its non-aviation businesses in the near to mid-term.

For the three months ended June 30, 2020, Sats sank into the red with a net loss of S$43.7 million, versus a net profit of S$54.7 million a year ago, weighed down by meagre aviation volumes and the losses from its associates in India and China.

Revenue slid 55 per cent to S$209.4 million, mainly due to the 73 per cent slump in revenue in its aviation-related businesses.

In a sign of how dire the situation had become, Sats handled just 0.2 million passengers and 6,550 flights, and served up 9.4 million meals in Q1FY21. This is a far cry from the 22.5 million passengers and 91,500 flights handled and the 19.3 million meals served a year ago.

That said, its non-aviation businesses saw revenue jump over 73 per cent to S$96.9 million in Q1FY21, which arose from growth in new customer segments as well as the consolidation of Country Foods (formerly Sats BRF Food).

In an earnings briefing late last month, Sats chief Alex Hungate indicated that it is turning to new sources of revenue, with its Sats China business "growing its customer base quite aggressively".

With the aviation industry buffeted by headwinds, aviation revenue accounted for nearly 53 per cent of its topline in Q1FY21, down from about 88 per cent a year ago. Meanwhile, its proportion of revenue from the non-aviation segment rose to 46 per cent, versus 12 per cent previously.

Seeking to build further scale in food processing and distribution - a path that it embarked upon three years ago - Sats acquired the remaining 49 per cent stake in Country Foods in September last year from its joint venture partner BRF for S$17 million.

Sats, which counts fast food group Yum and European supermarket chain Aldi among its customer base, sees the acquisition as a means to speed up growth in areas such as food services and retail.

Sats has other plans in the works for its food solutions business too. In India, it will construct a central kitchen as it eyes the fast casual market. In China, it is building a second central kitchen in Tianjin, adding to its first central kitchen in Kunshan that was established in 2017.

Blunting the impact

Meanwhile, cargo revenue is also helping to blunt some of the impact from the pandemic. While cargo volumes about halved during the quarter under review to some 221,000 tonnes, air freight rates have soared in recent months thanks to demand for essential goods such as medical gear and equipment, as well as a capacity crunch in the cargo market.

The latter has arisen from the grounding of scores of passenger aircraft, which carried roughly half of the world's air freight in their collective bellyhold pre-Covid, according to TAC Index.

With recurring waves of infection prompting governments to take a cautious stance on re-opening borders, recovery in the aviation industry remains elusive. While Singapore has embarked on fast lane arrangements with countries such as China, Malaysia and New Zealand, onerous requirements - including garnering necessary approvals and multiple swab tests - restrict travel to essential travel for now.

CGS-CIMB Research highlighted that Sats is working with the government to increase the number of passengers from countries where the infection rates are on the low side and designing transit procedures to minimise cross-infection. "We believe pre-travel swab tests could be a structural new norm, a role which Sats could take on in the near future with the right training and equipment," wrote analyst Lim Siew Khee in a note.

Even though analysts see air traffic as having bottomed out in April, tourists are likely to hold off on international travel until restrictions ease and the pandemic is better contained. While the emergence of a vaccine could also boost sentiment, as it currently stands, the road to recovery appears a long one.

Iata projects that it will take up to 2024 before passenger traffic returns to pre-Covid levels, and airlines have already started storing wide-body aircraft as well as retrenching surplus crew in recognition of a scaled down operating environment.

Forecasting passenger throughout at Changi Airport only recovering to about 39 per cent of pre-Covid levels by FY2022, UOB Kay Hian transport analyst K Ajith reckons that Sats could continue to bleed in FY2022 as government support such as the Jobs Support Scheme tapers off.

With the outlook far from sanguine, Sats will need to sharpen its focus on growing its non-aviation revenue to offset the drag from its ailing aviation businesses. In this respect, institutional and commercial catering as well cargo services are seen by some analysts as promising areas to do just that.