Will airline stocks manage turbulence?
In this issue:
- Cathay Pacific reports engine trouble
- Singapore Savings Bond yield falls to 2.77 per cent
Greetings dear reader,
The European aviation safety regulator has issued an emergency directive for airlines to inspect 86 A350-1000 planes powered by XWB-97 engines, responding to an engine fire that forced a Cathay Pacific flight to return to Hong Kong last Monday (Sep 2).
Following the incident, the Hong Kong carrier had conducted an inspection of its Airbus A350 fleet and cancelled 48 flights – including its Hong Kong-Singapore route.
According to the European Union Aviation Safety Agency (EASA), the A350-1000 aircraft suffered an engine failure due to a high pressure fuel hose failing. A Reuters report citing people familiar with the matter said a pipe feeding a fuel injection nozzle was pierced.
No other airline has reported similar damage, so it is possible that the problem has affected just one airline. The EASA’s directive only affects European airlines, but other airlines have taken precautionary action too.
Singapore Airlines (SIA) said last Tuesday it was inspecting the Rolls-Royce Trent XWB-84 engines in its fleet of A350-900 planes, although no flights were affected.
This is just one in a string of difficulties that the aviation industry is facing since its post-Covid rebound. More on that below, as well as the fading allure of fixed income.
What’s happening?
Speaking to AFP after Cathay’s issue was first revealed, aviation analyst Shukor Yusof of Endau Analytics noted that there are “chronic logistical problems involving supply chain and manpower arising from Covid that are now coming home to roost”.
Japan is facing a pilot shortage tied to an ageing workforce and low pay, which means it will soon have to start competing more seriously for foreign pilots.
Scoot, the low-cost arm of SIA, had to cancel some flights in May due partially to a global shortage of some components.
Malaysia Airlines is cutting its capacity by 20 per cent as it deals with a shortage of maintenance staff and delayed deliveries of new aircraft.
Meanwhile, a post-Covid glow on aviation stocks is fading. SIA shares are down 4.3 per cent this year and 9 per cent over a 12-month period. Although they are still above their pandemic low, they are now roughly in line with their pre-pandemic price.
The Straits Times Index, in comparison, is up 6.6 per cent year to date and 7.1 per cent over the last 12 months. It is also roughly 10 per cent above its pre-pandemic level.
SIA is not the only airline globally to be dropped from investors’ favourites list. A measure of 18 major airlines compiled by Yahoo Finance shows a year-to-date return of minus 1.2 per cent against the S&P 500’s 15.4 per cent return.
Respective returns on a one-year and five-year basis are minus 5.2 per cent and minus 33 per cent for the aviation industry, and 21.9 per cent and 84.8 per cent for the S&P.
Why it matters
It is hard to forget the record-breaking profits SIA reported as pandemic chains were lifted and revenge travel became a buzzword, but investors must look forward rather than back.
The director-general of Airports Council International Asia-Pacific and the Middle East, Stefano Baronci, painted a rosy picture for the media at an event my colleague Goh Ruoxue attended last week.
Nine of the world’s 10 fastest-growing markets in terms of passenger traffic are in the Asia-Pacific, he said. Across the region, steady growth will boost passenger traffic from 2023’s just over three billion to more than eight billion by 2042.
Unfortunately, more traffic doesn’t equal more profits – especially if there is more competition. Morningstar last week cut its fair value estimates for three Chinese airline companies, citing fierce competition.
Another Morningstar analyst, Angus Hewitt, said in a separate note on Australia’s Qantas Airways: “Air travel conditions have normalised. Pent-up demand has exhausted, previously constrained industry capacity has eased, and price competition has returned.”
He also noted that switching costs among airlines “remain negligible, underpinning our view that airlines, including Qantas, lack economic moats”.
There are cloudy skies ahead for SIA, which announced at the end of last month that it had received approval from India’s government for the proposed merger of its 49 per cent-owned associate Vistara with Air India.
Maybank analyst Eric Ong wrote in a note dated Sep 1: “Notwithstanding the strong local partner and immense potential, we maintain a neutral view on the deal, at least in the short term, given India’s highly competitive aviation landscape and the lack of profitability in the past.
“Despite robust growth in passenger traffic, SIA is also experiencing intense competition from other regional carriers, resulting in declining load factors and passenger yield, particularly for East Asia routes, due to the substantial capacity expansion in North Asia.”
The big number: 2.77%
That is the average annual return on the latest tranche of 10-year Singapore Savings Bonds (SSBs), applications for which opened on Monday.
It is a substantial fall from the September tranche, which had offered an average annual return of 3.1 per cent, and is also the lowest return in two years.
The last time the SSB return was below that was in October 2022, when the 10-year average was 2.75 per cent.
October 2024’s tranche, which closes on Sep 25, is also smaller: A total of S$800 million is available for application, versus S$900 million offered in September. That latter tranche was undersubscribed, with applications for a total of S$829.4 million.
The yields on Singapore’s Treasury bills (T-bills) are declining too. The cut-off yield on the latest six-month T-bill fell to 3.13 per cent, down from the 3.34 per cent offered in the previous six-month auction that closed on Aug 15.
This isn’t exactly surprising, but investors moving out of these safe-haven instruments should be careful not to stay in cash for too long.
In a commentary for The Business Times last week, DBS investment strategist Daryl Ho said: “Cash always faces the highest reinvestment risk at the turn of the policy cycle, making it no longer apt to just ‘T-bill and chill’ for the foreseeable future.”
Some analysts expect most of that money to end up in the higher-risk equity markets. Ho, however, recommends investors look at bonds, as yields today are the highest they have been in decades.
“By securing prevailing yields for a longer duration, investors (a) preserve the high-coupon yields available today for a longer term, and (b) benefit from price gains as rate cuts lower the yield environment on aggregate.”
5 big reads
- Upcoming Fed rate cuts may not have major implications for the next MAS decision ACCURATELY or otherwise, the degree of inflation that policymakers are willing to stomach may also be perceived to fluctuate with ground-level concerns.
- Rate cuts may put novel fund financing on the radar, but S-E Asia’s lenders need to up their game WHILE subscription line financing is common, other forms such as net asset value (NAV) financing are less so. Adoption is growing, but regional lenders could take time to shift from their present conservative positions.
- Singapore’s Nasdaq-listed companies in the news for all the wrong reasons THE move from being a privately held startup to a public company is a big one, and requires paying attention to the regulations and having a well thought out strategy. Being listed on Nasdaq is no guarantee of continued success.
- iFast, analysts refute short-seller claims that business is unsustainable THE report by Sakura Research called into question the sustainability of iFast’s Hong Kong ePension division’s revenue, the health of the company’s UK digital bank, as well as the company’s profitability as it grows its assets under administration (AUA).
- MAS review group should build on market’s track record, seek to strengthen big local companies WHILE investors should not be shielded from the risk of losing money, their apparent lack of confidence in the local market ought to be addressed.
