The fiscal year ending March 2023 was very good year for Singapore Airlines (SIA). The national carrier, along with its subsidiaries, recorded an after-tax profit of S$2.16 billion ($1.6 billion). They announced that a portion of these revenues would be paid to employees through profit sharing plan equals about eight months’ salary. This is a far cry from where the company was in fiscal year 2020/2021, when cash from operations was minus S$3.3 billion.
It’s safe to say that with the world and its airports reopening for business, Singapore Airlines has rebounded strongly. In fact, the company’s share capital was larger in March 2023 than it was in March 2019, before the COVID-19 pandemic. Other flag carriers in the region, such as Thai Airways and Indonesia’s Garuda, needed big bailouts and debt restructurings just to stay solvent. Currently, their earnings look better, but both airlines currently still have negative equity (their liabilities exceed assets).
One of the reasons for the increase in profits is that ticket prices rose last year. When global travel returned to life in 2022, the same thing happened to airlines as to other industries: high demand and limited supply led to high prices. As people emerged from quarantine, travel demand was extremely strong, but short-term supply remained limited as routes reopened gradually and aircraft and crews had to be ready to return to service.
When demand exceeds supply, like this, prices tend to rise. Now that international travel is returning to a more typical equilibrium (more aircraft from more carriers flying to more locations), I don’t expect operating margins to be as high in the future. But beyond prices, there’s another reason Singapore Airlines has weathered the pandemic better than most: it owns most of its aircraft.
Planes are expensive. For carriers that operate hundreds of aircraft, buying them outright requires a large capital investment, potentially billions of dollars. Instead, many carriers choose to lease the bulk of their fleet. This asset-based approach can work as long as the airline has stable cash flow to pay its lease payments (and they don’t sign bloated and overpriced leases like Garuda does). supposedly did).
Both Garuda and Thai Airways were heavily dependent on leased aircraft before the pandemic. In 2020, for example, Thai Airways had about $4 billion in lease liabilities. their balance, representing 59 percent of total assets. In 2020, Garuda generated $4.5 billion in revenue. long-term lease liabilities, which is about 42 percent of total assets. In 2019, the Garuda fleet consisted of 189 leased aircraft.
In March 2019, Singapore Airlines and its subsidiaries fleet of 202 aircraft. Only 66 aircraft were under operating lease, while the remaining 136 were owned by the airline. When the pandemic hit, Singapore Airlines faced the same cash crunch as everyone else. But because it owned most of its income-generating assets, it didn’t have the added problem of owing billions of dollars to outside parties for planes that had nowhere to fly. This meant that the airline could focus on raising cash to protect against short-term operating losses, but was never in danger of going bankrupt.
The shock of the pandemic has given carriers such as Garuda and Thai Airways the opportunity to cut some of their lease obligations by returning some aircraft and lowering payments for others. Their balance sheets look better now. Thai Airway’s negative equity fell from $4.1 billion in 2020 to $2 billion last year. Garuda’s negative net worth increased from $6.1 billion in 2021 to $1.5 billion in 2022. In both cases, liabilities still exceed assets, but the deficit is shrinking. If there was no sudden stop in international travel, it would be much more difficult to renegotiate these obligations with creditors. So, in a sense, the recent recession years have put them on a more sustainable long-term path.
But the experience highlights a key vulnerability in how many modern airlines operate and highlights the trade-offs associated with leasing, not ownership. The big advantage of ownership, as shown by Singapore Airlines, is that the assets from which you earn income belong to you. When the pandemic hit, every airline in the world faced a shortage of cash. But for airlines with large lease obligations, this meant that not only could they not cover all of their operating costs, but they could no longer pay their landlords. And in the business world, this can be a much bigger problem.