TL;DR I personally think that SIA isn't very profitable due to high staff costs, depreciation and fuel expenses. Weak cashflows, a highly competitive airlines industry and struggling value differentiation also doesn't make their shares too enticing either. Business Profile We are all quite familiar with SIA and their prominent air stewardess kebaya. It has been ranked one of the top 15 airlines in the world, and has been ranked one of the top 15 carriers in the world and is one of the largest airline business in Asia. Prominent subsidiaries under them include SilkAir, which operates flights to secondary cities and Scoot, which is a low cost carrier. They also have stake in Virgin Australia and SIA Engineering which is listed on the SGX. Financials Income Statement Although revenue increased by almost 7% YOY, as a whole, revenue has not grown much since FY2014. Revenue had dipped previously, but had recovered over the years. One of the reasons for such lacklustre growth in revenue could be attributed to the highly competitive nature of the airline industry and how SIA has become a more mature company with less room to grow. The bulk of its cost structure can be attributed to high fuel costs, staff costs and depreciation (due to high capital expenditures for their fleet). Profit Before Tax is significantly higher Year On Year (more than 2 times), mainly from surplus in disposal of its fleets and an increase in share of profits from joint venture companies. Hence, although net profit increased significantly, this increase can be mainly attributed to increases in non-core operating activities such as disposal of fleets and income from joint ventures. Thus, the financial picture for SIA may not be as rosy as it seems. Balance Sheet Current Ratio is below 1 at 0.76, which shows that SIA’s short-term liquidity isn’t very strong. This could mean that SIA might have issues fulfilling its short-term financial obligations. It also has a leverage of almost 1, which could suggest that long-term solvency (repaying of financial obligations in the long run) isn’t particularly strong either. With a Net Debt/EBIT (Earnings Before Interest and Taxes) of 0.52, SIA’s coverage is strong due to their high cash balance. (I used EBIT since D&A is very large). This means that what SIA earns should be enough to pay for ther debts in the future. Cashflows Cashflow from operating activities had only increased slightly despite the increase in net profit, due to weakened working capital conditions from a substantial increase in receivables. Decrease in trade debtors and decrease in deferred revenue all led to this weaker working capital situation. Cashflow from Investing Activities had an increase in outflow due to a 25% increase in capital expenditures, despite 50% less purchases in short-term investments. Cashflow from Financing activities had turned a positive due to SIA issuing bonds worth 1.6Bn, and lesser debt maturing in the short-term. An estimate of Free Cashflow (operating activities minus CAPEX) was actually negative, which was actually possible due to the issuance of bonds. This to me seems that SIA’s cashflows aren’t very strong, especially with a negative free cashflow and high capital expenditures with the need of high debt issuance. Growth Strategies Lower Crude Oil Prices With much lower oil prices in 2018, this could lead to average jet fuel price reducing. This can help to improve profitability since oil prices take up a large part of their cost structure. Strengthening Premium Positioning SIA has been traditionally recognised for their excellent service. They intend to grow this through increased service leadership. The recent A380s also have different offerings for both economy and first class services. Risks Market Saturation The market has been quite saturated with different players already. To compete, more than just offer excellent service, I believe SIA has to adopt more innovative strategies to improve customer experience as a whole. High quality service and a comfortable flight are already industry standards. Demand Shocks SIA is also vulnerable to different demand shocks, such as pandemics like the SARS outbreak in 2003. Although share prices rebounded after the situation was contained, this shows as to how volatile airlines can be to global forces. In fact, many a times, such situations may be out of SIA’s reach.