One of the world’s most respected airlines, Singapore Airlines Ltd (SGX: C6L), is looking beyond the pandemic.
It’s now ready to expand overseas again as the airline agreed to merge Air India and Vistara, together with Indian conglomerate, Tata.
Tata gained control of Air India at the beginning of this year while Vistara is an existing joint venture between Tata and Singapore Airlines, also known as SIA for short.
As part of the deal, SIA will be investing INR 20.6 billion (S$360 million) in Air India, giving SIA a 25.1% stake in an enlarged Air India Group.
Aside from that, SIA and Tata will inject additional capital to fund Air India in the current FY2023 ending March 2023 and the subsequent FY2024, if needed.
The additional capital injection could amount to INR 50.2 billion, or S$880 million, for SIA.
This will translate into a total investment of S$1.24 billion.
Investment to be funded by internal cash resources
SIA intends to fund the investment with its internal cash resources, which stood at S$17.5 billion as of 30 September 2022.
The strong cash position of SIA is mainly due to the improved operating environment and strong backing of its major shareholder, Singapore sovereign wealth fund, Temasek Holdings.
From the early days of the pandemic in 2020, SIA has stayed one step ahead of competitors as the airline asked for big funding requests and tapped shareholders for S$15 billion.
It was a bold move back then given that the amount was greater than the company’s market capitalisation at the time, but it was a strategic move to help SIA outlast the pandemic.
This has allowed SIA to be among the first to recover and tap the pent-up demand in travel.
Source: SIA Group Analyst/Media Briefing on H1 FY2023 Results
Multi-hub and portfolio strategies for growth
SIA’s CEO, Goh Choon Phong, shared that SIA’s multi-hub strategy is one of the ways to make up for the small Singapore market, which only has a local population of five to six million people.
As the population is small, there is a growth limitation by relying on the Singapore market alone.
In order to mitigate this, SIA has collaborated through various partnerships. This includes an extension of its network, to the inner domestic points in may parts of the world.
Goh said during the Q&A session at its analyst and media briefing (for the half year results ended 30 September 2022) that:
“Our multi-hub strategy is really to enable us to participate directly in the growth in that particular region or country, in a way that we cannot do so if we are just based in Singapore.”
With the investment into Air India, this will bolster SIA’s presence in the fast-growing India travel market.
This investment also complements the Singapore hub and could derive synergies from these two markets.
Source: SIA Group Analyst/Media Briefing on H1 FY2023 Results
SIA continues to stay ahead of the aviation industry
SIA was among the first aviation companies to recover to its pre-COVID level as the company kept its resources operationally-ready and injected capital ahead of demand.
This has allowed SIA to capture the pent-up demand in travel when international borders reopened.
However, downside risks for the aviation industry remain.
Among some of the key risks include high fuel costs, the emergence of new COVID variants, persistent inflationary pressure and recession fears as well as the rising geopolitical tensions.
However, given SIA’s track record, I’m confident that the expansion beyond Singapore – to tap the fast-growing market in India – will be another step that keeps SIA ahead of the broader airline industry.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
