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Aviation History
1986
1986 - 0040.PDF
sale of aircraft rather than operations. That feature has led some stock analysts to ask questions about the public offer's true value. The carrier had profits last year of S$145 million ($66 million) on revenues of S$3,000 million. For the nine months to last August 31, unaudited profits were S$130 million on revenues of S$l,300 million. While it is tempting to compare the two neighbouring carriers, it can also be misleading. SIA operates solely abroad—Singapore is scarcely big enough to fly across—while MAS must maintain extensive domestic services as well as its overseas routes. Many internal routes are provided as a (Government-dictated) social service and are run at a loss. In addition to its long, straggly peninsula, Malaysia has two states, Sabah and Sarawak, sharing the island of Kalimantan (Borneo) with Indonesia separated by several hundred miles of the South China Sea. As for similarities, both carriers had problems last year in expanding their network, both involving Britain. MAS finally got its fifth weekly service to London, after 18 months of haggling, but SIA is still fighting for its Manchester service. Most of the Malaysian line's inter national destinations are in Asia, but it intends to add Los Angeles in July (and maybe San Francisco later) after Rome and Cairo. Managing director Abdul Aziz describes the already crowded Los Angeles destination as the gateway to a "big, untapped market". There is a lot of traffic between Malaysia and the USA, and it is growing. But the sector is saturated and profit margins may prove wafer-thin. After months of resolutely declining any comment, Cathay Pacific Airways said in late November that it will offer 25 per cent of its equity to the public in the first half of 1986. The Hong Kong carrier is the biggest profit centre for Swire Pacific, which holds 70 per cent of Cathay's shares. The Hong Kong and Shanghai Banking Corporation has the remaining 30 per cent (and three Swire directors on its own board). The flotation, which is expected to raise some HK2,500 million, will be of existing shares, and is likely to leave Swire with 52 • 2 per cent and the bank with 22 • 5 per cent. "We are not just following fashion. We're doing this for our own very good reasons and have had it under active consideration for more than a year," says Michael Miles, chairman of Swire and Cathay. April or May seems the likeliest timing for what will be Hong Kong's biggest share issue. As with the others in the region, Cathay says it wants as many individuals and staff to get shares as possible. One reason for the unusual statement of intent was to alert the market to a major offer and allow small investors to prepare for it. Swire Pacific reported operating profits for the year to December 31, 1984, of HK$1,700 million ($217 million), up 25 per cent on 1983. While no breakdown is ever officially given by the company, the aviation division probably accounted for about HK$1,000 million, or 59 per cent of that. The current year started less robustly, and somewhat lower earnings are expected despite a pickup in the second half. Miles will not put a price on the shares, but suggests that they will be offered at a p/e ratio of anything from 6 to 11. To get that (not particularly helpful) guess, he compares the deregulated and competition intense American market with tightly regulated, one-carrier Singapore. SIA was offered at 11-3. Hong Kong analysts says a realistic pitch for Cathay would be 10-11. Speculation grew immediately that the share offer was to some extent dictated by political considerations. The carrier has no declared immediate need for that much cash—other than to reduce debt, which is not a critical factor—but may have felt it needed to establish more firmly its image as a Hong Kong rather than a British carrier in the light of the colony's eventual return to Chinese sovereignty. Swire's last balance sheet showed a total debt of HK$6,500 million, of which HK$1,700 million was as provisions for possible resumption of aircraft and other equipment sold and leaseback. The aggre gate of future payments for aircraft and related leasing was put at HK$3,300 million, excluding costs of resuming ownership if options were exercised. It is not necessarily the cheapest way to operate. The cost came to HK$732 million in 1984, against HK$346 million, the year before. Including depreciation, the group paid HK300 million or 61 per cent more for use of aircraft and related equipment. The advantage of Swire's method is that it can pay dividends sooner. The disadvantage is that such profits may not recur. Investors now have a stake in SIA's fleet, which includes 747-300s, and Cathay's fleet of nine TriStars and ten 747s im. wm iSSfe M M mm mm mm MM. m ^S^^e^^K ••MIIIMII HI,,,,,,, BiG **^ T/zve^/act*?^ s*/*9*.sMe£f\ TOP tg*:|r 40 FLIGHT INTERNATIONAL, 4 January 1986
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