SingPost, SBS Transit may not see lasting boost from transport fare, postage rate hikes

SBS Transit and Singapore Post (SingPost) do not usually excite investors, but they did last week on news that the public services they provide will soon cost more.

On Monday (Sep 18), the Public Transport Council (PTC) said bus and train fares will be increased by 7 per cent with effect from Dec 23. This is a significantly larger public transport fare hike than last year’s 2.9 per cent, and the previous year’s 2.2 per cent.

The following day, SingPost said it will raise domestic postage rates by 20 Singapore cents with effect from Oct 9. This translates to a more than 64.5 per cent increase in postage rate for standard regular mail – from the current 31 cents to 51 cents.

SingPost said it will also eliminate the weight criteria in its domestic postage rate structure. This will see the postage rate for standard large mail weighing up to 500 grams being reduced by as much as 35 cents or some 30.4 per cent.

These increases in postage rates and public transport fares were not entirely unexpected. The PTC conducts a public transport fare review every year; and SingPost said in its Q1 FY2024 business update last month that it was seeking approval from the Infocomm Media Development Authority (IMDA) for postage rate increases.

Yet, the size and timing of the hikes seemed to reflect confidence on the part of the authorities that consumers are in good shape to cope with higher costs as the post-pandemic economic recovery continues.

This boosted shares of SBS Transit and SingPost, despite generally bearish market sentiment.

SingPost climbed 5.1 per cent last week, closing Friday at S$0.515.

SBS Transit ended last week 2.3 per cent higher at S$2.64. ComfortDelGro – which owns 74.4 per cent of SBS Transit – was unchanged at S$1.28.

The Straits Times Index closed Friday at 3,204.82, down 2.3 per cent for the week.

Waning mail demand

The excitement generated by the hikes in public transport fares and postage rates may prove fleeting, though.

Companies that provide public services are often – quite rightly – not allowed to respond to shifting demand or cost inflation with their own pricing strategies. This may lead to protracted periods of subpar profitability.

SingPost said in its most recent annual report that its mail volumes had declined by more than 40 per cent from FY2019 to FY2023. (SingPost has a Mar 31 year-end).

The company reported a 70.3 per cent decline in earnings to S$24.7 million for FY2023, despite a 12.4 per cent rise in revenue to nearly S$1.9 billion. Operating profit declined 16.9 per cent to S$93.2 million.

SingPost attributed the reduced profitability to its post and parcel business, which sank into an operating loss of S$15.9 million versus an operating profit of S$24.9 million in FY2022. Revenue for this business division fell 16.2 per cent in FY2023 to S$521.3 million.

SingPost said last week that the higher postage rates will help it address the red ink caused by the persistent decline in postal volumes as well as rising costs.

Yet, the higher postage rates will do nothing to halt the decline in postal volumes. It may just be a matter of time before the red ink begins flowing again.

SingPost is now working with IMDA to come up with a long-term strategy to make its postal operations commercially sustainable.

This is a tall order, in my view. How can a business that is losing its relevance in the face of new technology be made commercially viable?

These days, I only check my mailbox once every few weeks – and only because I fear it becoming jammed up with junk mail.

The way I see it, IMDA should consider allowing SingPost the flexibility to adjust its postage rates as it pleases every year in order to maintain the profitability of its mail business.

Neither taxpayers nor SingPost shareholders should have to foot the cost of a public service that the public increasingly does not need.

Affordable transport fares

Unlike SingPost, public transport operators such as SBS Transit provide a service for which there is a great need.

There was an average of 6.4 million bus and train rides per day in 2022 – a significant improvement from 5.3 million rides in 2021 and five million rides in 2020. In 2019, before the pandemic struck, there was an average of 7.7 million bus and train rides per day.

The PTC said last week that the 7 per cent fare adjustment translates to additional fare revenue of S$137.4 million – S$20.9 million of which will go to SBS Transit.

SBS Transit is required to contribute 15 per cent of this increased fare revenue – or S$3.14 million – to the Public Transport Fund.

DBS Group Research estimates the fare hike will add S$14.7 million to SBS Transit’s annual earnings. This, in turn, will boost ComfortDelGro’s bottom line by S$11 million.

For H1 2023, SBS Transit reported earnings of S$34.8 million on revenue of S$744.4 million. ComfortDelGro reported earnings of S$78.5 million for the six-month period, on revenue of S$1.86 billion.

One troubling thing for shareholders of SBS Transit is that fare adjustments by the PTC may prioritise affordability for commuters over immediate cost recovery for the public transport operators.

Indeed, public transport affordability has improved over the past decade. Expenditure on public transport as a percentage of income among households in the second decile was 2.4 per cent last year versus 3.1 per cent in 2013.

Among households in the second quintile, expenditure on public transport as a percentage of income was 1.7 per cent in 2022 compared with 2.2 per cent in 2013.

Yet, the latest 7 per cent fare hike announced last week was well below the maximum allowable fare increase of 22.6 per cent – which comprised a 12-percentage-point increase under the current fare formula and a 10.6-percentage-point increase rolled over from last year.

The PTC said it will defer the remaining 15.6 percentage points to future fare review exercises. To cover the deferred fare adjustment, the PTC asked the government for an additional subsidy of S$300 million.

The government provides more than S$2 billion in operating subsidies annually across the bus and rail sectors.

To be clear, I am not arguing against keeping public transport fares low. Affordable and efficient public transport contributes to the vibrancy of Singapore’s economy.

Given all the subsidies involved, however, I wonder if the goal of public transport affordability could be even more effectively prioritised if SBS Transit were to be taken private by a government-related entity – as SMRT Corp was in 2016 – so that the interests of investors no longer need to be considered.