Singapore Airlines buckles up for stormy skies

IF it is any indication of the severity of the airline industry heading into a tailspin, it is when Singapore Airlines (SIA) – the world’s most profitable airline – announces it is taking more drastic measures to stay afloat. In recent days, the national carrier sent out several signals that demonstrated its vulnerability.

SIA became the latest airline in a long list of carriers to publicly reveal a fuel hedging loss, amounting to US$226 million (SGD341 million) in the fiscal quarter ended December. The numbers are expected to become worse in the following quarter since SIA has hedged 44 per cent of its fuel requirements at US$131 a barrel, compared to today’s price that hovers around US$34 a barrel.

Ironically, the continuing free fall of the oil price is not good news for many airlines which had misread the trend, thanks to analysts who had predicted that the oil price would hit $250 a barrel by 2009. Today’s price is more than thrice below the record of US$150 a barrel reached in July last year.

The real devil is the struggling global economy which has reduced the demand for air travel worldwide. The impact of the rising oil price a year ago paled by comparison. Then, many airlines resorted to raising fuel surcharges but cushioned the increase with some timely house-cleaning to improve productivity, introducing new cost-saving equipment and procedures.

However, the situation has become indomitable. Unless the global economy starts kicking again, there is little that the airlines can do but to downsize their operations to fit the shrinking market. Because of the small domestic demand by comparison, SIA is particularly affected. Its fortunes are tied largely to the long haul, and it derives 40 per cent of its revenue from premium travel. The decision to be in the forefront of the all-business-class flight to New York and to Los Angeles – introduced only last year – could not have been more ill-timed, if not altogether a somewhat ingenuous gamble that other big airlines like British Airways and Virgin Atlantic too considered but had not the courage or confidence to take on.

It is therefore to be expected that the latest slew of measures announced by SIA include cutting back on the all-business-class flights to New York and to Los Angeles. Other measures include the withdrawal of services to some destinations, the reduction of frequencies for certain routes and the use of smaller aircraft. Better sitting the aircraft idle than incurring costs without revenue – the lesser of two evils.

It does not look like the storm is abating any time soon. The International Air Transport Association (IATA) has forecast an industry loss of US$2.5 billion for 2009, making it “the worst revenue environment in 50 years” according to its chief Giovanni Bisignani.  Asian-Pacific carriers will be among the worst hit.

SIA does not anticipate a return to normalcy until at least April 2010. Others think it may stretch to 2011. But as the storm worsens, the harsh reality that confronts SIA is how the competition will play out differently. Exiting unprofitable routes makes business sense, but it also strengthens the competitors and opens opportunities for them to build their bases.

The competition is likely to be flat and driven by the dollar. More airlines will drop their fares as they become less differentiated by the olive in the martini. SIA will be challenged to balance its enviable frills against what its customers are willing to pay for such perks in the current climate, though its reputation for reliability and the excellent service provided by its in-flight crew will continue to stand it in good stead.

It has often been quoted that if there’s one airline that will make through the perfect storm, it is SIA. No doubt about it. It has fared better than most airlines even as the crisis deepens. For example, its hedging loss of US$226 million is far below that of the reported losses incurred by Cathay Pacific Airways (US$980 million), China Eastern Airlines (US$903 million) and China Airlines (US$629 million).

More significantly, SIA has been quick to react to the crisis as demonstrated by the slew of measures it is introducing to cut losses. It is a reality check that many others put off until it is too late. Retreating into maintenance mode will help SIA steer safely through the storm, but it must also be circumspect about its actions that they do not set it back unduly when the dark clouds finally clear. At the same time, SIA must continue to seek opportunities in adversity that only an airline of its standing can take advantage of.
all-business class

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About Dingzi
Writer by passion, with professional expertise in aviation, customer service and creative writing. Aviation veteran, author, editor and management consultant. Besides commentary on business issues and life-interest topics, travel stories and book reviews, genres include fiction, poetry and plays. Nature lover who abhors cruelty of any form to animals, and a tireless traveler. Above all, a dreamer.

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