What could be ailing Singapore Airlines?

Singapore Airlines (SIA) Group’s profit for Apr to Jun tumbled 82 per cent year-on-year, from S$253 million to S$45 million – what analysts described as “shocking” results. SIA the airline did worse, incurring an operating loss of S$36 million in contrast to a profit of S$136 million previously, although the first quarter of its financial year is generally the weakest.

SIA blamed high fuel prices in spite of hedging gains, economic uncertainties and a market affected by the Japanese earthquake and tsunami as well as political unrest in the Middle East. According to SIA, average jet fuel prices jumped 46 per cent, contributing largely to an expenditure increase of 11 per cent that outpaced revenue growth at only five per cent.

However, if that is any indication of the trend, SIA’s closest rivals in the region – Australian Qantas and Hong Kong’s Cathay Pacific Airways – seem to be bucking it. It is likely the volatile fuel price, if it continues to soar, will weigh heavily on these airlines as well, but the question is whether it is to the same extent.

Qantas, which will be announcing its results later this month, expects to post better-than-expected pre-tax profit of between A$500 million and A$550 million for the year ending Jun 30 2011, which covers the dismal quarter reported by SIA. This is boosted by a windfall of A$95 million as compensation from engine-maker Rolls Royce over a mid-air blast incident that led to the grounding of the Qantas A380 fleet. Note that Qantas too has its share of flight disruptions from a string of natural disasters; besides the earthquake and tsunami in Japan, there were the floods in Australia, earthquake in New Zealand and more recently Chilean volcanic eruption.

Qantas chief executive Alan Joyce said in a pre-emptive statement: “Considering the challenges facing the aviation industry, this is a very good result.”

Cathay posted record profits last year, overtaking SIA as the world’s most profitable airline. The Cathay Group recorded an attributable profit of HK$14,048 million for 2010, up from HK$4,694b million the previous year. At the time of the announcement in Mar this year, Cathay chairman Christopher Pratt said: “Demand is expected to remain strong in 2011, but this expectation could be undermined if the current (or any higher) level of oil prices were to reduce global economic activity.” It is to be seen if Cathay would suffer as much the same downturn as SIA.

In any case, what could be ailing SIA much worse than its rivals?

For one, the downgrading of air travel and slow recovery in premium travel continue to impact SIA. In the heyday of booming business, SIA was the doyen of premium travel. While that is gradually returning, the spread seems to be thinning out among the competition. At the same time, economy class travel has become highly price-sensitive, enabling the encroachment of budget carriers on the turf of full-service airlines. That has driven SIA to finally decide to set up its fully-owned budget subsidiary – in addition to Tiger Airways of which it already has a 32.9 per cent stake – to commence operations within a year.

Here again, SIA`s decision may have come late, losing out on time that had helped Qantas push the Jetstar advantage across the region. There is already a slew of other budget carriers, including Asia’s largest operator AirAsia which has also ventured into the long haul under the AirAsia X banner. Cathay has said it would not follow in the footstep of SIA but would instead introduce a premium economy class to cater to downgraders. Yet, perhaps, better late than never.

Then again, while SIA has assured its customers it will not happen, will it lose focus in its effort to manage a stable of four diverse airlines – SIA itself, SilkAir, Tiger and the new budget subsidiary – offering different products and service levels?

Full-service airlines that have sired budget subsidiaries – United Airlines and TED, Delta Airlines and Song, Continental Airlines and Lite, Air Canada and Zip, British Airways and GO, Scandinavian Airlines and Snowflake, to name a few – hardly succeed as ultimate champions on both fronts. With a veritable record of excellence, can SIA prove its prowess otherwise?

SIA’s growth appears to be hampered by the maturity of its traditional markets while Cathay continues to enjoy its gateway advantage to the vast Chinese market. Airlines such as Emirates, Etihad and Qatar Airways have intensified the competition in the Middle East. Qantas is pushing into growth areas beyond the Australian borders, through Jetstar and its intention to further utilize Singapore (which it has been doing for many years) as its base to extend its network.

SIA may find the competition becoming increasingly more challenging in the context of Singapore’s liberal open skies policy that has Changi Airport as its priority – SIA’s growth in recent years has been far below that of the airport.

The SIA management knows very well it is under pressure to find new initiatives to support its growth. The new budget subsidiary is first turf protection; growth may come after. With new leaders at the helm, can we expect more of the magic that has so successfully set SIA apart from the competition?

If it is any consolation, analysts who did not expect the steep decline in SIA’s 2011/12 first quarter’s profit are optimistic it must get better the next quarter. That sentiment speaks a lot about the confidence the industry has in the airline.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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