Singapore Airlines’ FY2011/12 unlikely to thrill

IN January 2012, Singapore Airlines recorded 2.9% year-on-year growth in system-wide passenger carriage (measured in revenue passenger kilometres) while capacity (measured in available seat kilometres) grew by 4.2%. As a result, passenger load factor declined by 1.0 percentage point to 78.1%. The number of passengers carried rose by 3.2% over the same month the previous year to 1.44 million.

Overall cargo traffic improved by 12.5% (measured in freight tonne kilometres) while cargo capacity increased by 10.1%. This led to an improvement in cargo load factor of 1.3 percentage points.

This should be an encouraging sign following the FY2011/12Q3 results of a 64% dive in operating profit for the airline to S$137 million (US$108 million) from S$378 million for the same quarter in the previous year, largely because of the high jet fuel cost that rose 34% or by S$316 million. Fuel accounted for about 40% of operating expenditure.

Subsidiaries SilkAir and SIA Cargo also showed a decline in operating profit, respectively by 29% from S$45 million to S$32 million and by 17% from S$48 million to S$40 million.

But is the improved January result a strong enough sign of a stronger Q4 performance to make up for the cumulative decline in net Group profit of the first three quarters, falling 59% from S$921 million to S$374 million? It would seem a long shot, especially when the current quarter is traditionally not its strongest, and in light of no clear signs of a relenting fuel price and a global economy that is finally firmly back on its feet.

Comparing the numbers with the preceding quarter may provide some clue about the trend. The 1.444 million passengers handled in January are still lower than the average 1.452 million passengers in the previous quarter though the difference is insignificant. This is however compensated by an improved performance in terms of revenue passenger kilometres of 1.4% – 7,499.4 million in January compared to the monthly 3Q average of 7,395.1 million. Overall, the trend looks flat in the near term.

The outlook is not a rosy one. SIA has said forward bookings continue to show signs of weakness in Q4. The airline has been particularly affected by the protracted Eurozone debt crisis – passenger load factor (PLF) for Europe fell 3.5 points to 77.8% in January. PLF for the Americas came down 2.9 points to 77.3%. The only region that showed a reasonable PLF growth is East Asia that saw an improvement of 1.5 points to 73.4%. This is expected to improve with renewed increased services to Japan.

In the present climate, managing capacity to be more in tune with market demand will have to be a top priority. The airline has terminated services to Kuwait and reduced frequencies to Riyadh and Cairo. It had also announced plans to cut back on flights to Istanbul, Dubai and Taipei.

In this connection, SIA Cargo too announced a 20% reduction in freighter capacity, citing the continuing weakness in demand and high fuel prices as reasons. In a statement it issued on 22 February, SIA Cargo President Tan Kai Ping said: “The air cargo market has shown weakness for the past nine months, and the depressed demand that we are seeing across all markets gives us little reason to be optimistic about the near-term outlook.” He did not expect any improvement in the first half of the year.

However, the mood is predominantly one of caution with hardly any excitement in the offing. SIA faces stiff competition from low-cost carriers which have captured a sizeable 25% market share at Singapore Changi Airport but the airline is likely to continue to bank on its premium class, which accounts for some 40% of its passenger revenue, for its next big leap. The early optimism about a healthy return of the premium traffic has been somewhat dampened by the stagnant yields in Q3. Against reports by industry sources of the poor load of its A380 Suite, SIA admitted that loads in the Suites have come under pressure as a result of the challenging economic conditions.

While the airline has adjusted capacity to better match demand in recent economic downturns, it firmly believes “there will always be a market for premium travel.” And it is not convinced – not yet, at least – that the premium economy which rival Cathay Pacific Airways has introduced is the way to go. “We do study the concept of Premium Economy from time to time,” said SIA spokesperson, “but we have determined that it is not something that we will introduce at this stage.”

Australian flag carrier Qantas has also embarked on a cost-restructuring programme to keep the flying kangaroo in the air, its immediate priority being a move to cut capital expenditure by A$700 million over the next two years, and considered the delayed delivery of the first three of 15 Boeing 787-8 (Dreamliner) as a blessing in disguise. However, SIA, which is blessed with a strong balance sheet, is less edgy in this connection. The airline has 20 Airbus 350-900s on firm order, scheduled for delivery starting from FY2013/2014, and is in talks with Boeing on the delivery schedule for 20 firm order of the B787-9.

The airline is planning ahead. It has said it is in the business for the long term. Indeed, we have seen how quickly some airlines without that stamina to hold out fall by the wayside. FY2011/12 may not turn out to be as promising as it once was expected to be, and the game belongs to those who can see far enough.

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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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