Singapore Airlines disappoints

Courtesy Singapore Airlines

Courtesy Singapore Airlines


Singapore Airlines (SIA) prefaced its report on its annual performance (2012/13) with attribution to high fuel prices and lower yields owing to a weak global economy for its lacklustre results. The announcement concluded with an equally dismal outlook, saying very much the same thing, warning that “the global economic outlook remains uncertain with the ongoing weakness in the Eurozone and sluggish recovery in the United States” and that “yields are likely to remain under pressure amid weak economic sentiment.”

So what’s new, indeed?

While the results per se disappoint, the presentation disappoints even more so, simply because it does not provide any excitement going forward, almost in resignation to whatever the circumstances that will decide its fate. Perhaps it is because we have come to expect so much more from an airline that has for a long time been considered one of the world’s most profitable, most innovative and most gungho airlines.

Group operating profit fell 19.8% to S$229 million (US$184 million) with only the parent company registering an increase of 3% from S$181 million to $187 million on the back of a growth of 7.3% in passenger carriage, and cushioned by the surplus on sale of aircraft spares and spare engines. SIA Engineering and SilkAir reported lower profits, the former from S$130 million to S$128 million (1.6%) and the latter from S$105 million to S$97 million (7.6%). Losses for SIA Cargo deepened by more than 40% from S$119 million to S$167 million.

The not so-good-signs for SIA the airline are falling yields, a weak fourth quarter of losses and relatively flat demand in forward booking for the next few months. In fact, SIA’s last quarter performance ran contrary to industry performance which, according to the International Air Transport Association (Iata), saw air passenger travel growing by 5.9%, boosted by emerging markets. Iata chief Tony Tyler added: “Strong demand for air travel is consistent with improving business conditions.” However, developed markets were experiencing relatively low growth. That could explain SIA’s limited growth – operating largely in mature markets that are highly competitive.

The pressure on yield will continue to be a challenge – and with time, a bigger challenge – as SIA faces increased competition from rival airlines for not only the long haul but also regional routes. Middle-East airlines such as Emirates, Etihad Airways and Qatar Airways in particular have become very aggressive in the premium air travel segment, investing heavily in the product and forging strategic partnerships with other operators. Their increased popularity is likely to also shift hub airport activity to the Middle East, threatening Singapore Changi Airport’s hub status in east-west connections between Asia-Pacific and the regions of Europe and Africa. No doubt SIA will benefit from Changi’s ability to remain a favourite hub among airlines and their customers.

At the lower end, SIA also faces exposure to cheaper options from regional and budget operators that in pre-economic crisis days would have been scoffed at. Consequently SIA is adopting a broad catch-all strategy – that saw the launch of budget subsidiary Scoot last year – which may not necessarily work in its favour as it dilutes its premium product and compromises yield. The other airlines in its fold are not exactly star performers: Little has been reported of Scoot’s performance to date; Tiger Airways in which SIA has a 33% stake is losing money; and SilkAir is operating below capacity growth.

SIA needs a more robust and focussed strategy than that – to lead, rather than follow, and to pro-act, rather than react. In a highly competitive environment, the player that sets the rules wins. High fuel prices and the continuing sluggish state of the global economy are by now givens since they are woes that cut across the industry, and they should be viewed as challenges and not as excuses for poorer performances. The success story of Japan Airlines’ turnaround in spite of these circumstances provides a lesson on not accepting things as they are; the Japanese carrier emerged from bankruptcy to become the world’s most profitable carrier in 2011. Certainly the credit must go to the man at the helm – honorary chairman Kazuo Inamori, who very humbly attributed his success to hardworking employees.

Some observers think that SIA is hugely disadvantaged by its lack of strong partners, but the airline has a speckled history of failed relationships, notably its acquisition of stakes in Virgin Atlantic and Air New Zealand in 1999/2000. Both stakes were later relinquished at a loss. SIA also failed to buy into China Eastern Airlines, which today has entered into a codeshare arrangement with Qantas. To be fair to SIA, a number of other airlines have also bought lemons. The International Airlines Group which owns British Airways and Iberia has reported a first-quarter loss of 630 million euros (US$808 million) – almost five times more than the 129 million euros loss in the same quarter last year – attributed to the poor performance of the Spanish partner.

The choice of the right partner is key to success. SIA has recently increased its stake in Virgin Australia from 10% to 19.9%, added to extensive marketing cooperation in schedule meshing and the use of each other’s premium lounges int heir networks. While there is potential in Virgin making big forays in the international arena, the alliance at best will present a stronger domestic presence for SIA in Australia for now and pales by comparison with the mega alliance (albeit a non-equity partnership) between Qantas and Emirates which is an attempt to shift the traditional competition to a new playing field such as replacing Changi with Dubai as Qantas’ hub for flights on the kangaroo route.

It is always with great interest and perhaps somewhat unfortunately with high expectations that the industry awaits moves by SIA to regain its lead in the business of flying. But the introductory and closing remarks of its latest result announcement provide little to excite the imagination. Somehow it seems SIA prefers to bide its time. SIA chief executive officer Goh Choon Phong said at the results briefing: “We think at some point there’ll be a recovery, and we’ll be well positioned to tap the recovery with the growth and the partnerships that we’ve established within Asia and other parts of the world.”

However, telling the same bleak story may be consoling, but it can also be dangerously self-fulfilling in resignation. The good neBut it seems SIA prefers to bide its time. SIA chief executive officer Goh Choon Phong said at the results briefing: “We think at some point there’ll be a recovery, and we’ll be well positioned to tap the recovery with the growth and the partnerships that we’ve established within Asia and other parts of the world.”ws is that many still believe in the airline’s ability to do better, in spite of gloomy weather. Backed by a strong balance sheet, not many of its rivals have the privilege of believing still that the game is theirs to lose.

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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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