Singapore Airlines posts improved Q2 results but faces yield pressure

Courtesy Singapore Airlines

Courtesy Singapore Airlines


Singapore Airlines (SIA) carried more passengers in the second quarter (Jul-Sep 2014) than the preceding quarter, thus boosting the numbers for the first half of its current financial year 2013/14. However, year-on-year, while Q2 carriage saw an increase of 6.2% from 4.53m to 4.81m passengers, the first half posted a lower increase of 4.0% from 9.03m to 9.39m passengers. This translates into a Q2 operating profit of S$97m (US$78m), up 15% from S$84 year-on-year. Yield was lower, thereby pushing the passenger breakeven load factor up from 79.8% to 82.7%.

If the improved Q2 performance is any indication of the trend, then it is good news for the airline which last full year posted an operating profit of S$187m, increasing by only 3% from the previous year’s S$181m, attributed to a growth of 7.3% in passenger carriage and sale of aircraft spares and engines. A straight line projection would lift SIA’s full-year expected profit above $190m but below $200m. With Europe showing positive signs of recovery, particularly of premium travel, this should augur well for SIA. But with falling yield and the absence of an aggressive marketing thrust while not ignoring its latest enticement of increased checked-in baggage allowances, it will be a challenge.

SIA is projecting higher advance bookings for the coming months compared to the same period last year. This is a critical factor as Q3 performance cashing on the year-end peak season will determine more accurately how the profitability graph will shape up for the full year, not forgetting the dismal Q4 that it experienced last year dipping into the red. Competition, it seems, is becoming increasingly a major concern of the airline. The outlook, according to SIA, “remains challenging amid continued global economic uncertainty.” With airlines such as British Airways reporting impressive results and close rival Cathay Pacific expressly optimistic about improved performance, the real challenge is one posed more by the competition than by the world economy continually dragging its feet. Fuel, a perennial bugbear, was given scant mention in the statement that SIA issued, the usual expectation that prices are likely to remain high and volatile.

For an airline not known to shy from a good fight, SIA has become somewhat diffident about its prowess in the open but changing landscape. Increased competition from Middle East carriers, the mega partnership of Qantas and Emirates, and the encroachment of low-cost operators have shaken the ground on which SIA stands somewhat. Naturally that calls for more aggressive counter measures. In that context, SIA is expecting increased pressure on yields resulting from “ongoing promotional activities necessitated by intense competition.” Yes, indeed, if only you can have the cake and eat it!

Wholly-owned subsidiary SilkAir posted a lower Q2 operating profit of S$8m compared to S$19m for the same quarter last year, attesting to the intense competition in the region. The plunge of almost 58% was attributed to passenger carriage growth not keeping pace with capacity increase apparently aimed at developing new markets in the region. There was in fact an increase of 3.0% in the number of passengers carried, from 802,000 to 826,000 for Q2 year-on-year. The inability to fill up capacity points to the limited growth facing SilkAir.

SIA did not report any numbers for budget subsidiary Scoot but mentioned that the carrier would be launching flights to Hong Kong and Perth before the end of the year. So much for the competition when both destinations are already served by SIA itself and Tigerair. Hong Kong will see increased competition when Jetstar Hong Kong, a joint venture between Qantas and China Eastern Airlines and a local investor, commences operations before long.

SIA Cargo continued to incur losses, albeit reduced (S$31m) when compared with the same second quarter last year (S$31m). Cargo demand is expected to stay flat.

Including SIA Engineering which posted a lower operating profit by 12.5% at S$28m, the SIA Group earned an operating profit of S$87m in Q2, an increase of S$17m or 24.3% over the same quarter last year. At half-time, the operating profit was S$168.6m, an increase of 18.4% over S$142.4 of the same quarter last year. Looking ahead, the interest is not whether SIA would do better this year after the disappointment last year. That much may already be in the bag. The moot question is: By how much? It will depend largely on Q3 performance since the last quarter is generally a slow one.

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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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