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Singapore Airlines – beyond the 3Q numbers

5 February 2016

A350-900ULR_SIA_

SIA Airbus A350-900ULR

Source: Airbus

Singapore Airlines (SIA) posted a net profit of SGD275 million (USD195 million) for its third quarter ending 31 December 2015. That’s up 36%, compared to the SGD202 million it registered in the same period a year before. The superior numbers were largely due to steep falls in oil prices (a 24% fall in fuel expenses) as well as gains from the sale and leasebacks of some aircraft.

Let’s look at some other key numbers for the 3Q: operating profit was up SGD288 million while losses from jet fuel hedges amounted to SGD72 million and forex losses were around SGD77 million.

SIA said in an official release: “While more relief could arise from lower fuel prices, which have declined to a 12-year low, fuel continues to make up a significant portion of the Group’s expenditure, with 46.6% of the Group’s fuel requirement in the fourth quarter hedged at a weighted average price of USD90 per barrel.” (see SIA 3QFY15/16)

That’s quite a significant volume hedged at prices well above the current levels of jet fuel per barrel (USD43/bbl as of end-January). SIA shares ended trade on 4 February at SGD10.82 (-0.9%) before the results were announced after market close. The stock is likely to climb up today (5 February) on the back of the 3Q results.

A stagnant SIA?

That said, and despite the admittedly flattering figures, we believe there is cause for concern in the long term. For a start, SIA’s over-reliance on the premium segment of the business has seen its margins in the past 3-4 years eroded considerably. That’s partly because fewer business travellers are willing to pay the fares SIA charges for seats at the front of the aircraft; and more importantly, there are now fewer premium travellers.

Secondly, the three major Middle Eastern carriers (ME3) namely Emirates, Etihad and Qatar Airways, have eaten a sizeable portion of SIA’s breakfast, lunch and dinner. In almost all aspects (cost, efficiency, frequency, network, reliability and even in terms of cabin crew “aesthetics”), they now have the edge over an airline once dubbed “A Great Way To Fly”.

Not anymore. Granted, SIA remains among the best players in the firmament, but it no longer is the star player, the fiery forward that scores the goals. In soccer parlance, SIA is now reduced to the role of a “defensive midfielder”, surrounded by a galaxy of Gulf goal poachers. In Italy, they define this style of playing as catenaccio, with the emphasis more on defence than attack.

Does SIA have a vision of what it would like to be 5-10 years down the road? What has its skipper (CEO) got in mind? After all, he’s led the team for five years now and apart from the decline in share price (over the period), there’s also been a marked deficiency in quality and morale, in our view. One could even go so far to say SIA is losing (if it hasn’t already) its shine.

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Plenty of real estate on SIA A380 J class. Pic/Shukor Yusof

Time for new tactics

As SIA readies to take delivery of its first Airbus A350XWB (there are 67 on order), we won’t have long to wait to see if the new aircraft, probably the best twin-aisle commercial airplane in terms of economics and élan in the market today, can help rejuvenate the carrier. We believe SIA’s decision to restart non-stop direct flights to the U.S. using seven A350-900 ULR (Ultra Long Range) aircraft is likely to reignite the romance in ultra long-haul air travel. It would be a bonus, too, if the airline made some money along the way…

Indeed, SIA’s decision to shift the fleet of Boeing 787 aircraft it ordered to low-cost subsidiary Scoot – and instead employ the A350XWB as its flagship workhorses – is a very smart and savvy move. While the Dreamliner does have its advantages over certain sectors, overall the A350XWB provides the depth and dimension to allow SIA to keep pace with the ME3 airlines (Qatar has ordered 80 and Etihad 62).

All things being equal, we do recognise the challenges SIA is confronting as well as the inherent disadvantage of Singapore being such a small country. There are not many countries in the world with a similar population and physical size as Singapore that has managed to produce an airline of SIA’s calibre.

Yield management (and erosion) will continue to be the bane of SIA. The airline has the lowest revenue yield among the major carriers (just over 10 Singapore cents and overall down some 12% in the past three years). The reason for this is that SIA is a huge sixth freedom airline.

“Sixth freedom” means a carrier is allowed to fly from Country A to ferry passengers from Country B to Country C via Country A. For example: Mumbai-Singapore-Tokyo. In order for SIA to consistently make profits, its cost of production must remain very low. Even when it succeeds in constantly lowering production costs, it needs to ensure people want to fly SIA.

Our opinion on SIA is based on many factors, especially the fast and often changing landscape of the aviation industry and a global economy whose growth is currently tepid at best. The U.S. recovery is ongoing but remains fraught with difficulties, while business sentiment in Europe is still bad.

A sharp rise in oil prices and further weakening of the Singapore dollar (SGD) would raise costs and squeeze margins even more, not to mention persistent threats of terrorism and cross-border pandemics (keep a close watch on Zika…).

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