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SQ, MH & Value Alliance

16 May 2016

SIA_B777 Everett

An SIA Boeing 777 at assembly line in Everett, Seattle. Pic/Shukor Yusof

SIA

Singapore Airlines (SIA) on 12 May announced its 4Q and annual earnings – net income for FY15/16 of SGD804 mln (USD585 mln) from SGD368 mln in FY14/15. Fourth quarter (Jan-Mar 2016) profit grew 40% to SGD225 mln (from SGD184 mln in 4Q15).

At first glance the figures are fabulous for any carrier but to put things in perspective, they are just about a quarter of the profit Emirates made during the same period. Of course, SIA remains one of the undisputed top global airlines and the profit it just posted is not to be scoffed at…

That said, yields have fallen yet again – 10.6 SG cents in FY15/16 compared to 11.2 SG cents the previous year. And yields are a good indicator of the health of an airline. Our observation is that SIA’s yields have, for the past 3-4 consecutive years, weakened considerably.

A big chunk of the profit posted came from reduced fuel cost, and if oil prices start to inch up, expect to see less stellar numbers in the coming quarters. SIA has been cutting fares significantly, even on business class, something unheard of pre-Lehman Brothers financial crisis.

Its two discount units – Tigerair and Scoot – performed well but not SIA Cargo. This trend likely will continue for the near future.

Meanwhile, SIA reportedly is preparing to hand back five Airbus A380s to lessor Doric when its 10-year lease expires in 2017. Read here. The carrier has five more new A380s due to join its fleet. The A380’s second hand market is unknown and neither is its residual value, but from our conversations with lessors, it can only be described as dismal.

SIA is being squeezed hard by the ME 3 (Emirates, Etihad, Qatar Airways) carriers as well as intense competition from low-cost carriers that are increasingly enlarging their market share within Asia Pacific.

The airline is working hard to improve its numbers in India via Vistara and policy changes within India’s aviation sector might see SIA double its investments in the sub-continent.

Other strategies SIA is looking at include working with other airlines (United, for example) and deploying its Airbus A350XWBs in the next few years to compete more effectively against the ME3. Bottomline is: SIA’s good old days are gone. Forever.

MAB

Across the border from Singapore, Malaysia Airlines Berhad (MAB) also announced some numbers. The flag carrier said Jan-Mar 2016 it made MYR14 mln (USD3.5 mln) from a loss of MYR450 mln in the same period in 2015.

Much of this profit, however, didn’t come from operations. Rather, lower fuel oil prices, a shrunken workforce and reduction in its fleet and hence, capacity. Nothing to gloat about, really.

In April MAB offered a one-for-one deal for anyone who bought a first or business class ticket – talk about desperation! It said guests would also enjoy 50kg and 40kg of checked-in baggage for first and business class, respectively. But who’s to say the airline won’t impose a ban on luggages again, like it did in January this year?

Outgoing MAB boss Christoph Mueller said the airline staff would get a new look, too, by way of a new uniform design that will be ready in 3Q16. Not sure how much this cosmetic uplift will cost but we reckon there won’t be much (or any) change left from the MYR14 mln profit after the redesign of attire.

B777_Galley MH crew

Does she need a new attire? MH crew hard at work in the galley of a B777. Pic/Shukor Yusof

In our view this change is unnecessary for now, given the fragile financial profile of the airline. We believe at this juncture a rebranding of MAB does little or nothing to ensure profitability unless the core of the company is overhauled. That would require a complete restructuring of the people who were responsible for the airline’s current predicament to begin with.

At least we know Mueller is realistic when he said: “We will not make a profit for full year 2016.” When will MAB make profit then? To this, Mueller provided more clues – “we haven’t been smart buyers in the past… many goods and services we purchased was 20% to 25% above market rates…” This begs the question: is Mueller saying previous CEOs and management of the airline weren’t smart people, that they were foolish to pay up to 25% above market rates?

Value Alliance

On 16 May the world’s first pan-regional low-cost carrier alliance was revealed in Singapore. It’s called Value Alliance and its members are Tigerair Australia, Cebu Pacific, Cebgo (a unit of Cebu Pacific), Jeju Air (South Korea), Nok Air (Thailand), NokScoot (Nok+Scoot Singapore), Vanilla Air (Japan) and Tigerair Singapore.

A320 CEBU MSN5442 TO

Value for money? Cebu Pacific is one of Value Alliance’s members.

What value does Value Alliance bring to passengers? Tigerair Australia’s boss said the grouping provides greater value, connectivity and choice for travel throughout Asia Pacific. Read here. In other words, it benefits the airlines more than its customers.

Our first impression is that this grouping smacks of a cartel. The airlines in the group served over 47 million passengers from 17 hubs in 2015. It is no secret that competition amongst LCCs is intense, cutthroat even. Discount carriers have sacrificed yields for volumes by offering fares that are sometimes cheaper than a jug of beer. Not anymore… Value Alliance is a sign that LCCs are keen to work together and stabilize airfares, so there won’t be a wide disparity in prices across the region.

Notably absent are AirAsia, Jetstar and Lion Air – three prominent and influential discount airlines. It isn’t clear why the trio isn’t there but we believe they don’t see a clear benefit in joining. At least for now. Or perhaps they see this new grouping as a combined effort to undermine them? Let’s hear what AirAsia boss Tony Fernandes has to say in the next few days.

Will passengers pay less to fly the airlines in Value Alliance? Initially, probably yes, given that promotions typically follow such a major announcement. But an airline’s raison d’être is to make money for its shareholders, not customers. So at some point airfares will be more realistic. Ancillary choices and new technologies introduced by Value Alliance cost money and airlines don’t go out of their way to provide new products unless they benefit from it.

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