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What next for Singapore Airlines after 4Q loss?

SY-9V-SME-2017-02-05-01Cr-SIA-A359-TOS

sia is banking on the a350s to revive its revenues. pic/sim kok chwee

As it prepares to celebrate its 70th year of operations, Singapore Airlines (SIA) is facing bleak prospects in the near term. SIA announced on May 18 it had posted annual net profit of SGD360.4 million (vs. SGD804.4 million profit in the previous financial year) but in the fourth quarter (January-March 2017) it registered a net loss of SGD138.3 million (vs. SGD224.7 million profit in 4QFY16).

Read the official release here.

The airline attributed the loss to weaker operating profit and SIA Cargo’s SGD132 million provision for competition-related issues. Unlike many other regional airlines, whose losses were due to poor management and leakages, many of SIA’s problems are structural and some beyond its control.

For instance, its over-reliance on the premium segment of the business, which had previously contributed immensely to its coffers, means SIA now has to find new sources of revenue as profits from the front-end of the aircraft has deteriorated every year following the Lehman financial crisis in 2008.

SIA was also slow to react to the advent of low-cost carriers (LCCs) in the region and it wasn’t adequately prepared for the onslaught brought about by the Gulf carriers as well as mainland China’s three main airlines.

In order to compete with the Middle East airlines and China’s rapidly improving carriers, SIA has had to lower its fares. Hence, the severe yield decline (down 3.8% to 10.2 Singapore cents) in both the premium and economy sectors.

The positive for the SIA Group, as has been observed for the past 2-3 years, is in its discount segment, with Tiger Airways and Scoot – housed under Budget Aviation Holdings – registering an operating profit of SGD22 million.

SY with Rico BBC

Endau Analytics discussing sia’s financials with the bbc’s rico hizon at the beeb’s singapore studio mid-week

What can SIA do to reverse the slump? Not much, really. What it can do, the airline has already done it. The reality is, the dynamics and landscape of the commercial airline business have changed – permanently.

In Southeast Asia it began with the arrival of the discount airlines post-9/11, the growth of the Gulf and mainland Chinese carriers and the development of new, more fuel-efficient aircraft that can bypass key hubs such as Changi and Chek Lap Kok.

With parent airline SIA in decline, the Group is understandably aggressively pushing Scoot – its low-cost, long-haul arm – to maintain the momentum, at least in trying to increase the volume of passengers. This summer Scoot, with its fleet of B787 Dreamliners, will begin flights to Athens. Honolulu is probably next and it isn’t unthinkable that the Group may even offer discount travel (via Scoot, of course) to newer destinations in Europe and North America by 2020.

China Airlines Flyaway PhotosJessica Oliver rms276872 cns2014nef

a scoot b787-9. pic/boeing

Fortunately for SIA, it has deep pockets. As of March 2017, the company has cash reserves of at least SGD3.3 billion. The carrier will take delivery of close to 100 aircraft within the next 5-8 years, including Airbus A350s and Boeing 777-9s and 787-10s. Seven A350ULRs will be deployed next year for direct flights from Changi to New York and Los Angeles; SIA is banking on these Airbus planes to rejuvenate its premium income.

In the short-term, SIA is also likely to expand its joint venture Vistara outfit in India as well as continue to explore potential business deals in China.

But how will SIA react to this latest setback? The good old days are gone forever, as are the days when SIA could almost guarantee its investors decent returns. The airline’s stock price has stagnated for several years now and will no doubt take a hit in the coming weeks as the market digests those feeble figures.

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