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High fuel prices and weak load factors erode SIA's profits

13-May-2011

Singapore Airlines (SIA) has recorded a significant improvement in fiscal year profits but has seen its profitability drop over the past few months as a result of rising fuel prices and lower load factors. As a result, SIA is now warning the “twin” challenges of high oil prices and weak load factors could continue to affect its financial performance in the new fiscal year.

SIA recorded a group net profit of SGD1.09 billion (USD878 million) for FY2010/11, a huge jump over the SGD216 million it eked out during a challenging FY2009/10. The profit is also slightly higher than the SGD1.06 billion group net profit recorded in FY2008/09. But it falls well short of the level achieved prior to the onset of the global economic recession in FY2006/07 and FY2007/08, when profits exceeded SGD2 billion.

Singapore Airlines Group net profit: FY2006/07 to FY2010/11

Group revenues in FY2010/11 increased 14% to SGD14.52 billion. This still falls short of the revenue figures SIA achieved in the three years prior to the global recession and is 21% below the peak year of FY2008/09.

Singapore Airlines Group revenue: FY2006/07 to FY2010/11

SIA Group costs increased 5% to SGD13.25 billion, resulting in a group operating profit of SGD1.271 billion compared with just SGD63 million in FY2009/10. This included an SGD851 million operating profit at the Singapore Airlines unit in FY2010/11, compared with a SGD39 million loss the previous year. Singapore Airlines revenues increased 14% to SGD11.74 billion.

SIA's regional airline unit, cargo airline and maintenance business were also profitable and recorded improvements over the previous year. Silk Air turned a SGD121 million operating profit in FY2010/11, compared with a SGD49 million profit in FY2009/10, while SIA Cargo turned a SGD151 million operating profit compared with a SGD145 million loss. SIA Engineering recorded a SGD136 million profit in FY2010/11, compared with a SGD110 million profit the previous year. Silk Air contributed about SGD666 million in revenues while SIA Cargo generated SGD2.79 billion and SIA Engineering SGD1.107 billion in revenues, increases of about 14%, 21% and 10%, respectively.

But SIA Group including the airline struggled in its fiscal 4Q ending 31-Mar-2011 as fuel prices surged and demand dropped. After recording group net profits of SGD253 million in fiscal 1Q, SGD380 million in fiscal 2Q and SGD278 million in fiscal 3Q, the group profit was only SGD171 million in fiscal 4Q, a 38% drop compared with the same quarter last year. The SIA Group, however, has still remained profitable for six consecutive quarters, having pushed back into the black in the second half of FY2009/10 after losses the first two quarters.

 SIA Group net profit/loss over the last eight quarters

Group revenues for fiscal 4Q increased 8% to SGD3.59 billion but costs were up 11% to SGD3.34 billion due primarily to a 34% increase in fuel costs. As a result the group’s operating profit in fiscal 4Q dropped 31% to SGD166 million, by far the lowest of all four quarters. This included a SGD94 million profit at the parent airline.

Singapore Airlines quarterly fuel price and expenditure over the last two years

In addition to soaring fuel costs, a 5% increase in capacity contributed to the higher costs in fiscal 4Q. SIA’s RPKs, however, dropped by 1% in the quarter and as a result its load factor dropped 4.5 percentage points to 74.5%.

The sudden drop in load factor follows RPK and load factor gains in the first three quarters of FY2010/11. For the full year, SIA’s load factor still improved slightly from 78.4% to 78.5% as both RPKs and ASKs were up by 2%. Passenger yield improved by 14% for the year but by only 9% in fiscal 4Q despite the surge in oil prices.

Singapore Airlines' annual load factor and break-even load factor: FY2006/07 to FY2010/11

Singapore Airlines' quarterly load factor and break-even load factor over the past two years

The negative load factor trend has continued into the start of FY2011-12. SIA warns the “twin challenges of near term weakness in load factors and high fuel prices will adversely affect operating performance of airlines”. As a result the SIA Group’s outlook for FY2011/12 is unclear.

SIA says its Japanese routes continue to be affected by the Mar-2011 earthquake with forward bookings remaining weak. It also points out that the global economic picture is uncertain and jet fuel prices “are likely to remain high and volatile in the near term”.

The company adds it will continue to closely monitor demand patterns and will adjust capacity if needed. For now, SIA is planning to increase capacity (ASKs) in FY2011/12 by 6%. This will be achieved by increasing average aircraft utilisation as the total size of its passenger fleet will shrink by six aircraft over the year.

SIA ended FY2010/11 with 108 passenger aircraft, including seven B747-400s, 66 B777s, 19 A330-300s, 11 A380s and five A340-500s. In FY2011/12, SIA plans to take delivery of eight additional A380s while retiring its last seven B747-400s and five 777s.


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