30-Nov-2015 12:47 PM

Scoot approaches profitability & becomes SEAsia’s top performing long haul LCC, boosting SIA outlook

Analysis

Singapore based LCC Scoot is closing in on profitability and has become the best performing long haul LCC in Southeast Asia only three years after it was launched by the Singapore Airlines (SIA) Group. Scoot's losses have narrowed significantly in recent quarters and the LCC is now profitable when excluding the impact of fuel hedging losses.

The Singapore based carrier outperformed all five other Southeast Asian long haul LCCs in the quarter ending 30-Sep-2015. Load factors are the highest in its peer group and Scoot is starting to see an improvement in yields.

Scoot's outlook for 2016 is bright as it starts to enjoy the full benefits of its transition to 787s, lower fuel prices and a closer relationship with short haul LCC sister carrier Tigerair. But a 49% increase in capacity in the fiscal year starting Apr-2016 and several new route launches will likely pressure yields and could delay Scoot's ability to turn its first annual profit until the fiscal year commencing Apr-2017.

Scoot losses narrow significantly in last two quarters

SIA decided to establish Scoot in 2011, the first of several major strategic changes implemented by then new SIA Group CEO Goh Choon Phong. Scoot launched services in mid-2012 with a fleet of 777-200s and by the end of 2013 was operating six 777s to 13 destinations excluding Singapore.

Scoot was highly unprofitable in its first three years as it was operating inefficient aircraft and spooling up its initial routes. Initial load factors were high - generally above 80% - but yields were low as Scoot was constantly offering promotional fares across its network, resulting in a break even load factor well above 100%.

SIA began reporting figures for Scoot at the start of the fiscal year commencing 1-Apr-2015 (FY2016). Scoot incurred an operating loss of SGD22 million (USD16 million) in 1HFY2016 compared to an operating loss of SGD44 million (USD35 million) 1QFY2015. In the most recent quarter ending 30-Sep-2015 (2QFY2016) Scoot had an operating loss of only SGD2 million (USD1.4 million) compared to a loss of SGD19 million (USD15 million) for the same period the prior year.

Scoot had an average load factor of 84.5% in 2QFY2016, an improvement of 2.8ppt compared to 2QFY2015. Yield was up 2% while unit costs declined by almost 10%, driven by lower fuel prices (although this was partially offset by fuel hedging and USD appreciation), the transition to more efficient 787s and higher economies of scale as the size of the fleet expanded.

Scoot outperforms other Southeast Asian long haul LCCs

Among the six Southeast Asian medium/long haul LCCs, Scoot came closest to break even in the quarter ending 30-Sep-2015 and had by far the highest load factor among its peers.

Scoot had an operating loss of only about USD2.50 per passenger compared to about USD8.50 for the largest long haul LCC in the region (and the world), Malaysia AirAsia X. There were generally larger losses per passenger at smaller peers - including at Scoot's own overseas joint venture, Thailand based NokScoot.

(Note: Cebu Pacific does not provide specific profit/loss figures for its long haul unit, which is not a separate carrier like the other five long haul LCC operators in Southeast Asia. But Cebu Pacific provides a separate load factor figures for its long haul operation and has stated its five long haul routes were collectively in the red in 3Q2015 and are expected to incur a loss for the full year of about USD5 million.)

Southeast Asian long haul LCC financial and operating highlights: quarter ending 30-Sep-2015

Carrier	Fleet size	Passenger numbers	Load factor	Operating result (USD)	Net result (USD)
Malaysia AirAsia X	20	902,000	75%	7.7 million loss	71 million loss
Scoot	8	572,000	85%	1.4 million loss	N/A
Cebu Pacific	6	N/A	79%	Undisclosed loss	Undisclosed loss
Thai AirAsia X	4	204,000	71%	N/A	11 million loss
NokScoot	3	N/A	N/A	N/A	8.5 million loss
Indonesia AirAsia X	2	52,000	70%	N/A	6.7 million loss

Scoot is confident it can continue to further improve its profitability in the coming months as the SIA Group's more expensive fuel hedges wind down. The SIA Group including Scoot hedged 57% of its fuel consumption in 1HFY2016 at an average price of USD106 per barrel while 50.7% of its 2HFY2016 consumption is hedged at an average price of USD93 per barrel.

Scoot is now profitable when excluding fuel hedging losses

Scoot CEO Campbell Wilson told CAPA on the sidelines of the 24-Nov-2015 CAPA Asia Aviation Summit that Scoot incurred SGD22 million (USD16 million) in fuel hedging losses in 1HFY2016. As this equals the reported operating loss, Scoot would have been break even for the six month period if it had not been hedged. Scoot would have been profitable in 2QFY2016 as its hedging loss for 2QFY2016 far exceeded its SGD2 million reported operating loss.

Mr Wilson also pointed out that for the Singapore market the first half is seasonally weaker than the second half. He added that the current quarter will also be the first full quarter Scoot will enjoy the benefits of an all 787 scheduled operation. Scoot stopped deploying the 777 in its scheduled network in early Sep-2015. (It plans to continue operating one 777-200 for charters to South Korea until early 2016.)

Scoot operated six 787-9s, one 787-8 as of the end of 2QFY2016. It has since added two more 787-8s, giving it an improved economy of scale as it is able to spread its costs over a larger fleet. "The prognosis for the full year is encouraging," Mr Wilson told CAPA TV.

Scoot CEO Campbell Wilson discusses Scoot's improved financial performance, the transition to the 787, recent route launches and growth plans for 2016

 

In a separate interview with CAPA TV, Mr Goh said the group is "optimistic about Scoot's outlook. Scoot has gotten very good acceptance by the market and with the transition into the new technology aircraft obviously it will be much more cost effective."

Singapore Airlines Group CEO Goh Choon Phong discusses the outlook for Scoot and other new strategic initiatives implemented by the group, including the launch of NokScoot, Vistara and premium economy and the planned resumption of US non-stops

Scoot to grow ASKs by 49% in the next fiscal year

Scoot should see further reductions in fuel prices in the fiscal year starting 1-Apr-2016 (FY2017) but acknowledges that rapid capacity expansion could make it challenging to post its first annual profit. Mr Campbell said Scoot is projecting a 49% increase in ASKs, which represents much faster expansion than FY2015 and FY2016.

In 1HFY2016 Scoot's ASKs were up by only 10%. Capacity expansion has accelerated in recent months, with a 13% increase in ASKs for 2QFY2016 and 21% ASK growth in Oct-2015. But this is still a much easier to absorb increase than the projected 49% rate for FY2017.

Scoot monthly ASKs: first seven months of FY2016 vs first seven months of FY2015

The huge capacity injection for FY2017 will pose a short term challenge but is necessary for Scoot to improve unit costs and catch up after two years of extremely slow growth. As CAPA previously highlighted Scoot did not add a single aircraft or route in 2014 and in 1H2015 decided to use its initial batch of 787s to replace 777 rather than pursue growth. Fleet and network growth resumed in Jul-2015 with the first growth aircraft and the first new destinations - Kaohsiung and Osaka - in over 18 months.

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The capacity from the first growth aircraft and two new destinations drove the slight acceleration in the ASK growth rate in 2QFY2016. The ASK growth rate will accelerate further in 3QFY2016 as Scoot has added two 787-8s to its fleet in the current quarter, which were used to launch services to Hangzhou in late Oct-2015 and to Melbourne in the beginning of Nov-2015.

Scoot capacity growth will further accelerate in 4QFY2016 with the launch of services to Guangzhou in Jan-2016 following the delivery of its 10th 787. But the full impact of the 10th aircraft, as well as the recently delivered eighth and ninth aircraft, will not be felt until FY2017.

Scoot to add four aircraft and several new destinations next fiscal year

Scoot is also slated to add four more 787s in FY2017, including an aircraft at the beginning of the fiscal year which will be used to launch services to Jeddah on 1-May-2015.

Scoot fleet summary: as of 30-Nov-2015

Aircraft	In Service	On Order
Total:	10	11
Boeing 777-200ER	1	0
Boeing 787-8	3	7
Boeing 787-9	6	4

Scoot is also planning to increase the utilisation of its initial fleet of 10 787s, contributing to the 49% planned increase in ASKs. The three 787-8s are particularly being underutilised with an average utilisation rate of only 10 to 11 hours based on current schedules.

In addition to the already announced Guangzhou and Jeddah routes, Mr Wilson said Scoot plans to launch two to three destinations in India in CY2016 and about two new destinations in North Asia.

Scoot yields improve for now but may decline as several new routes are launched

Scoot saw an improvement in yields in 1HFY2016 in part because all but two of its routes had been operating since 2012 or 2013. Scoot also credits the maturity of its distribution network and its brand for driving improved yields in 1HFY2016.

The distribution network will continue to mature in the coming months and Scoot should also start seeing a yield benefit from a new interline with Singapore Airlines. SIA began selling Scoot flights in Jul-2015 but Mr Campbell said the volumes generated from this new sales channel have so far been very small as SIA and Scoot are still in the proof of concept phase and making sure their systems are properly aligned. As the interline becomes fully implemented it should bring Scoot more high yielding traffic as SIA only sells higher fare classes and a bundle which includes checked luggage, seat assignments, comfort kits, through check-in and disruption assistance in case of a delay or cancelled flight.

But yields will inevitably come under pressure in FY2017 as Scoot launches more new routes. Scoot will have at least six routes that are less than a year old in 1QFY2017. With four to five more routes to be launched later in FY2017 the portion the portion of Scoot's network that is still in the spooling up phase will reach about 50%.

Scoot outlook to further brighten in FY2018

Growth will slow in the fiscal year starting Apr-2017 (FY2018) as Scoot is slated to add only three additional aircraft in FY2018. If Scoot does not quite reach profitability in FY2017, the carrier should be better positioned to reach profitability in FY2018 as it will have a chance to slow down growth and allow all the capacity added in FY2017 to become fully absorbed.

At that point Scoot should also be fully benefitting from an enhanced partnership with Tigerair. Scoot and Tigerair will transition to a common reservations system in 2016 and will start to become more closely aligned over the course of the year, unlocking new synergies.

SIA proposed in early Nov-2015 to acquire the remaining share in Tigerair and is aiming to complete the transaction at the end of Dec-2015. As CAPA recently highlighted: "If the proposed transaction is completed, the group will finally be able to integrate Tigerair fully with its three other airline brands - Scoot, SIA and regional full service subsidiary SilkAir. 2016 could deliver several major SIA Group network adjustments involving Tigerair, similar to the recent decision to use Scoot to take over flights to Hangzhou from SilkAir and to Jeddah from SIA."

Tigerair's outlook should also improve, enabling the short haul LCC to return to profitability, as cooperation with Scoot increases. Tigerair is particularly in an improved position after a prolonged period of losses and overcapacity because it has no plans to resume expansion in the short to medium term. Tigerair ASKs were down 4% in 1HFY2016 and are expected to be maintained at roughly the current level as it intends to keep its fleet stable at 23 aircraft.

Scoot to become the second largest SIA Group airline as mainline capacity shrinks

Scoot is poised to overtake Tigerair in FY2017 as the second largest airline in the SIA Group based on ASKs. Scoot recently overtook SilkAir and in 2QFY2016 had 7% more ASKs than SilkAir but 16% fewer ASKs than Tigerair.

SIA the parent airline is still by far the biggest carrier in the group, accounting for 80% of the group's total ASKs in 1HFY2016. But SIA has been shrinking, including a 2% reduction in ASKs in 2QFY2016. SIA is likely to end FY2016 with slightly fewer ASKs than FY2014 and FY2015 - and about the same number of ASKs as FY2009.

SIA sees the new A350 fleet as an opportunity to resume capacity growth, particularly in the long haul market. SIA plans to use one of its first A350-900s to launch Dusseldorf, which in Jul-2016 will become its first new destination since Sao Paulo was launched in 2011 (excludes destinations SIA has added that were already served by SilkAir). SIA also plans to use seven A350-900ULRs in 2018 to resume non-stops to New York and Los Angeles and launch non-stops to one other US destination.

But any capacity growth at the parent airline will almost certainly be modest. SIA is reducing capacity as it rolls out premium economy, which is replacing economy rather than business class seats on its A380 and 777-300ER fleets. For example the introduction of premium economy on A380s and some 777-300ERs will result in about a 4% reduction in seat capacity to Europe. Only about half of this reduction will be offset by the launch of Dusseldorf.

Maintaining or even reducing capacity at the parent airline while pursuing growth at Scoot and to a lesser extent at SilkAir, which is full service but has a lower cost structure than SIA, is sensible. Competition on long haul routes has intensified, particularly with the Gulf carriers adding significant capacity in Singapore and other Southeast Asian markets. SIA does not mind ceding lower end economy traffic in the Southeast Asia to Europe and North America markets as long as it keeps or increases its share of premium traffic.

Scoot is an important component of the new SIA Group strategy

With the Aug-2015 introduction of premium economy, the 2017 introduction of new long haul business and first class seats and the 2018 resumption of US non-stops SIA is making several major strategic steps to reinforce its position at the top end of the market. As CAPA stated in announcing on 23-Nov-2015 the selection of Mr Goh as the Asia Pacific Airline Chief Executive of the Year: "While SIA has reinvented itself in order to capture growth in the LCC space, it also has been reinforcing its position as a leading premium carrier."

CAPA added its Asia Pacific Aviation Awards for Excellence judging panel selected Mr Goh "for his daring and successful implementing of several major new strategic initiatives that has positioned the SIA Group for future growth despite intensifying competition from LCCs and Gulf carriers."

Singapore Airlines Group CEO Goh Choon Phong accepts the 2015 CAPA Asia Pacific Airline Chief Executive of the Year Award and discusses the strategic transformation of the SIA Group

While SIA has probably made more major strategic changes since Mr Goh took over as CEO in early 2011 than any other full service airline group there will still be challenges to overcome over the next five years. Competition continues to intensify and several components of the new strategy are still not yet fully implemented.

The next year or two will be critical as several components of the new strategy start to bed down. Scoot reaches a particularly important juncture as it accelerates growth and pursues closer cooperation with Tigerair.

The launch of Scoot was the biggest and most daring of the strategic changes made by Mr Goh. If Scoot continues on its current trajectory and becomes profitable, the decision to launch a long haul low cost subsidiary will also go down as Mr Goh's biggest achievement.