03-Feb-2010 11:47 AM

Singapore Airlines in recovery mode, though economic uncertainties persist

Analysis

Singapore Airlines has released its most upbeat assessment of market conditions since late 2007, declaring the business outlook for the Group in 2010 is “encouraging”. But SIA was quick to acknowledge, “uncertainties linger over the global economy”. SIA’s rising confidence stems from passenger load factors in Jan-2010 and forward bookings that suggest the signs recovery witnessed in the third quarter are, "likely to continue in the final quarter of the current financial year”.

SIA also noted the December quarter’s improvement in passenger yields is “also holding up”. Passenger yields rose 5% off their September quarter floor, but are still down 18% year-on-year.

GFC impact on yields three times worse than SARS

Interestingly, SIA’s yields are some 25% higher than during the SARS episode in the June quarter in 2003, but the reduction from peak to trough was about three times as severe during the global financial crisis than SARS.

Singapore Airlines passenger yields (SGD cents per pkm): 1Q2002-03 to 3Q2009-10

SIA has now endured four consecutive quarters of yield reductions, with very deep falls in the last three quarters. It could be some time before yields recover to pre-crisis levels.

Singapore Airlines passenger yields (% change year-on-year): 1Q2002-03 to 3Q2009-10

Cargo worries persist

SIA was less sanguine about cargo, noting that although air cargo yields have shown similar improvement recently, “it is more tentative because of the excess of freighter capacity and the unidirectional nature of cargo flows”.

Singapore Airlines overall yields (SGD cents per ltk): 1Q2002-03 to 3Q2009-10

SIA has suffered five consecutive quarters of cargo yield reductions – and nine reductions in the past 13 quarters, which demonstrates the volatilty (and fragility) of the global air freight segment.

Singapore Airlines cargo yields (% change year-on-year): 1Q2002-03 to 3Q2009-10

Big positive swing in third quarter profit

The SIA Group returned to profitability in the third quarter of the financial year with a net profit of SGD404 million – an impressive swing from losses of SGD307 million in the first quarter and SGD159 million in the second quarter (ended 30-Sep-2009).

Group revenue rose 10.9% to SGD3,418 million, while Group expenditure fell 5.2%. There is still much work to be done to restore SIA’s historic margins, especially if yields struggle in coming quarters.

Singapore Airlines passenger yield growth vs passenger unit cost growth: 1QFY08 to 3QFY10 (Financial year ended 31-Mar)

The increase in jet fuel price led to a SGD34 million rise in fuel cost before hedging. However, hedging losses were SGD146 million lower. Savings in other areas, such as payroll costs, contributed a further SGD57 million.

As a result, Group operating profit for the December quarter reached SGD323 million, in contrast to the operating loss of SGD182 million in the previous quarter.

Singapore Airlines Group operating profit margin and net profit margin: 1QFY08 to 3QFY10 (Financial year ended 31-Mar)

The Parent Airline Company recorded an operating profit of SGD231 million in the third quarter, against an operating loss of SGD157 million in the previous quarter on “continued recovery in load factors and yields, and lower losses from fuel hedging.

All the main companies in the Group were profitable in the quarter:

SIA Cargo: Operating profit of SGD40 million (against a loss of SGD46 million);
SilkAir: Operating profit of SGD23 million (against a profit of SGD12 million);
SIA Engineering: Operating profit of SGD22 million (against a profit of SGD29 million).

Tiger Airways’ performance was not disclosed.

Operating profit (loss) for the main subsidiaries of SIA group: 3QFY09 to 3QFY10 (Financial year ended 31-Mar)

Lower capacity levels finally reap rewards

SIA decommissioned one B747-400 and one B777 during the quarter, leaving an operating fleet of 107 passenger aircraft as at 31-Dec-2009, including ten A380-800s.

Load factor growth has been restored after eight consecutive quarters of reductions.

Singapore Airlines passenger numbers growth vs passenger load factor growth: 1QFY08 to 3QFY10 (Financial year ended 31-Mar)

During the quarter, SIA cut capacity to Athens and Dubai, and services to Pakistan and Nanjing will be suspended from Feb-2010 and Mar-2010, respectively. On the other hand, SIA increased frequencies to Auckland, Christchurch, Brisbane, Perth, Manchester, Rome and Houston (via Moscow), and since 19-Jan-2010 the non-stop all-Business Class service to Newark has returned to daily operations. From late March, Munich will be added to the SIA network, and the A380 will be deployed to Zurich.

The airline has now shrunk capacity for four consecutive quarters, but the moves outlined above suggest SIA is anxious to grow again soon, especially as Middle East rivals continue to expand aggressively. See related report: Emirates, Qatar Airways and Etihad Airways: Opportunities for airports as Gulf airlines expand

Singapore Airlines passenger traffic (RPK) vs passenger capacity (ASK): 1QFY08 to 3QFY10 (Financial year ended 31-Mar)

As a result of network cuts, SIA has restored actual load factors above break even levels for the first time in a year.

Singapore Airlines passenger load factor vs passenger breakeven load factor: 1QFY08 to 3QFY10 (Financial year ended 31-Mar)

Outlook: Full-year red ink still possible, but heading in right direction

SIA is still expected to report a full-year loss (to 31-Mar-2010) – its first since listing in 1985 – following a dismal first half. But having finally brought capacity levels down to better reflect the demand environment, SIA is once again seeing growth in load factors after two lean years.

As a result, yields have stopped their precipitous decline, helped by signs of improvement in the underlying global economy. SIA is not entirely out of the woods yet, but it is certainly on the right track.